Federal Estate Taxes and Internal Revenue Code Section 6166
There are concerns that the federal estate tax exemption will be drastically reduced by President Biden and the new administration to levels as low as $3,500,000. This would increase the likelihood of the estate of the owner of a small closely held business being subject to large amounts of estate taxes. If the business has not planned otherwise, Internal Revenue Code Section 6166 can be used by the family of the business owner to help with the payment of estate taxes as a result of the ownership of the closely-held business.
Individuals with family businesses are usually busy operating the business to make sure that it is profitable. They are also making long term decisions to determine whether the business will remain static with its profits or expand business operations and significantly increase profits and the value of their business. With that increased value of the business, potential federal estate taxes also increase. The current federal estate tax exemption is $11,700,000 per person. Therefore, for a husband and wife, that federal estate tax exemption is currently $23,400,000. For the calendar year 2021, there is some unknown as to whether that exemption may be drastically reduced to $3,500,000 for a single individual or $7,000,000 for a married couple.
Even if the current administration keeps the estate tax exemption as it is, please note that beginning in the calendar year 2026, the current federal estate tax laws will sunset and will return to approximately $5,000,000 per person, or $10,000,000 per married couple, plus an inflationary adjustment. If your business meets certain qualifications, then your family may be able to exercise an election under Internal Revenue Code section 6166. This section allows estate taxes to be paid over a number of years instead of having to pay all of the estate tax within 9 months after passing. In order to qualify for this payment plan, you and your business must meet certain criteria.
Generally, the criteria is as follows:
- The individual who passed away must have been a U.S. citizen or resident at the time of his or her death;
- The individual’s interest in the closely-held business must be worth more than 35% of that individual’s total gross estate; and
- The individual’s executor must make the 6166 election on a timely-filed federal estate tax return.
If the deceased business owner satisfies these three items, then the estate tax may be deferred and paid over a 14-year period. During the first five years, only the interest on the deferred tax must be paid. There is a special calculation that is required to determine the interest; however, it is usually very reasonable.
Beginning five years after the return was due, the actual federal estate tax and the interest are payable in equal annual installments over a ten-year period. Therefore, if your estate does not have the liquidity to pay the estate taxes, and/or if you have not purchased life insurance which could provide the liquidity to pay estate taxes, then you should determine whether your estate can qualify for this 6166 election. You may be able to do some planning to make sure you meet the criteria to qualify for this 6166 election.
Please contact your local estate planning attorney and CPA if you need to further review these types of planning opportunities.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
405 Chauncey Avenue NW
New Philadelphia, Ohio 44663
Phone: (330) 364-3472
Fax: (330) 602-3187