For one thing, a Section 6166 deferral is not automatically assured; that is because the mathematical 35 percent test must be met to qualify, and it must be an active business interest. What's more, it defers only that portion of the tax that is attributed to the value of the business.
The deferral doesn't create assets; it just postpones payment of part of the total estate tax due. Furthermore, interest increases the total cost substantially.
If the source of money to pay the tax and interest is from the business, then the source of payment will be expensive after-tax dollars (dividends).
A 6166 deferral commits the heirs to retaining the business for up to 14 years if they wish to avoid accelerating the tax due.
Funded buy-sell agreements and irrevocable life insurance trusts provide the liquid capital needed to fully fund business transfers and cover estate taxes. Heirs can transfer the business as it best benefits them. When comparing the premium dollars spent on life insurance to the dollar outlay for paying taxes and/or interest with money from other sources, the advantages to using the life insurance solution become clear.
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