What Constitutes Interests in a Closely Held Business?

Most of our clients are small business owners, and can be classified as a
“Closely Held Business.” Being a closely held business can have its upsides
and its downsides. For example …

Executors of an estate are eligible to defer the payment of their estate taxes
if 35% or more of their estate is made up of interest in a closely held
business. To figure out if that much of an estate does in fact constitute
interest in a closely held business, we must first define what a closely held
business is.

Basically, a closely held business is a business for which shares cannot be
traded on the public stock exchange, meaning that the owners of these
corporations are more actively involved in their businesses. For example, if
the owner of a closely held business personally took care of day-to-day
operations such as the hiring of contractors, then this person would
definitely own a large interest in the business. Interest in a closely held
business, for the purposes of estate law, requires a certain percentage of
ownership.

According to section 6166 of the Internal Revenue Code, interest in a closely
held business can mean one of three things:

  • 1. Being the proprietor in a trade or business run as a proprietorship.
  • 2. Being a partner in a partnership that carries on a trade or business if
    either i) 20% of more of the total capital interest in this partnership is used
    to determine the gross estate of the decedent, or ii) if this partnership had
    45 or less partners.
  • 3. Owning stock in a corporation that carries on a trade or business if either
    i) 20% of more in value of the corporation’s voting stock is used to determine the gross estate of the decedent, or
    ii) if this corporation had 45 or less stockholders.

As long as the value of the interest in a closely held business is 35% or
higher of the gross estate, then section 6166 of the IRC permits executors to
pay the estate tax in two or more, but no more than ten, instalments if the
decedent was a resident or citizen of the US on the date of death.

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