First, you can leave a substantial amount of property to your heirs free of estate taxes. All property left to your spouse is exempt from any estate taxes. In addition, the 1986 estate tax "unified credit" allows $500,000 in property to pass to other heirs tax-free. This "tax free" amount will increase to $600,000 after 1986.
Second, the Internal Revenue Service allows a closely held family business to value land on the basis of its "current use" rather than on the standard "fair market value." Current use valuation of farmland usually can reduce the land value by 20 to 50 percent. This will, in turn, sharply reduce potential estate taxes.
Third, tax laws allow for delayed payment of federal estate taxes. These provisions can be useful for estates that experience shortages of liquid assets upon the death of the estate owner.
This guide will explain conditions under which you can delay payment of estate taxes. This guide is not intended to be a substitute for professional advice. Consult your attorney or accountant for assistance with specific estate tax questions.
Examples of "reasonable cause" are:
The deceased must have been a U.S. citizen or resident at the time of death to use 6166.
You may defer only the federal estate taxes due on the portion of the estate that consists of closely held business property. For example, if 50 percent of the estate consists of closely held business property, then only 50 percent of the estate taxes may be deferred by electing 6166. The remaining estate taxes are due within nine months of the estate holder's death and are subject to interest and penalty for late payment.
Section 6166 is a voluntary election. Should the heirs desire to delay the payment of estate taxes, the executor can elect 6166 on part or all of the property eligible.
To elect Section 6166, the deceased must have been actively involved in management of the business and:
If the deceased owned more than one closely held business, only those businesses in which the deceased had an interest of 20 percent or more may be combined and treated as a single business.
No penalty is made for early payment of installments.
The estate executor is personally liable for deferred taxes unless the IRS files a lien on the property as security for taxes postponed.
The interest rate will increase from 4 percent to the prime rate for the delinquent period if you make any payments late. In addition, a penalty of 5 percent of the payment will be charged for each month the payment is late.
Any payment not made within six months of the due date will cause the remaining balance to become due in full.
To make delayed payment under Section 6166, attach a letter to the estate tax return. The letter must include the reason the estate qualifies for 6166 and a payment schedule.
The election to use Section 6166 must be made on a timely filed estate tax return. No extensions are allowed. If you are uncertain about whether you want to use Section 6166, consider filing for it anyway. This is called a "protective election." You can always decide later not to use it, but once the initial filing deadline has passed, you cannot elect 6166.
A protective election often is made when the exact amount of the tax due is uncertain, as might be the case when current use valuation of farmland (Section 2032A) is used. If the IRS later disallows the current use valuation and if you then owe additional estate taxes, you will still be able to use the 6166 delayed payment method because you made the protective election.
| Adjusted gross estate | $1,250,000 |
| Estate tax due | $255,500 |
| Percent closely held business | 80 percent |
| Tax eligible for deferral | $204,400 |
| Tax due 9 months after death | $51,100 |
Had the value of the farm business exceeded $1 million, only the deferred estate taxes on the first $1 million in closely held business property would have been eligible for 4 percent interest. The prime rate would be used to calculate interest on the excess.
As you can see from this example, electing Section 6166 does not reduce estate taxes. You pay the entire amount due ($255,500) but you pay it over an extended period. If you hadn't made the 6166 election, the $255,500 would have been due nine months after the death of the estate owner.
Table 1. 6166 Estate tax payment schedule.
| Date of death plus | Principal | Interest |
|---|---|---|
| 9 months | $51,100 | -- |
| 1 year and 9 months | -- | $8,176 |
| 2 years and 9 months | -- | 8,176 |
| 3 years and 9 months | -- | 8,176 |
| 4 years and 9 months | -- | 8,176 |
| 5 years and 9 months | 20,440 | 8,176 |
| 6 years and 9 months | 20,440 | 7,358 |
| 7 years and 9 months | 20,440 | 6,541 |
| 8 years and 9 months | 20,440 | 5,723 |
| 9 years and 9 months | 20,440 | 4,906 |
| 10 years and 9 months | 20,440 | 4,088 |
| 11 years and 9 months | 20,440 | 3,270 |
| 12 years and 9 months | 20,440 | 2,453 |
| 13 years and 9 months | 20,440 | 1,635 |
| 14 years and 9 months | 20,440 | 818 |
| Total | 255,500 | $77,672 |
The use of 6166 results in payment of a substantial amount of interest -- $77,672 in this example. At 4 percent, it probably will be the lowest rate of interest you can get.
Issued in furtherance of Cooperative Extension Work Acts of May 8 and June 30, 1914, in cooperation with the United States Department of Agriculture. Ronald J. Turner, Director, Cooperative Extension Service, University of Missouri and Lincoln University, Columbia, Missouri 65211. • University Extension does not discriminate on the basis of race, color, national origin, sex, religion, age, disability or status as a Vietnam-era veteran in employment or programs. If you have special needs as addressed by the Americans with Disabilities Act and need this publication in an alternative format, write ADA Officer, Extension and Agricultural Information, 1-98 Agriculture Building, Columbia, MO 65211, or call (573) 882-8237. Reasonable efforts will be made to accommodate your special needs.