§6166 Installment Payment of Estate Tax

[Kathleen Reynolds]

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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 “two percent” amount, the amount eligible for two percent interest, and then the annual payments and the after-tax cost to make those payments.

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 ten years. Interest is paid all fourteen years.

The “2 percent amount” is incremental federal estate tax on $1,000,000 (adjusted for inflation after 1998, or $1,390,000 in 2012, $1,430,000 in 2013, $1,450,000 in 2014, $1,470,000 in 2015, $1,480,000 in 2016, $1,490,000 in 2017, $1,520,000 in 2018, $1,550,000 in 2019, $1,570,000 in 2020, $1,590,000 in 2021, $1,640,000 in 2022, or $1,750,000 in 2023) above the unified credit applicable exclusion amount. The program calculates this 2 percent amount using the inflation adjustments based on the inflation rate entered, and the estate tax is calculated using current rates and credits.

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

• Year of Death Enter the year of the decedent’s death.
• Profit Margin of Business Enter the business’ profit margin.
• 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.
• Inflation Rate Enter the inflation rate.
• Gross Estate Enter the value of the decedent’s gross estate.
• Admin. Expenses Enter the total amount of administrative expenses, funeral expenses, debts, etc.
• Value of Business Enter the value of the business.
• Net Federal Estate Tax Enter the net federal estate or generation skipping transfer tax payable.
• Estate Tax Calculations In 2010, the user can select the 35% rate or No Estate Tax.
• 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.

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