Legal Blog

The Weekly Scenario: Federal Estate Taxes for Small Business Owners

Question: I am a small business owner and am worried that I may be forced to sell off business interests at “fire sale” prices to help pay federal estate taxes. Are there any remedies to minimize the impact of federal estate taxes?

Answer: Section 6166 of the tax code is one potential remedy to this problem. 6166 allows heirs to stretch out estate tax payments over time. If a business meets the conditions for 6166, the executor of the estate can elect to postpone payments for five years and then take another 10 years to meet the tax obligations in annual payment installments.

In order to qualify for the tax deferral under 6166, an interest in a closely held business (must be an active trade or business as opposed to a passive interest) must (i) comprise more than 35% of the deceased individual’s estate, (ii) the decedent must have been a U.S. citizen or resident at the time of her death and (iii) an election must be made by the estate’s personal representative on a timely filed estate tax return.

Comment: The IRS does require that interest be paid on the unpaid tax liability. However, it is a relatively low 2% interest charge on the tax attributable to the first $1,000,000 of value and then the IRS underpayment rate on amounts over $1,000,000.

Of course not everyone can qualify under Section 6166. It may therefore be advisable to purchase additional life insurance coverage for this purpose. Life insurance is a tool that should be considered in many cases so as not to disrupt a family owned business operation.


As always, if you have any questions or would like to learn more, please let me know.


Steve Shane Casual SmallSteve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.

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