Estate Tax Deferral for Estates Including a Closely Held Business
Estate Tax Deferral for Estates
Including a Closely Held Business
A special estate tax deferral election is available for Federal estate tax
if more than 35% of your estate is comprised of a closely-held business.
If your estate qualifies, such tax is deferred for up to five years
and is then subsequently paid off over a ten-year period. Interest on
the deferred amount, subject to a limitation discussed below, is set at
only 2%. As President Barack Obama has already indicated his opposition
to estate tax repeal and his desire to retain the current exemption
amount and tax rate ($3,500,000 and 45% in 2009), the estate tax
deferral election remains a relevant and useful tool for managing the
estates of closely held business owners.
Qualification For Deferral
1. The Business Interest Test.
The business interest must be one of the following:
•If you own the business as a sole proprietor, you satisfy this test;
•If your business was conducted in partnership form, you satisfy this
test if either: (i) there were no more than 45 partners; or (ii) you had
at least a 20% capital interest; or
•If the business was conducted as a corporation, you satisfy this
test if either: (i) there were no more than 45 shareholders; or (ii) your
owned at least 20% of the corporation’s voting stock.
In applying the 45 partner or shareholder test, above, interests or
shares owned by your spouse, siblings, ancestors, and descendants
are treated as owned by you. Additionally, any jointly-owned interest
by a married couple is counted as one partner or shareholder.
Example (1). John Smith’s adjusted gross estate (as defined below)
is $5 million. Included in his estate is a partnership interest valued at
$2,000,000 (i.e., 40% of the estate). However, there are 48 partners
in the partnership (unrelated to M), and M held only a 16% interest.
Result: M’s estate does not qualify for the deferral provisions.
Example (2). The facts are same as in Example (1) except that M’s
wife, brother, sister, father and mother were among the 48 partners in
the partnership. These five interests plus M’s are treated as a single
interest. There are only 42 other partners. Thus, there would be only
43 partners and M’s estate would qualify for deferral.
2. The 35% Test.
If your business interest qualifies, its value (if you own more than one
business you can combine them to satisfy this test) must exceed 35%
of your “adjusted gross estate.” (The adjusted gross estate is defined
as the gross estate minus deductions for expenses, debts, taxes and
How much estate tax qualifies for deferral?
If the above two tests are satisfied, the portion of the federal estate tax
bill allocable to the qualifying business interest is deferred.
Example. M’s estate’s tax bill is $1 million. The amount included for
the qualifying business interest was 38% of the total adjusted gross
estate. Thus, 38% of $1 million, or $380,000, qualifies for deferral.
How much of the tax being deferred qualifies for the 2% interest rate?
The special 2% rate applies to the portion of the deferred estate tax
attributable to the first $1,330,000 (subject to adjustment for inflation)
in taxable value of the closely held business. The first $1,330,000
in “taxable value” is the first $1,330,000 above the applicable exclusion
amount. For example, if the current estate tax exemption amount
equals $3.5 million, the amount of estate tax attributable to the value
of the closely held business between $3.5 million and $4,830,000 is
eligible for the 2% interest rate. Please be aware that the interest paid
is not deductible for estate or income tax purposes.
Randall L. Duncan
Direct Line: 541-417-6010
Douglas S. Chiapuzio
Direct Line: 503-417-6009
Jonathan D. Mishkin, LL.M.
Direct Line: 503-417-6007
1001 SW Fifth Avenue
Portland, OR 97204-1116
Phone: (503) 242-0000
Fax: (503) 241-1458
360 E. 10th Avenue, Suite 300
Eugene, OR 97401-3273
Phone: (541) 485-0220
Fax: (541) 686-6564
333 High Street, N.E.
Salem, OR 97301-3632
Phone: (503) 371-3330
Fax: (503) 371-5336
If you have questions concerning whether you qualify for estate
tax deferral mechanism, please contact our closely held business
members Randall L. Duncan, Douglas S. Chiapuzio or Jonathan D.
Mishkin, LL.M. at (503) 242-0000, and we will be glad to assist you.
Nothing in this communication creates or is intended to create an attorney-
client relationship with you, constitutes the provision of legal advice,
or creates any legal duty to you. If you are seeking legal advice,
you should first contact a member of the Closely Held Business Team
with the understanding that any attorney-client relationship would be
subsequently established by a specific written agreement with Harrang
Long Gary Rudnick P.C. To maintain confidentiality, you should not
forward any unsolicited information you deem to be confidential until
after an attorney-client relationship has been established.
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