IRS Requires Estates of Small Business Owners to Post Bond(s) for Payment of Estate Tax Under Sec. 6166

HNWFirm News

Estates holding a closely held business interest valued at greater than 35 percent of the adjusted gross estate can elect to pay estate taxes in installments. The rules also permit the IRS to require the estate to post a surety bond to secure the government’s interest in the deferred tax. The IRS has imposed a policy to make the bond mandatory and the issue was litigated in Tax Court. The Tax Court held that the IRS should apply the bond requirement on a discretionary case-by-case basis. In response, the IRS announced a revision of its policy (IRS Notice 2007-90, 2007-46 IRS 1003) and will apply various factors to determine the need to require a bond. Among the factors to be considered are (1) the duration and stability of the business, (2) the timely ability to pay the installments of tax and interest, and (3) the compliance history of the business. The Notice requests comments from practitioners about other factors that might be appropriate. If you have questions on this issue, please call me to discuss.

Failure to Name an Alternate Beneficiary to an IRA Accelerates Income Tax Liability

In a recent case, the decedent, aged 78, owned an IRA at the time of his death. The designated beneficiary of his IRA was his wife. The decedent failed to name a secondary beneficiary, although a prior designation named his daughter as secondary beneficiary. When his wife died, the decedent failed to complete a new beneficiary form before his death. The executor got the probate court to approve a change in the beneficiary to the IRA owner’s daughter subsequent to his death. The IRS ruled (Ltr. 200742026) that the estate is the beneficiary of the IRA and that no individual can be named beneficiary for the purposes of determining the applicable distribution period of the IRA. Thus, the account must be distributed over the decedent’s remaining fixed-term life expectancy instead of the daughter’s life expectancy, causing income taxes to be incurred earlier than necessary. This ruling indicates the importance of checking beneficiary designations and making timely changes as necessitated by individual circumstances.

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