Deferred Payment of Estate Tax

If you die owning a small business, the business you leave behind will become part of your estate. If the value of your small business makes up more than 35 percent of your adjusted gross estate, your executor may elect to pay the estate tax attributable to the business interest over a 14-year period. The estate will make annual payments of only interest for the first four years and paying the balance in 10 annual installments of principal and interest.

There is no limit on the amount of tax that may be deferred under this provision. The interest rate on the first $1,390,000 of the estate's value is capped at two percent. (The valuation limit is indexed annually for inflation and increases to $1,430,000 for 2013.)

The interest rate imposed on the amount of the deferred estate tax attributable to the taxable value of a farm or closely held business in excess of the two-percent portion is an amount equal to 45 percent of the rate applicable to underpayments of tax (which has hovered around 3 percent in recent years.)

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 at least 50 percent of the value of the interest in the business is transferred to someone who is not within a specified class of family members.

Tip If your family members who receive your small business interest will be able to make more than two 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.

© 2024 Wolters Kluwer. All Rights Reserved.