Estate tax installment plans for closely-held businesses

The following information provides some general information and an example about installment plans consistent with §6166 of the Internal Revenue Code (IRC). Please see IRC §6166, as it existed on Jan.1, 2005, for details.

Though computing estate tax for estates with closely-held businesses is the same as for other estates, an estate with closely-held businesses may defer the payment of estate taxes attributable to the closely-held businesses.

Qualifications to defer estate tax owed

To qualify for an installment election (as explained in IRC §6166) both of the following must be true:

The decedent must have been a citizen or resident of the United States at death.
The decedent’s interest in a closely-held business must exceed 35% of the adjusted gross estate. The term “interest in a closely-held business” means one of the following:
- An interest as proprietor in a trade or business carried on as a proprietor.
- An interest as a partner in a partnership carrying on a trade or business, if 20% or more of the total capital interest in such partnership is included in determining the gross estate of the decedent, or such partnership had 45 or fewer partners.
- Stock in a corporation carrying on a trade or business if 20% or more in value of the voting stock of such corporation is included in determining the gross estate, or such corporation had 45 or fewer shareholders.

How much estate tax can be deferred?

A deferral applies only to the amount of tax attributed to the value of the closely-held business as compared to the amount of the adjusted gross estate. The non-deferred estate tax is due nine months after the decedent’s death.

How do I make an installment election?

An installment election is made on the Washington State Estate and Transfer Tax Return under Part 3 – Elections by the Executor, Line 3. A statement must be provided showing the calculation to qualify, the payment plan chosen, the payoff schedule, and explicitly describing how the closely-held business qualifies. The closely-held business must be an active trade or business. Passive income activities, generally, do not qualify as a trade or business.

Adjusted gross estate for installment plans

The “adjusted gross estate” means the gross estate less any allowable deductions under IRC §§2053 or 2054. These allowable deductions generally include funeral expenses, administrative expenses, debts of the decedent, and losses (those deductions properly reported on Schedules J – L).

Example of deferral for a qualifying estate:

Gross Estate	11,000,000
Allowable Deductions (Sch J–L)	4,000,000
Adjusted Gross Estate	7,000,000

Attributable to a Closely–Held Business	3,920,000

Note: 3,920,000/7,000,000 = .56 (56% of the tax due can be deferred under an installment election).

For this example, if the estate tax due is $1,070,000 then $599,200 is deferrable. The remaining 44% of the tax due must be paid within nine months after the decedent’s date of death ($470,800 non-deferred).