Inheritance tax can be paid in installments in limited circumstances, and what most people call “inheritance tax” is actually the federal estate tax, which the estate itself pays before assets pass to heirs. If the estate holds a large enough share of a closely held business, Internal Revenue Code Section 6166 lets the executor stretch payments over as long as 14 years.1Office of the Law Revision Counsel. 26 USC 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business Estates without a qualifying business can ask for hardship extensions of up to 10 years under Section 6161. The five states that levy a true inheritance tax on heirs set their own, generally stricter, rules.
First, Is Any Tax Actually Owed?
The federal government does not impose an inheritance tax. It imposes an estate tax, paid by the estate. For 2026, that tax only applies to estates above a basic exclusion of $15,000,000.2Internal Revenue Service. What’s New – Estate and Gift Tax Estates below that threshold owe nothing federally and don’t need a payment plan. When tax is owed, both the return and payment are due nine months after the date of death.3Office of the Law Revision Counsel. 26 USC 6075 – Time for Filing Estate and Gift Tax Returns
An inheritance tax, by contrast, is paid by the person receiving the assets, and only Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania impose one. Those rules are covered at the end.
Who Qualifies for the 14-Year Installment Plan
Section 6166 exists to keep families from having to sell a business to cover estate tax. The gate is strict: the decedent’s interest in a closely held business must exceed 35 percent of the adjusted gross estate.1Office of the Law Revision Counsel. 26 USC 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business Passive holdings like rental properties or stock portfolios don’t count.
A “closely held business” for this purpose means one of three things:
- A sole proprietorship the decedent ran.
- A partnership interest where the decedent owned at least 20 percent of the capital interest, or where the partnership had 45 or fewer partners.
- Corporate stock where the decedent owned 20 percent or more of the voting stock, or where the corporation had 45 or fewer shareholders.
An estate holding mostly investment assets does not qualify, no matter how large it is.
How the 14-Year Schedule Works
Once the estate qualifies, only the portion of estate tax attributable to the business interest can be deferred. The first five years are interest-only, with no principal due. After that, the remaining tax is paid in up to 10 equal annual installments, for a total run of up to 14 years.1Office of the Law Revision Counsel. 26 USC 6166 – Extension of Time for Payment of Estate Tax Where Estate Consists Largely of Interest in Closely Held Business
Interest is charged in two tiers, both cheaper than the standard IRS underpayment rate. Deferred tax up to a threshold amount, called the 2-percent portion, accrues interest at a flat 2 percent per year. For decedents dying in 2026, that threshold is $1,940,000, and it is adjusted for inflation annually.4Internal Revenue Service. Revenue Procedure 2025-32 Deferred tax above the threshold accrues at 45 percent of the standard underpayment rate.5Office of the Law Revision Counsel. 26 USC 6601 – Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax That pricing usually beats what the estate could get borrowing commercially.
The Collateral Requirement
The IRS does not defer large tax bills on trust alone. Under Section 6324A, the executor can elect a special lien on estate property in place of posting bonds. The designated property must have a fair market value at least equal to the deferred tax plus expected interest, and it does not have to belong to the estate — it can belong to an heir or other consenting party.6eCFR. 26 CFR 20.6324A-1 – Special Lien for Estate Tax Deferred Under Section 6166 If the collateral’s value later falls below the outstanding balance, the IRS can demand additional property within 90 days.
What Ends the Plan Early
A Section 6166 plan can collapse fast. Three situations trigger acceleration, meaning the entire remaining balance becomes due at once.
The first is disposing of too much of the business. If cumulative sales, distributions, or withdrawals of money reach 50 percent or more of the business interest’s value, the deferral ends and the IRS can demand the full unpaid balance. This applies to the aggregate of transactions across the life of the plan, so a series of smaller distributions can cross the line without anyone noticing until it’s too late.
The second is a missed payment. A late installment of principal or interest triggers acceleration, though there is a narrow safety valve: if the estate pays within six months of the missed deadline, the plan survives, but a penalty of 5 percent of the payment amount applies for each month it was late.
The third is failing to apply undistributed net income toward the tax in a year an installment is due.
If the Estate Has No Qualifying Business: Section 6161
An estate made up of real estate, investments, or other non-business assets can still get relief. Under Section 6161, the IRS can grant one-year extensions of time to pay, renewable for a cumulative maximum of 10 years from the original due date, when paying on time would create undue hardship.7eCFR. 26 CFR 20.6161-1 – Extension of Time for Paying Tax Shown on the Return
The bar is higher than Section 6166. This isn’t an election into a defined schedule; it’s a discretionary request, and the executor has to document a real cash shortage. The request goes on Form 4768, separate from Form 706, and must include a statement explaining why full payment is impractical, the estate’s current cash position, and a proposed partial payment plan.8Internal Revenue Service. Instructions for Form 4768 The request must be filed before the estate tax due date; late applications generally are not considered.
Interest during a Section 6161 extension runs at the full underpayment rate, without the two-tier pricing Section 6166 offers. That makes it more expensive, but for estates sitting on illiquid property that would otherwise sell at a discount under time pressure, it can be worth it.
How to Elect the Installment Plan
The Section 6166 election is a written notice attached to a timely filed Form 706, the federal estate tax return. Form 706 is due nine months after the date of death, and a six-month extension to file is common.3Office of the Law Revision Counsel. 26 USC 6075 – Time for Filing Estate and Gift Tax Returns The notice identifies the qualifying business, shows that its value exceeds 35 percent of the adjusted gross estate, states the amount of tax to be deferred, and lays out the proposed schedule of interest-only years and annual installments. The IRS reviews the election and sends written notice of acceptance or denial, and a denial can be appealed administratively.
State Inheritance Taxes
The five states that impose an inheritance tax on heirs each set their own payment rules, and they are generally less flexible than the federal options. Pennsylvania, for example, requires full payment within nine months of the decedent’s death and offers no installment option. Some states with their own estate taxes provide hardship-based extensions or short deferrals, but nothing on the scale of the 14-year federal schedule. A federal Section 6166 election does not cover any state tax, so heirs facing a state bill need to work directly with their state revenue department.