Can an estate pay estate tax in installments?
Available to estates that meet the 35% test and elect on time
Yes, for qualifying estates. Under IRC §6166, if a closely held business interest exceeds 35% of the adjusted gross estate, the executor can elect on a timely filed estate tax return to pay the tax attributable to that interest in up to 10 annual installments. The first installment can be deferred up to 5 years, with interest-only payments until then. Under §6601(j), interest on the 2-percent portion is 2%.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- The closely held business interest must exceed 35% of the adjusted gross estate.
- Only the estate tax attributable to the business interest can be deferred.
- The election must be made no later than the due date of the estate tax return, including extensions.
- For 2026 deaths, the 2% interest rate applies to tax on the first $1,940,000 of taxable value above the exemption; the rest bears interest at 45% of the regular underpayment rate.
- Late payments and dispositions of 50% or more of the business can accelerate the unpaid tax.
What it is
Estate tax is generally due nine months after death. For a family whose wealth is concentrated in an operating business, that deadline can force a sale of the business or expensive borrowing.
Section 6166 gives qualifying estates up to about 14 years from the original due date to pay the estate tax attributable to the business. It does not reduce the tax; it changes when the tax is paid. For 2026, the basic exclusion amount is $15,000,000 (Rev. Proc. 2025-32), so this matters mainly for larger estates.
What the law says
IRC §6166(a)(1) allows the executor to elect to pay part or all of the estate tax in 2 or more, but not more than 10, equal installments if the value of a closely held business interest included in the gross estate of a citizen or resident exceeds 35% of the adjusted gross estate. Section 6166(a)(3) allows the first installment to be due up to 5 years after the normal due date, and each later installment one year after the previous one. Section 6166(d) requires the election to be made no later than the due date for filing the estate tax return, including extensions.
Section 6166(b)(1) defines an interest in a closely held business, including a proprietorship, a partnership interest if 20% or more of capital is included or the partnership had 45 or fewer partners, and corporate stock if 20% or more of voting stock is included or the corporation had 45 or fewer shareholders. Passive assets are excluded from the business value.
Section 6601(j) sets interest at 2% on the 2-percent portion and at 45% of the normal underpayment rate on the rest. IRM 20.2.10.2.1 describes how the IRS computes this interest, and IRM 4.25.5.2.31 provides the examiner lead sheet for §6166 elections. Interest on deferred estate tax is not deductible (§163(k)).
Requirements and tests
The estate must meet each of these:
- The decedent was a U.S. citizen or resident at death.
- The business is an active trade or business, not a passive investment holding.
- The interest meets the §6166(b)(1) definition of a closely held business.
- The value of the interest exceeds 35% of the adjusted gross estate (gross estate minus deductions allowed under §§2053 and 2054).
- The executor makes the election on a timely filed Form 706, including extensions, with the information required by Treas. Reg. §20.6166-1(b).
- The IRS may require a bond or a special lien under §6324A.
How it works
First compute the share of the estate tax attributable to the business: the total estate tax multiplied by the business value as a fraction of the adjusted gross estate. That amount can be deferred; the rest is due nine months after death.
The executor then chooses the schedule. During the deferral period, only interest is paid each year. After that, the deferred tax is paid in up to 10 equal annual installments, with interest on the unpaid balance.
A protective election can be made on a timely return when the estate's qualification depends on values that are not yet final. If the IRS later increases values, deficiencies attributable to the business interest can generally be added to the installments.
The 2-percent portion is based on the tentative tax on the 2026 amount of $1,940,000 plus the exclusion amount, reduced by the applicable credit, but not more than the deferred tax.
Assumptions: Decedent died in 2026 as a U.S. citizen and Texas resident (no state estate tax); no lifetime taxable gifts; no marital or charitable deduction.; Adjusted gross estate and taxable estate $22,500,000; basic exclusion amount $15,000,000; estate tax at 40% on the excess, or $3,000,000.; The closely held business interest is worth $13,500,000 (60% of the adjusted gross estate) and consists entirely of active business assets.; The 2-percent portion uses the 2026 amount of $1,940,000 (Rev. Proc. 2025-32). The IRS underpayment rate is not assumed, so interest on the rest is not computed.
| Estate tax (($22,500,000 − $15,000,000) × 40%) | $3,000,000 |
|---|---|
| Tax attributable to the business ($3,000,000 × 60%) | $1,800,000 |
| Tax due nine months after death ($3,000,000 − $1,800,000) | $1,200,000 |
| 2-percent portion ($1,940,000 × 40%) | $776,000 |
| Annual interest on the 2-percent portion at 2% | $15,520 |
| Balance bearing interest at 45% of the underpayment rate ($1,800,000 − $776,000) | $1,024,000 |
| Each of 10 annual principal installments ($1,800,000 ÷ 10) | $180,000 |
The estate pays $1,200,000 at nine months and spreads $1,800,000 over up to 10 installments that can start as late as five years after the due date, with interest on the balance.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
Missing an installment can end the deferral; the statute gives a six-month grace period with penalties before acceleration. Selling or withdrawing money from the business equal to 50% or more of its value generally accelerates the remaining tax. The estate must also keep the IRS informed and maintain the security the IRS requires. Examination of the business valuation can change both the tax and the qualification.
Who it is not for
This is not for estates whose business interest is 35% or less of the adjusted gross estate. It is not for an executor who misses the election deadline. It is not for estates whose business value is mostly passive assets. And it is not for families who plan to sell the business soon, because a sale of 50% or more generally accelerates the tax.
How ebotCPA helps
We test the 35% requirement, compute the deferrable tax and the 2-percent portion, prepare the election with Form 706, and calendar the installments. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
How long can estate tax be deferred under 6166?
The first installment can be due up to 5 years after the normal due date, followed by up to 10 annual installments, so the last payment can be about 14 years after the due date.
What is the 2% portion for 2026?
For decedents dying in 2026, the 2% rate applies to the estate tax on the first $1,940,000 of taxable value above the exemption, limited to the deferred tax (Rev. Proc. 2025-32).
Can the election be made late?
No. IRC §6166(d) requires it by the due date of the estate tax return, including extensions. A protective election can be made on a timely return if qualification is uncertain.
What ends the installment arrangement?
Late payments beyond the grace period, and dispositions or withdrawals of 50% or more of the business interest, can accelerate the unpaid tax.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.