Donald M. Thompson - Wills, Trusts, and Estate Planning


Financing of Estate Tax Generated by
Closely Held Businesses

If over 35% of a decedent's adjusted gross estate consists of an interest in a closely held business then the estate may qualify for deferred payment of the estate tax generated by that interest. The maximum amount of tax that can be deferred is determined by multiplying the total tax by the value of the closely held business interest and dividing the result by the value of the adjusted gross estate. The decedent must own 20% by value of the business and the business must have no more than 15 owners. The business must be an active one. The management of passive assets will not qualify.

The first installment can be deferred for up to 5 years and the payments can be spread over 10 years.

The interest rate is 2% on the portion of estate tax attributable to the business which is deferred. This applies to tax generated by the first $1,030,000 in taxable value of the interest. Any other taxes generated by the interest are deferred at 45% of the rate applicable to underpayment of tax which was 4% as of December 31, 2003. The underpayment interest rate is 3% over the short term federal rate for the previous calendar quarter.

If 50% or more of the business is sold or 50% more of its assets are withdrawn the deferral ceases and all unpaid tax is due in full.

IRS can require a bond as a condition of granting the deferral. Alternatively, the estate may give IRS a lien on the business interest.

If the closely held business is a C corporation the estate may also be able to cause redemption of stock it holds in the corporation to get cash for payment of estate tax. Ordinarily a partial redemption of a large shareholder's interest in a closely held corporation results in a dividend (ordinary income), but the Code allows non-dividend treatment if the value of the stock held by the decedent exceeds 35% of the modified gross estate (includes all transfers for less than full value within 3 years of death).

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Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
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