QUALIFYING UNDER INTERNAL REVENUE CODE SECTION 6166: POST-DEATH ESTATE TAX DEFERRAL THROUGH CAREFUL INTER VIVOS PLANNING

By Alyse Pelavin, Esq.^*

I. INTRODUCTION

Internal Revenue Code section 6166 provides an important estate tax deferral benefit if an interest in a closely held business exceeds 35 percent of a decedent’s adjusted gross estate.¹ If an estate qualifies for Section 6166 deferral, the portion of the decedent’s estate taxes attributable to that qualifying business interest may be deferred for five years, during which time the estate pays only interest on the deferred tax. After the five-year deferral period, the deferred estate taxes are payable in equal annual installments over a ten (or fewer) year period² at relatively low interest rates.³ For example, in the first quarter of 2008, the estate tax attributable to the first $1,280,000 of the decedent’s estate is subject to a 2 percent interest rate, and the interest rate applicable to the remaining portion is 3.15 percent (45 percent of the underpayment rate of 7 percent).⁴ This combined benefit of deferring estate taxes and "borrowing" at low interest rates permits qualifying estates to continue to operate profitable businesses without the need to seek third party financing, request discretionary extensions to pay estate taxes from the IRS, or undertake a forced sale of the closely held business.

Notwithstanding these important benefits, many practitioners do not adequately consider the qualification requirements of Section 6166 during a client’s lifetime, instead focusing on these provisions only after the client’s death. Unfortunately, when administering an estate, an executor may discover roadblocks to Section 6166 qualification that could have been avoided with prospective inter vivos planning.