Borrowing for Postmortem Liquidity
Part 1 of this article focused on liquidity planning for closely held businesses through the use of conventional borrowing, Graegin loans, and loans from the Internal Revenue Service (IRS) under § 6161 of the Internal Revenue Code of 1986 (IRC), as amended. Part 2 will focus on an estate’s obtaining liquidity by “borrowing” funds from the IRS under IRC § 6166.
IRC § 6166 permits certain estates that consist largely of an interest in a closely held business to elect to take a “loan” from the federal government for the payment of estate taxes. Specifically, IRC § 6166(a) permits an estate of a U.S. citizen/resident decedent, in which more than 35% of its adjusted gross estate (as defined under IRC § 6166(b) (6)) consists of closely held business interests, to defer the payment of its estate taxes for a period of five years and thereafter to make payments in equal annual installments over an additional 10-year period. The maximum amount of the estate tax that can be deferred and paid in installments under IRC § 6166 is the amount that will bear the same ratio to the estate tax imposed (reduced by credits against the tax) as the closely held business amount bears to the amount of the adjusted gross estate. The “closely held business amount” is the value of the interest in a closely held business that qualifies under IRC § 6166(a)(1). IRC § 6166(b)(5). The first installment under IRC § 6166 must be paid on or before the date not more than five years after the date fixed for payment of the estate tax. Succeeding installments are to be made no more than one year after each prior installment.