When most of an estate is one company, the federal tax is due in cash nine months after death. Two provisions of the Internal Revenue Code let the business fund that tax over time, provided the estate qualifies and the plan keeps it qualified.
A family company does not turn into cash on the estate tax calendar. The plan decides whether the business pays the tax over years, or the family sells to pay it at once.
In 2026 the federal estate tax exclusion is $15 million per person, and California has no estate tax of its own. Above the exclusion, the tax is due with the return, nine months after death. For an owner whose estate is mostly one operating company, the usual sources of that cash are a sale of the company, a loan against it, or a drain on its working capital.
When no court appoints an executor, the federal definition of executor reaches whoever holds the decedent's property (Internal Revenue Code section 2203). For a business held in a living trust, that is usually the successor trustee, who files the estate tax return and makes the elections described below.
Installment payment under section 6166. If the business interest is worth more than 35 percent of the adjusted gross estate (the gross estate less debts, expenses and losses), the executor can elect to pay the tax attributable to the business in up to ten annual installments. The first installment can be deferred up to five years, with interest paid annually in the meantime, so the final payment can fall fourteen years after the original due date. The election is made on a timely filed estate tax return.
What counts as a closely held business. A sole proprietorship qualifies. A partnership or corporate interest qualifies if the estate holds 20 percent or more of the capital interest or voting stock, or if the entity has 45 or fewer owners, with family members' holdings counted together for that limit. The business must be active. Passive assets inside it, such as an investment portfolio, are left out of the value used for the 35 percent test.
The interest cost. A 2 percent rate applies to the deferred tax on a first, inflation-indexed slice of the business value. The balance bears interest at 45 percent of the ordinary underpayment rate. The estate cannot deduct that interest.
Redemption under section 303. A corporation can buy back shares included in the estate, and the payment is treated as a sale rather than a dividend, up to the total of death taxes plus deductible funeral and administration expenses. The stock must be worth more than 35 percent of the gross estate after debts, expenses and losses. Because inherited shares take a basis equal to their value at death, the redemption usually produces little or no taxable gain. The company funds the tax, and the family keeps the company.
The tax clause. A section 303 redemption is protected only to the extent the redeemed shareholder actually bears the death taxes or expenses. If the trust charges all estate tax to a share of the estate that holds no stock, while the company shares pass to a child free of tax, a redemption from that child does not qualify. If the trust is silent, California law generally spreads the tax among recipients in proportion to what they receive. The clause that allocates the tax should be drafted with the redemption in view.
What happens after death. Under section 6166, if half or more of the business interest is sold, distributed or withdrawn, the remaining deferred tax becomes due. A buy-sell agreement that requires the estate to sell its shares at death, or a family decision to sell the company a few years later, can end the installment schedule. A section 303 redemption does not count toward that half, provided an amount equal to the redemption is paid toward the estate tax by the next installment date. A missed installment can also accelerate the balance.
The balance sheet. Cash and investments the company holds apart from its operations count as passive assets for both 35 percent tests. An owner near the line can fall below it because reserves sit in a brokerage account. The IRS can also require a bond, or a special lien on business property, to secure the deferred tax, and the company's lenders should hear about that possibility early.
Estate Planning for a Family Business means testing the trust, the buy-sell agreement and the company's balance sheet against these rules while the owner can still change any of them.
General information about federal tax and California law, not legal or tax advice, and no attorney-client relationship is created. Eligibility depends on the values in your estate, your entity documents, and the terms of your trust.
Bring the trust, the buy-sell or shareholders' agreement, and the company's latest balance sheet. We will run the 35 percent tests and read the tax clause against them.
