If the interest of a decedent in a closely held business exceeds 35% of his adjusted gross estate, his estate may defer the payment of a portion of the federal estate at low rates of interest. The deferred tax is payable in the number of equal annual installments (up to 10) elected by the estate. To the extent the value of the business is comprised of passive assets, i.e., assets not used in carrying on a trade or business, the deferral is not available.

In PLR 200845023, the IRS once again addressed the application of these deferral rules to real estate assets. The decedent owned all of the interest in a limited liability company (“LLC”) that owned interests as a tenant-in-common in three parcels of real estate. Even though the LLC did not own the entire parcel, the decedent nevertheless worked full time for the LLC in connection with the management of two (Properties “A” and “B”) of the three properties. There was no written agreement with the other co-tenant, but it was understood between them that the decedent would manage the properties. The decedent had no involvement in the management of the third property (Property “C”).

The IRS ruled that to the extent the value of the company was attributable to its interests in Properties A and B, those interests constituted a trade or business and qualified for deferral of estate tax under Section 6166. The value of the interest in Property C did not qualify.