Own a Business and Owe Estate Tax? Pay the Estate Tax in Installments: Section 6166 Election

Several of our estate planning clients own businesses in Louisiana (or elsewhere). Some of these business owners have an estate that will require estate tax to be paid when they die. Many business owners are told that "half of their estate will go to the government when they die" so they must take drastic action today to somehow reduce that tax.

What many people don't know is that there are breaks in our Internal Revenue Code which permits certain estates to pay the estate tax liability over a period of 14 years - if they qualify for it because they own a closely held business.

Generally speaking, if a business owner dies and the value of his ownership interest in his or her business exceeds 35% of his adjusted gross estate, then the executor is allowed a 14 year period to pay estate tax attributable to an estate's interest in a closely held business. The estate may pay interest only payments for the first four years, and the taxes can then be paid over a 10 year period.

Here's an example that would not occur in real life but it shows how this election can help an estate. Let's say that Fred owns Fred's construction company. This is the only asset in Fred's estate. The business is worth $10.45 million. Fred is told by some that half of his estate will go to the government when he dies. This concerns Fred because there is not $5.225 million in liquidity in his estate to pay this tax and Fred worries that his children will lose the business.

But the Fred realizes that his estate could make a Section 6166 election timely after Fred dies. First, the estate tax must be calculated. Since there is a $5.45 million exemption, and a 40% estate tax on the balance, Fred figures there would be $2 million in tax - still a big worry to Fred. But if his estate makes the timely IRS Section 6166 election after he dies, his estate can pay interest only payments of $40,000 for four years after Fred dies, and then his estate can $200,000 annually for another 10 years. Fred now realizes that his business will produce enough revenue annually to pay this tax over the 14 year period, and his children will not lose the business due to estate tax liabilities.

If you are a business owner in Louisiana, whether your business is in Baton Rouge, Lafayette, New Orleans, Lake Charles, Shreveport, or Monroe, and you want to make sure that your estate passes intact to your family or other heirs, you may want to give my office a call at 866-491-3884, and tell our great staff that you own a valuable business and you want to speak to me to find out how to leave it the right way, I look forward to the opportunity to speak with you about how the IRS Section 6166 election for owners of closely held businesses can help your family, or how other little-known tax elections can help your family.