If the value of your interest in a closely held business makes up more than 35 percent of your adjusted gross estate, your executor may elect to pay the estate tax attributable to your business interest over a 14-year period, with a 5-year deferral from the original due date for the first installment. However, you also have to pay interest to the government on the deferred amount. In effect, Uncle Sam will take a mortgage on the business.
There is no limit on the amount of tax that may be deferred under this provision, but, in 2008, only the first $576,000 in deferred estate tax qualifies for a special interest rate of two percent. This amount will periodically be indexed for inflation.
The interest rate imposed on the deferred estate tax in excess of the two-percent portion is an amount equal to 45 percent of the rate applicable to underpayments of tax (which has varied since 1990 between 7-11 percent).
The continued ability to pay taxes on this installment schedule will be lost if installment payments of principal and interest are not paid on time, or if 50 percent or more of the value of the interest in the closely held business is transferred to someone who is not within a specified class of family members.
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Save Money
If your family members who receive your small business interest will be able to make more than 2 percent on money kept in the business, or invested elsewhere, your executor may find it advisable to opt for deferred payment even if the estate has sufficient funds to pay the estate tax liability in full. Financial need to defer payment is not a requirement for this provision.
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