Recent tax laws have generally extended favorable estate tax provisions, with certain modifications, on a permanent basis. But estate planning remains a prime concern for many business owners and others wealthy enough to be hit by the tax. One way to reduce the impact on your family is to stretch out any tax payments over a long period. Installments may be extended for as long as 14 years if business interests comprise the bulk of your net worth.
Normally, estate tax must be paid within nine months of the estate owner’s death. However, if the estate qualifies, its executor can make a special election to stretch out annual payments for 10 years following a deferral period of five years. So it would mean the estate’s beneficiaries could take as long as 15 years to pay the estate bill in full. Technically, the maximum deferral period is 14 years, because of the way payments must be structured.
This tax deferral is available only if the estate includes a farm or closely held business whose value exceeds 35% of the value of the “adjusted gross estate.” That’s defined as the gross estate value minus any expenses, debts, and losses. A “closely held business” may include any of the following:
- An interest in a sole proprietorship.
- An interest in a partnership if 20% or more of the total capital interest in the partnership is included in the gross estate, or if the partnership had 45 or fewer partners.
- Stock ownership in a corporation if 20% or more of the value of the voting stock is included in the gross estate or if the corporation had 45 or fewer shareholders.
Note that the estate tax deferral applies only to the closely held business interests. For example, if those business interests represent 50% of the gross estate, half of the estate tax may be spread out over that 14-year period. The other half must be paid within nine months of the estate owner’s death.
If your heirs qualify to extend estate tax payments and decide to take advantage, they’ll owe interest annually on the unpaid portion of the tax. However, the estate is required to pay only 2% interest on the amount attributable to the first $1 million (adjusted for inflation) of the taxable value of the business interest. The normal IRS interest rate for tax underpayments applies to amounts above that threshold.
There may be additional methods that could actually limit the estate tax on family business or farm assets. For example, heirs who agree to keep those assets in the family may be able to reduce the taxable amount of the estate. But this is a complex area of tax law. We can work with you and your attorney to make sure any tax breaks and extension of tax payments are handled properly.