Annual Installment Example 5 |
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| Feb-17-2016 | Date of death |
| Nov-17-2016 | Estate tax return due date. Form 4768 is filed to request an automatic 6-month extension of time to file with a separate request to extend the time to pay. The estimated amount of tax that will not be deferred under §6166 is $3,000,000, which designated sum is paid with the Form 4768 filing. |
| May-17-2017 | Estate tax return filing date. The estate makes a regular section 6166(a) 14-year election. The actual amount of non-deferred tax is $2,805,379.17, meaning there is an overpayment of non-deferred tax of $194,620.83. The estate elects to defer the maximum amount of tax eligible for deferral. |
| No payments are due with the return. | |
| Summary of post-filing payments | |
| Nov-17-2017 | 1st anniversary date - $171,910.24 interest paid. |
| Feb-18-2018 | Voluntary payment of $250,000 designated as tax. |
| Aug-25-2018 | Voluntary payment of $250,000 designated as tax. |
| Nov-17-2018 | 2nd anniversary date - $168,586.17 interest paid. |
| Feb-07-2019 | Voluntary payment of $250,000 designated as tax. |
| Aug-10-2019 | Voluntary payment of $250,000 designated as tax. |
| Nov-17-2019 | 3rd anniversary date - $161,387.36 interest paid. |
| Feb-24-2020 | Voluntary payment of $250,000 designated as tax. |
| Aug-30-2020 | Voluntary payment of $250,000 designated as tax. |
| Nov-17-2020 | 4th anniversary date - $154,840.12 interest paid. |
| Feb-06-2021 | Voluntary payment of $250,000 designated as tax. |
| Nov-17-2021 | 5th anniversary date and 1st tax installment due date - $148,362.91 interest and $ - 0 - tax is paid. |
| Nov-17-2022 | 6th anniversary date and 2nd installment due date - $147,637.52 interest and $568,169.32 tax is paid. |
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Annual Installment Computation - Example 5
§6166(b)(6) Adjusted Gross Estate Computation
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| Gross estate | 50,000,000.00 | |||||
| Schedule J - | ||||||
| A. | Funeral expenses | 25,000.00 | ||||
| B. | 1. | Executors' commissions | 1,000,000.00 | |||
| 2. | Attorney fees | 1,400,000.00 | ||||
| 3. | Accountant fees | 415,000.00 | ||||
| 4. | Miscellaneous | |||||
| a. | Appraisals | 250,000.00 | ||||
| b. | Utilities | 14,375.00 | ||||
| c. | Other | 1,215.00 | ||||
| Total Schedule J | 3,105,590.00 | |||||
| Schedule K - Debts | ||||||
| Debts of decedent | 144,535.00 | |||||
| Schedule K - Mortgages and Liens | ||||||
| Mortgages | 876,550.00 | |||||
| Total Schedule K | 1,021,085.00 | |||||
| Total Schedules J and K debts and expenses | 4,126,675.00 | |||||
| Allowable amount of deductions | 4,126,675.00 | |||||
| Schedule L - Net Losses | 0 | |||||
| Schedule L - Expenses on property not subject to claims | 0 | |||||
| Total Schedules J, K, and L debts and expenses | 4,126,675.00 | 4,126,675.00 | ||||
| Section 6166(b)(6) adjusted gross estate | 45,873,325.00 | |||||
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Annual Installment Computation - Example 5
§6166(a)(2) Ratio Computation
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| Section 6166 business value, divided by | 37,500,000.00 | |||
| Section 6166(b)(6) adjusted gross estate, yields | 45,873,325.00 | |||
| Section 6166(a)(2) ratio for the maximum amount of tax which may be paid in installments | 0.817469 | |||
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Annual Installment Computation - Example 5
Estate Tax Computation
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| 1 | Gross estate | 50,000,000.00 | ||||
| Schedules J, K, and L deductions | 4,126,675.00 | |||||
| Marital deduction | 0.00 | |||||
| Charitable deduction | 2,000,000.00 | |||||
| 2 | Total allowable deductions | 6,126,675.00 | ||||
| 3a | Tentative taxable estate | 43,873,325.00 | ||||
| 3b | State death tax deduction | 0.00 | ||||
| 3c | Taxable estate | 43,873,325.00 | ||||
| 4 | Adjusted taxable gifts | 0.00 | ||||
| 5 | Add lines 3c and 4 | 43,873,325.00 | ||||
| 6 | Tentative tax on the line 5 amount | 17,495,130.00 | ||||
| 7 | Total gift tax paid or payable | 0.00 | ||||
| 8 | Gross estate tax | 17,495,130.00 | ||||
| 9a | Basic exclusion amount | 5,450,000.00 | ||||
| 9b | DSUE amount | 0.00 | ||||
| 9c | Applicable exclusion amount | 5,450,000.00 | ||||
| 9d | Applicable credit amount | 2,125,800.00 | ||||
| 10 | Adjustment to applicable credit amount | 0.00 | ||||
| 11 | Allowable applicable credit amount | 2,125,800.00 | ||||
| 12 | Subtract line 11 from line 8 | 15,369,330.00 | ||||
| 13 | Credit for foreign death taxes | 0.00 | ||||
| 14 | Credit for tax on prior transfers | 0.00 | ||||
| 15 | Total credits | 0.00 | ||||
| 16 | Net estate tax | 15,369,330.00 | ||||
| 17 | Generation-Skipping taxes payable | 0.00 | ||||
| 18 | Total transfer taxes | 15,369,330.00 | ||||
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Annual Installment Computation - Example 5
The Annual Installment Payable
