22. Extension for Estate Tax Payments

Even though payment of the Federal Estate Tax is due within nine months of the decedent's date of death, the I.R.S. may grant an extension of up to ten years for "reasonable cause." The interest rate charged by the I.R.S. will approximate 100% of the current prime rate.

The Internal Revenue Code 6166 allows the executor of a decedent's estate where the decedent owned an interest in a closely held business, to pay the estate taxes attributable to that business in installments. To qualify for this special treatment, the value of the decedent's interest in the closely held business must exceed 35% of his or her adjusted gross
estate. An interest in a closely held business is defined as:

1. The interest of a proprietor in a sole proprietorship or

2. The interest of a partner in a partnership where at
least 20% of the partnership's total capital interest is
included in the decedent's gross estate or where the
partnership had fifteen or fewer partners or

3. A shareholder's interest in a corporation where 20% or
more of the voting stock of the corporation was included
in the decedent's gross estate or where the corporation
had fifteen or fewer shareholders

I.R.C. 6166 allows that portion of the estate tax attributable to the decedent's interest in a closely held business to be paid in annual installments over a maximum period of ten years. Additionally, the estate executor may delay the beginning of the annual installments up to five years after the date of death.

Interest on the installments is charged at an annual rate of 4% of the amount of tax due up to $345,800--less the amount of the Unified Credit allowed against the estate tax.

I.R.C. 6166 also provides that where a decedent owns interest in two or more closely held businesses and 20% or more of the value of each business was included in the decedent's gross estate, the interests are treated as one interest in a single closely held business.

The I.R.S. may terminate the 6166 installment arrangement in certain situations such as where an annual payment is delinquent or where the interest in the closely held business is sold or exchanged.

The owner of an interest in a closely held business should consider the purchase of life insurance on his or her life with the policy death benefit payable to the estate. This would allow the estate executor a choice between paying the estate taxes due out of the policy proceeds or electing the 6166 installment treatment.

Tax reference verification 1-800-829-1040

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