Section 6166: Definition and How It Works in California

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Section 6166 lets an estate pay the federal estate tax on a closely held business in up to 10 annual installments, starting up to five years after the due date. It applies when the business is worth more than 35 percent of the adjusted gross estate.

How it works in California

Ridley Law’s guide to estate tax deferral under section 6166 covers the election in detail. The executor makes the election under 26 U.S.C. § 6166(a), and only the share of the tax attributable to the business can be deferred. A sole proprietorship qualifies, as does a partnership or corporation carrying on a trade or business if the estate holds at least 20 percent of the capital or voting stock, or if it has 45 or fewer partners or shareholders (§ 6166(b)(1)). Passive assets held by the business don’t count (§ 6166(b)(9)).

Interest on part of the deferred tax runs at 2 percent, and on the rest at 45 percent of the normal underpayment rate (26 U.S.C. § 6601(j)). Deferral ends early if 50 percent or more of the business interest is sold or withdrawn (§ 6166(g)). For a California family business that owns real estate, any restructuring among heirs to raise cash also needs a property tax review, because a transfer that gives anyone more than 50 percent of an entity triggers reassessment (Rev. & Tax. Code, § 64(c)).

Why it matters

Deferral gives heirs years to pay, so they don’t have to sell the business to cover the tax. Life insurance is the other usual answer, and Connelly v. United States (2024) 602 U.S. 257 shows how that can backfire. When a company owned the policy to redeem a deceased owner’s shares, the Supreme Court held the redemption obligation didn’t reduce the value of the shares, so the insurance money raised the value being taxed. In a hypothetical, an estate whose $30 million manufacturing company is 60 percent of the adjusted gross estate can elect to defer the tax on that 60 percent and pay it over as long as 14 years.

Common mistakes

Counting investment accounts and rental property the company holds as part of the business, when passive assets are left out. Selling or distributing too much during the deferral and accelerating the whole balance. And letting the executor miss the election, which has to be made on time.

Related terms

• Family Limited Partnership (FLP): an FLP that only holds investments usually isn’t a trade or business for section 6166.
• Executor: the executor makes the section 6166 election and stays responsible for the installments.
• Irrevocable Life Insurance Trust (ILIT): the other common source of cash to pay estate tax on a family business.

Part of the California estate planning glossary. For the full treatment, see Estate Tax Deferral Under Section 6166: Paying Estate Tax on a Family Business Over 14 Years.