For a family that owns an operating business, the federal estate tax can create a painful problem. The tax is generally due nine months after death, and it is calculated on the value of everything the decedent owned — including the business. But a business is not cash. If most of the estate's value is locked inside the company, the heirs can be forced to sell it, borrow against it, or break it up simply to write a check to the IRS. That is the opposite of what most owners spend a lifetime building.

Internal Revenue Code (IRC) Section 6166 exists to prevent that outcome. It lets the executor of an estate spread the estate tax attributable to a closely held business over as long as 14 years, instead of paying it all at once. The goal is straightforward: keep the business in the family long enough that the tax can be paid out of the company's earnings rather than out of its hide.

When This Actually Matters

Section 6166 only helps if an estate owes federal estate tax in the first place. For 2026, the One Big Beautiful Bill Act set the federal estate and gift tax exemption at $15 million per person ($30 million for a married couple using both exemptions) and is currently scheduled to maintain that level with inflation adjustments after 2026, subject to future legislative changes. Most families will pass under that threshold and owe nothing.

The estates that do face the tax, however, are often exactly the ones where Section 6166 is most valuable — successful business owners whose company makes up the bulk of their net worth. For those families, this provision may help support the ability to keep the business rather than sell it.

How the Payment Structure Works

If the estate qualifies and the executor makes the election, the estate tax tied to the business can generally be paid like this:

• Interest only, up to the first four years. During the early years of the deferral, the estate pays only interest on the deferred tax — no principal.
• Then up to 10 annual installments of principal. After the interest-only period, the tax itself is paid in as many as 10 yearly installments. Combined, the deferral can stretch to roughly 14 years from the original due date.

The interest terms are deliberately favorable:

• A 2% rate on the first layer. A reduced 2% interest rate applies to the estate tax attributable to roughly the first $1.94 million (the 2026 inflation-adjusted figure) of closely held business value above the exemption. In practical terms, that caps the amount of tax eligible for the 2% rate at about $776,000 for 2026.
• A reduced rate on the rest. Estate tax above that first layer does not bear the full IRS underpayment rate. It is charged at 45% of the standard underpayment rate set under IRC Section 6621 — a meaningful discount to the rate an ordinary late taxpayer would face.

One important caveat: interest paid under a Section 6166 election is not deductible for income or estate tax purposes for anyone dying after 1997. The favorable rates are the trade-off for losing the deduction.

Who Qualifies

The election is not automatic, and the rules are strict. The estate generally must meet all of the following:

1. The 35% test. The value of the closely held business interest must exceed 35% of the decedent's adjusted gross estate. This is the gateway requirement.
2. An active trade or business. The company must be conducting a genuine operating business, not simply holding passive investments. An entity that exists mainly to manage stocks, bonds, or rental real estate generally will not qualify.
3. An ownership threshold. The decedent's estate must hold at least 20% of the total value of the company, or the business must have 45 or fewer owners (partners or shareholders).
4. A timely election. The executor must affirmatively elect Section 6166 on a timely filed federal estate tax return (IRS Form 706). Miss the deadline and the opportunity is generally lost.

Cautions Worth Knowing in Advance

Section 6166 is powerful, but it is not a set-and-forget benefit:

• The deferral can be accelerated. If the family later sells a large portion of the business, or misses an installment, the IRS can call the entire remaining balance due. The business has to stay substantially in the family for the plan to hold.
• The IRS may require security. The government can require a special lien or a bond to protect its interest over the long payment period.
• Definitions matter. Whether an interest counts as an "active trade or business," and how the 35% and ownership tests are applied, can hinge on details of entity structure and valuation. These are not areas to guess at.

The IFA Perspective

Section 6166 is a payment tool, not a planning strategy on its own. It buys time; it does not reduce the tax. Families who plan ahead may be better positioned to use it effectively — coordinating their estate structure, business succession, and investment portfolio so that liquidity is available when it is needed and the qualifying tests are actually met at death.

That coordination is where thoughtful planning earns its keep. A well-structured, diversified portfolio alongside the business may help provide liquidity and reduce the risk of liquidity constraints for heirs, and appropriate entity and ownership arrangements may help preserve eligibility for relief like Section 6166, depending on specific circumstances.

If you own a closely held business and your estate may exceed the exemption, this is generally a conversation worth having well before it is needed — with your estate attorney and CPA, and with your advisor as part of your broader financial plan.