Can You Defer the Federal Estate Tax Bill and Should You?

As I have written in previous blog articles, the federal estate and gift tax only applies to those gross estates above $5.43 million in value. In addition, with portability under the federal estate tax, the unused portion of the $5.43 million of the spouse that died first can be transferred to the surviving spouse, and depending up on the circumstance, create at $10.86 million exemption from the estate tax. Also, the federal estate tax bill is due, along with the federal estate tax return, no later than nine months after the date of death.

However, what if you own a business? Obviously, when you pay any tax, you pay by usually writing a check. The IRS will not accept stock, bonds, furniture, cars, or real estate as a form of payment. The federal estate tax bill is no different. However, if you own a business, that could be a sizeable asset as part of your taxable estate. For example, if you have a taxable estate that is $15 million on the date of death with a business worth $10 million and $5 million in other assets, you could have an estate tax bill worth roughly $1,660,000. As stated above, this tax bill is due no later than nine months after the date of death. This could be very difficult for the estate, especially in the situation of a business where the business continues on in the family after the death of the business owner.

Well, under the IRS code, a business can enter into a payment schedule and defer the estate tax that is owed to the federal government. In the example above, this could appear to be a relatively attractive option as opposed to paying $1.66 million to the federal government in a lump sum. However, deferring estate taxes in this scenario should be heavily considered as such a strategy does have its consequences. For instance, the IRS will normally place a tax lien on the business when you engage in this type of tax deferral strategy. In addition, if the taxes are not paid pursuant to the payment schedule, the IRS can accelerate the amount due and demand the lump sum together with a considerable amount of interest and penalties. Therefore, you should only consider this type of tax deferral strategy when it comes to estate taxes after speaking with a knowledgeable and experienced estate planning attorney.

If you have questions regarding the federal estate tax, deferring the federal estate tax for your business, the Tennessee Inheritance Tax, estate planning, avoiding probate nightmares, and avoiding nursing home poverty, then I encourage you to attend one of our many free educational events that are held throughout the greater Nashville area every month. In addition, I encourage you to request one of our many free legal reports that are available on this website.