Deferral of Estate Taxes

In the past, estate taxes owed by business owners were typically due nine months after the owner’s death, and many families were forced to sell businesses to meet the liability. In response to this problem, the Economic Recovery Act of 1981 provided a 14-year deferral to families of owner-executives. Under this Act, a closely-held business may defer taxes when:

  • The business interest is 35% of the adjusted gross estate.
  • The decedent was a sole proprietor or partner, owning 20% or more of the capital interest with 15 or fewer partners, or was a shareholder owning at least 20% of the voting stock of a corporation with fewer than 15 shareholders.
  • The estate does not dispose of 50% or more of the value of the decedent’s interest in the closely-held business before the total estate taxes are paid.

For the first four years after the owner’s death, the estate pays interest only. Thereafter, the balance is paid in ten annual installments. Interest is pegged at 4% on the first $1 million of ownership in a closely-held business. Interest on the balance exceeding $1 million is paid at an adjusted prime rate.

Finally, even closely-held corporations that do not qualify for a 14-year deferral are allowed to spread payments over ten years when the estate can show reasonable cause. However, granting of this 10-year deferral is at the discretion of the Internal Revenue Service (IRS).


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