Succession & Estate

Section 6166 Estate Tax Deferral

Work through the deferral provision line by line — the 35% test, what counts as a closely held business, the subsidised interest rate, the non-deductibility that raises its real cost, and the four ways the whole thing accelerates.

  • Expert
  • 9 min total
  • 12 chapters

What decision this helps you make: Whether an estate qualifies for extended payment of the tax attributable to a closely held business, whether to elect it, and what the family must avoid for the next fourteen years.

What this topic is

A statutory election permitting an estate whose closely held business interest exceeds 35% of the adjusted gross estate to pay the estate tax attributable to that interest over an extended period — interest only for an initial period, then up to ten annual instalments, with a preferential interest rate on a portion of the balance. It is the single most powerful liquidity tool available to an illiquid estate, and it comes with continuing conditions that last as long as the deferral.

Why it matters

For an estate whose principal asset is an operating company, this provision is often the difference between keeping the business and selling it. It converts a lump sum due in nine months into a payment stream the business can service from operations. It also binds the family for up to fourteen years: dispose of half the interest, withdraw half its value, or miss an instalment, and the entire remaining balance becomes due at once.

Who should learn it

Executors of estates holding operating businesses, owners assessing whether their estate will qualify, and advisers structuring an estate so that it does.

What you will understand

  • The 35% test, what an interest in a closely held business is, and how businesses are aggregated
  • The payment schedule, the two interest rates that apply, and why non-deductibility raises the real cost
  • The four acceleration triggers and how families fall into them by accident
  • How the election is made, what security may be required, and how it combines with a redemption for death taxes

Prerequisites

Common misconception

"It is a 2% loan from the government." Only partly. The preferential rate applies to the tax attributable to a limited, inflation-indexed slice of the business value — recent years have been in the region of $1.9 million of value, producing roughly $760,000 of tax at that rate. Everything above that bears interest at a fraction of the ordinary underpayment rate, which is materially higher. And critically, none of the interest is deductible for either estate tax or income tax purposes, so the after-tax cost is meaningfully above the nominal rate.