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Many closely held businesses do not survive the death of the owner. While there can be a variety of non-tax reasons, the lack of liquidity planning, much of which caused by federal transfer tax laws, can be a dominant factor. Insufficient liquidity with which to pay the estate tax may cause a forced sale or liquidation of the business. This writing is intended to give the layperson an overview of Section 6166, a section of the Internal Revenue Code that is supposed to provide some relief.

Why is Section 6166 Important to A Business Owner?

The estate tax is usually due within nine months after a decedent’s death. Subject to meeting a variety of rules, some of which are unclear and subjective, Section 6166 allows an estate to defer estate taxes for up to 14 years on the portion of the estate tax related to a closely held active trade or business. The deferred tax is subject to interest at favorable rates. Depending on the facts and circumstances, an estate can be eligible to pay interest only for the first five years followed by ten equal installments of principal, plus interest.