If your estate clears the exemption, the 40% tax is due in cash nine months after death—and the IRS does not accept shares of the family business. When the wealth is locked in an operating company, a ranch, or commercial real estate, the heirs face a brutal choice: fire-sell the crown jewel at a distressed price to a competitor who knows you are forced sellers, or find another way. Life insurance in an ILIT (section “Life Insurance Workaround”) is the cleanest pre-funding, but three statutory tools exist for estates that did not insure enough:
If a closely held business makes up more than 35% of your adjusted gross estate, IRC §6166, “Extension of time for payment of estate tax where estate consists largely of interest in closely held business” lets the estate defer the business-attributable tax: interest-only for up to five years, then principal in installments over up to ten more—roughly fourteen years total—at a deeply subsidized 2% rate on the tax attributable to the first $1̇ million-plus of value (indexed). For an asset-rich, cash-poor estate, this is the difference between keeping and losing the business.
Normally, pulling cash out of a C corporation is taxed as a dividend. IRC §303, “Distributions in redemption of stock to pay death taxes” carves out an exception: a corporation can redeem a deceased shareholder’s stock—up to the amount of estate taxes plus funeral and administration expenses—as a tax-favored sale rather than a dividend, giving the estate liquidity from corporate cash without a punitive second tax.
The estate borrows the cash to pay the tax (often from a related entity) on a fixed, non-prepayable note, and—under Estate of Graegin v. Commissioner—deducts the entire future interest as an administration expense on Form 706, reducing the taxable estate today. The loan must have genuine economic substance, so the IRS litigates aggressive versions; structure it with a real lender and a real business need.
A Worked Example: §6166 Maria dies in 2026 leaving a $25 million estate: a $20 million manufacturing company she built, a $2 million home, and $3 million in cash and securities. After her $15 million exemption, the taxable estate is $10 million and the estate tax is $4 million—due in cash nine months after death. Her $3 million of liquid assets, part of it already spoken for by debts and administration expenses, cannot cover it. Without relief, the company is sold to pay the IRS.
Section 6166 rescues the estate because the business ($20 million) is 80% of the estate, far above the 35% threshold. The tax attributable to the business is million, and that portion can be stretched over roughly fourteen years: interest only for the first four years, then ten annual principal installments. A deeply subsidized 2% interest rate applies to the tax on the first $1.9 million or so of taxable value (indexed annually), with a reduced rate above it. So instead of finding $4 million in nine months, Maria’s executor pays the $800,000 of non-business tax up front and services the remaining $3.2 million out of the company’s own annual earnings over more than a decade. The business survives intact—which was the entire point of Maria building it.
These are not mutually exclusive with insurance—they are the backstop when the policy is too small or was never bought. The planning lesson is to identify the liquidity gap while you are alive, when you can still buy coverage, restructure the entity, or start gifting interests, rather than leaving your executor to negotiate a fire sale.