What is a 6166 Election?
A 6166 election allows an executor to extend payment of part or all of the portion of the estate tax that is attributable to a closely held business interest (as defined in section 6166(b)(1)). (See Treas. Reg. § 20.6166A-1)
Essentially, when an estate is taxable and there is a family company or other closely-held business interest, a 6166 election should be considered when filing the estate tax return or extension, as it must be made within 9 months from date of death.
NOTE: Additionally a Graegin loan may also be available (or even preferable given rising interest rates) to assist with the payment of the estate tax, whether or not the estate is eligible for 6166 relief. Learn more about Graegin loans here.
How do I know if the estate qualifies for 6166 relief?
An estate is eligible for 6166 election relief if
- The election is timely filed.
- The decedent is a US citizen or resident.
- The estate includes one or more closely held business interests that, when taken together, have a value exceeding 35% of the adjusted gross estate (See IRC 6166(a)). Note that multiple closely held business interests may be aggregated for purposes of satisfying the 35% requirement only if each closely held business interest otherwise meets the requirements.
What does a “closely held business” mean within the context of 6166?
A business interest will be treated as a “closely held business interest” for §6166 purposes if it meets both of the following 2 requirements:
- Requirement 1: Trade or business - If you are the sole owner of the business, you actively participate in that business, or, if you have co-owners, the partnership or corporation carries on a trade or business.
- Rqequirement 2: Degree of Control - Either the estate owns 20% or more in value of the capital interests of the partnership or voting stock of the corporation (the 20% ownership test) OR the partnership or corporation has fewer than 45 partners or shareholders (the 45 owner test).
What if I am not sure?
It is better to make the election than not, even if you are unsure your estate qualifies to receive 6166 relief. This is called making a “protective election.” This way, if it is later determined that the requirements are satisfied after all, the subsequent election will not be denied because it is untimely, and the portion of tax remaining unpaid can be deferred.
How do I make a protective election? A protective election can be made by filing a notice of election (Schedule A-1) with your estate tax return (Form 706).
How do I make the election?
In order to make the election, your personal representative must do all of the following:
- Check the appropriate box on your estate tax return (Form 706), complete all appropriate lines, and attach all appropriate items.
- Attach a completed statement - a “Notice of Election” to the estate tax return. A completed statement must include all of the following information:
- (1) The decedent's name and taxpayer identification number as they appear on the estate tax return;
- (2) The amount of tax which is to be paid in installments;
- (3) The date selected for payment of the first installment;
- (4) The number of annual installments, including the first installment, in which the tax is to be paid;
- (5) The properties/assets shown on the estate tax return which constitute the closely held business interest (identified by schedule and item number); and
- (6) The facts which formed the basis for the executor's conclusion that the estate qualifies for payment of the estate tax in installments.
Lengthy Installment Schedules - Prolonged Executorships
The executor of an estate has a fiduciary duty to pay the estate taxes. However, when payment can be spread out over many as 14 years, a prolonged executorship solely for purposes of paying the estate tax can prove to be difficult. Luckily, during the installment schedule, the executor can post a bond for the outstanding tax and apply for a discharge.
Acceleration of the deferred tax
Even with a successfully made 6166 election, there are certain actions that can accelerate the payment of all remaining deferred unpaid tax. For instance, if the executor misses a payment deadline by 6 months or divests the estate 50 percent or more of the decedent’s interest in the closely held business after the date of death (i.e. via a sale or estate distribution), payment of all unpaid tax will be accelerated. However, it is important to note that if the business redeems shares to pay for the estate tax, funeral expenses, and administrative expenses, the redemption will not face an acceleration of the unpaid tax.