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The Installment Strategy for Dealing with Estate Tax

The federal estate tax applies a substantial 40 percent tax to inherited assets in excess of a $5.34 million exemption. By law, these taxes must be paid within nine months after the death of the estate holder. However, the IRS allows for an installment plan on these taxes in the specific instance that the estate’s value includes a business interest.

The parameters to qualify for this installment allowance are as follows:

  • The estate includes a farm or business that can be valued as at least 35% of the adjusted gross estate (meaning that debts and expenses have been factored into the estate total).
  • The estate holder’s interest in the business was either as sole proprietor or with a significant stake of capital or stock in a partnership/corporation. The adjusted gross estate must include 20% or more of the total capital interest or voting stock to be qualified. Or if the partnership or corporation had 45 or fewer partners.

Provided the estate meets these requirements, the heirs may pay the business interest taxes over a course of up to 14 years—set up as annual payments for ten years following a five-year deferral period. Note that this installment plan will only apply to the portion of the estate that is related to the business—all other taxable assets in the estate must be paid within nine months. Additionally, taxes owed throughout the duration of the installment setup will tack on annual interest money due. This interest rate is fairly modest—2 percent annually, and only as related to the first $1.45 million (for 2014) of the business interest value.

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