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| Net estate tax (equal to total transfer taxes in this example) | 15,369,330.00 |
| Section 6166(a)(2) ratio expressed as a percentage | 81.7469% |
| Maximum amount of tax eligible for a section 6166 election | 12,563,950.83 |
| Tax not deferred and due on the return due date of Nov-17-2016 | 2,805,379.17 |
| Non-deferred tax paid on the return due date | 3,000,000.00 |
| Balance (or Overpayment) of non-deferred tax due | (194,620.83) |
| The Annual Installment | |
| Maximum amount of tax eligible for the section 6166(a) election | 12,563,950.83 |
| Number of installments selected | 10 |
| The annual installment, the first of which is due Nov-17-2021 | 1,256,395.08 |
| The 1st Annual Installment Payable Nov-17-2021 | |
| The annual installment due | 1,256,395.08 |
| Prepayment credit - overpayment of non-deferred tax | (194,620.83) |
| Voluntary tax payment Feb-18-2018 | (250,000.00) |
| Voluntary tax payment Aug-25-2018 | (250,000.00) |
| Voluntary tax payment Feb-07-2019 | (250,000.00) |
| Voluntary tax payment Aug-10-2019 | (250,000.00) |
| Voluntary tax payment Feb-24-2020 | (250,000.00) |
| Voluntary tax payment Aug-30-2020 | (250,000.00) |
| Voluntary tax payment Feb-06-2021 | (250,000.00) |
| Total prepayment credits | (1,944,620.83) |
| 1st annual installment payable | 0.00 |
| Interest payable on Nov-17-2021 | 148,362.91 |
| Total installment payable Nov-21-2021 | 148,362.91 |
| Excess prepayment credits carried forward | (688,225.75) |
| The 2nd Annual Installment Payable Nov-17-2022 | |
| The annual installment due | 1,256,395.08 |
| Excess prepayment credits brought forward | (688,225.75) |
| Other prepayment credits | 0.00 |
| Total prepayment credits | (688,225.75) |
| 2nd annual installment payable | 568,169.33 |
| Interest payable on Nov-17-2022 | 147,637.52 |
| Total installment payable Nov-21-2022 | 715,806.85 |
| Excess prepayment credits carried forward | 0.00 |
| Annual Installment Example 5, Comment 1: Cincinnati Campus sometimes credits overpayments of deferred tax against interest due on the following anniversary date. If that were to be done in the example above, the installment payable Nov-17-2021 would be reduced to zero and the excess prepayment credits carried forward would be reduced by the amount of interest that was offset. However, we do not agree with this method of offsetting interest accruals with overpayments of tax unless the estate specifically requests it in writing. In our opinion, tax overpayments should be credited only against tax installments as they come due, pursuant to example 1(i) in Reg. section 20.6166-1(i). |
| Annual Installment Example 5, Comment 2: The problem we have with such offsetting of interest (i.e. when not specifically requested by the estate) is that it is really a back-door suspense account interest payment regime without the restrictions that a true suspense account payment regime would impose. See PLR 9130001, where this method of applying overpayments of tax against future interest accruals is permitted if the estate requests in writing that the overpayments be applied against future interest accruals. But the PLR also makes clear that the amount to be applied against future interest will not earn interest and will not reduce the base on which interest is computed. An estate pays a price for choosing this option - it receives no benefit from the overpayment until it is applied against interest. Over the course of a 14-year §6166 election an estate could pay several thousand dollars additional interest to IRS, and an executor might be subject to surcharge in some jurisdictions as a result. |
| While with IRS at the service center the author received a request from an estate for precisely this type of suspense account treatment for a very large up-front excess payment - apply it to future interest and not to tax. (The estate had cash on hand at the time but expected to have very little cash available for several years in the future because of business expansion expenses.) The executors and all of the heirs had agreed to this approach. |
| The computations were set up as requested and the payment was treated accordingly. The Accounting function manually tracked the excess payment on the side of its account folder. Subsequent anniversary date interest accruals were computed on the account balance unreduced by the amount being held in suspense. The estate earned no interest on the payment being held in suspense. |
| The suspense account balance was used up by the 4th anniversary date interest payment, at which time the estate had sufficient cash to begin making regular installment payments the following year. |
| Annual Installment Example 5, Comment 3: Before consolidation of estate tax filing and section 6166 account management at Cincinnati Campus in 2001, there were 10 service centers across the country that handled estate tax return filings and section 6166 account administration. Some service centers routinely applied overpayments against subsequent interest accruals, others did not. |