Deferring Payment of Estate Tax
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. However, you also have to pay interest to the government on the deferred amount. In effect, Uncle Sam will take a mortgage on the business.
There is no limit on the amount of tax that may be deferred under this provision, but only the first $1,000,000 in value qualifies for a special interest rate of two percent. The $1,000,000 limit will periodically be indexed for inflation. The inflation adjusted limit for 2007 is $1,250,000.
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 varied since 1990 between 7-11 percent).
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.
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Save Money
If your family members who receive your small business interest will be able to make more than 2 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.
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