Overview

Main Menu Name: §6166

This calculation determines if an estate meets code section 6166 requirements for a four-year deferral and 10-year payout of federal estate tax. It then calculates the limit of the amount that can be paid in installments and the amount of tax that is due immediately. It computes the "2-percent portion", the amount eligible for two percent interest, and then the annual payments and the after-tax cost to make those payments.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

This calculation determines if an estate meets code §6166 requirements. That Code Section allows a four-year deferral of tax (interest only is payable) and then requires the unpaid tax be paid, together with interest, over an up to 10-year period. It then calculates the limit of the amount that can be deferred and paid in installments and the amount of tax that is due immediately. It computes the "two percent" amount, that is, the amount of tax upon which an extremely favorable 2% rate can be paid and the amount eligible for 45% Underpayment Rate, (any balance of tax) and then the annual payments and the after-tax cost to make those payments.

Code §6166 was created to alleviate an estate's liquidity problems. If the estate qualifies to use §6166, an executor may use installment payments to pay the federal estate tax attributable to the decedent's interest in a closely held business.

Generally, 2% interest is applied to the tax generated by the incremental estate tax on $1,570,000 (adjusted for inflation after 2020) above the unified credit applicable exclusion amount. The "going rate" (a rate of 45% of the interest charged to unpaid income or estate tax) is applied to the balance. Both rates are calculated on a daily compounded basis. To qualify for §6166, the gross estate must include an interest in a closely held business whose value is more than 35% of the decedent's adjusted gross estate. The tax, which may be paid in installments, is the proportion attributable to the value of the closely held business. The balance of the estate tax is paid nine months after the decedent's death.

§6166 is a useful tool when an estate is unable to pay tax without selling assets at a loss. It is also useful when the business or estate is capable of earning a greater after-tax rate of return than it spends in interest for the deferral privilege.

If the estate meets §6166 requirements, the first payment of principal and interest must be paid within five years and nine months from the date of death. Succeeding installments are paid within one year of the previous one. Most planners will recommend that this Code Section be combined with Code §303 in order to use corporate dollars to pay estate taxes and bail those dollars out of the corporation without income tax. Corporate owned life insurance is typically used to finance the corporation's purchase of stock from the estate. That cash is then used year after year to pay for the interest and principal under Code §6166.

Getting Started

Code section 6166 was created to alleviate an estate's liquidity problems. If the estate is qualified to use section 6166, an executor may use installment payments to pay the federal estate (and/or generation skipping) tax attributable to the decedent's interest in a closely held business. When section 6166 is used, tax payment is deferred for the first four payments and then paid in equal installments for the following 10 years. Interest is paid all 14 years.

Interest on deferred estate tax is charged at two levels:

     2%:     based on the "2-percent portion" (6601(j)(2))

     X%:     excess of estate tax (attributable to the business) over the "2-percent portion".  This rate is
                 45% of the underpayment interest rate in effect for the quarter when payment is made.

2024

The "2-percent portion" ($740,000 in the example below) is calculated as follows:

2005

The "2-percent portion" ($539,900 in the example below) is calculated as follows:

Note the 2-percent portions in the chart below for the 2023 and 2005 examples above:

To qualify for section 6166, the gross estate must include an interest in a closely held business whose value is more than 35% of the adjusted gross estate. The tax, which may be paid in installments, is the proportion attributable to the value of the closely held business. The balance is paid nine months after the decedent's death.

Section 6166 is a useful tool when an estate is unable to pay estate or generation skipping taxes without selling assets at a loss. It is also useful when the estate is capable of earning a greater after-tax rate of return than it spends in interest for the deferral privilege.

If the estate meets section 6166 requirements, the first payment of principal and interest must be paid within five years and nine months from the date of death. Succeeding installments are paid within one year of the previous one.

Entering Data

1. Year of Death:  Enter the year of the decedent's death.
   
   
2. Profit Margin of Business:  Enter the business' profit margin.
   
   
3. Underpayment Rate:  Enter the interest rate that will apply to the non-two percent amounts. This represents your estimate of future overall government interest rates, which may actually change every quarter.
   
   
4. Inflation Rate:  Enter the inflation rate.
   
   
5. Gross Estate:  Enter the value of the decedent's gross estate.
   
   
6. Admin. and Other Expenses (Schedules J, K, and L):  Enter the total amount of administrative expenses, funeral expenses, debts, etc.  Do not include the state death tax deduction.
   
   
7. Value of Business:  Enter the value of the business.
   
   
8. Net Federal Estate Tax:  Enter the net federal estate or generation skipping transfer tax payable.
   
   
9. Estate Tax Calculations:  In 2010, the user can select the 35% rate or No Estate Tax.
   
   
10. Sunset in 2026?:  If the year is 2026 or later, you can select how future estate tax calculations will be handled.

Results

The Summary Tab indicates if an estate is capable of meeting code section 6166 requirements. It shows the amount of federal estate tax that can be paid in installments, and the tax that must be paid immediately. Additionally, the results separate the deferred tax into two portions: the portion taxed at the special 2% rate and the portion taxed at the going rate.