With changes to the estate tax rules, effective Jan. 1, 2026, many owners of closely held businesses will face serious real value and liquidity issues. With the new rule, the estate tax exemption threshold drops from $12.92 million to less than half that amount.
Should business owners sell their company to generate the needed liquidity to cover the estate tax? Or can IRC Section 6166 save the day?
IRC Section 6166
Under IRC Section 6166, if a closely held business in a decedent’s estate makes up more than 35 percent of the adjusted gross estate, the estate can defer payments for four years by paying interest only. Then, estate tax payments can be made in equal installments over 10 years.
This can be helpful to business owners; however, there are very strict rules to meet the requirements for this deferral. There is much to consider:
- The company will be paying two sets of taxes: normal income tax and deferred estate tax.
- The IRS will have a “tax lien” against the business assets. An alternative would be a bond, but normal banking is greatly impaired.
- Does it impede the company from normal succession planning?
- If sold, will the value of the business be reduced? Deferred estate tax is due immediately.
- Interest payments are not deductible for income or estate tax. The deferral interest rate is only 2 percent, and the installment interest rate will fluctuate.
- Does the business meet the 35 percent threshold?
Benefits of a company sale
Selling a company or a portion of it can provide many benefits to owners and their heirs. A sale can:
- Maximize value and provide liquidity.
- Make available “dry powder” to buy other businesses.
- Allow for preparation time to sell and increase the ability to get your “number.”
- Help diversify your personal finances.
- Provide an opportunity to attract more talent.
- Allow for favorable capital gain rates.
A partial sale allows company owners to stay involved but not be tethered to the business. It also provides an opportunity to bring in critical key managers to serve as equity owners. After considering the potential estate tax cost, IRC Section 6166 can help maintain closely held ownership and a sale can provide longer-term lifestyle and financial benefits.
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