Estate Tax Installments and Postponements: Part 3 of Form 706
3 of 8 in Series: The Essentials of Completing the Estate Tax Return (Form 706)
An estate’s administrator can use Part 3 of Form 706 to make elections concerning the payment of federal estate taxes. When electing to pay the tax in installments, you need to verify that the estate qualifies for this election. If reversionary or remainder interests (future interests in property) constitute a large portion of the decedent’s taxable estate, you may want to use Part 3 to elect to postpone the taxes on this interest.
Electing to pay the estate tax in installments
If you elect installment payments, consult with a qualified tax preparer to ensure that you meet all the necessary conditions for this election. If the estate qualifies for installment payments under Section 6166, the interest payments are deductible on Form 1041, despite the prohibition against deducting personal interest on income tax returns.
One difference between income tax for estates/trusts and for individuals is that you’re allowed deductions on fiduciary income tax returns for expenses that you’ve paid solely because it’s an estate or trust, even if that same expense isn’t deductible on an individual return.
Section 6166 interest is personal interest, but you’re paying it because you elected an option available only to estates. Therefore, it’s deductible for income tax purposes.
Electing to postpone estate taxes
On line 4, Part 3, you may elect, under Section 6163 of the Internal Revenue Code, to postpone the tax on any future interests (reversionary or remainder) until six months after the termination of the precedent interest (interest which comes before the reversionary or remainder interest) in the property.
Reversionary and remainder interests are each a right to the future enjoyment of property which is being used by another at present. You can request a further extension of a reasonable period up to three years after the original extension for reasonable cause.
You should consider making this election if the estate will otherwise be left short of cash by paying the tax currently, and if the reversionary or remainder interest makes up a sizeable portion of the taxable estate. If you make the election, you must post a bond to the IRS for twice the amount of the tax and estimated interest.