0:01 And where are you going? What do you want? [Music] Hello and welcome to Trust and Estates Weekly. I'm your host, Kevin Bemel, and I'm here every Monday at 10:00 a.m. Pacific time to talk about estate planning and trust and probate administration. uh primarily from the standpoint of people like myself who do this professionally. Uh but also to help those of you who are going through your
0:37 own estate planning process or trying to get more familiar with it and in anticipation of doing so or or perhaps you've been uh appointed as the executive of an estate and you don't know what to do. So certainly here to uh help you as well. So today I'm going to be talking about a situation where the um an estate uh does not have uh sufficient liquidity or perhaps any liquidity
1:13 uh with which to administrate it. So while technically this could happen in a trust uh because of the ongoing nature of the trust and the typically much broader authority that a trustee has um as compared to the personal representative for an estate. Um as well as um shoot my thought just went away. Um uh so uh oh as well as the fact that
1:52 with a trust again generally speaking the court does not have cognizance over what a trustee or the trustees do right so dealing with the issue of illquidity is is easier in a trust in in most cases. Uh but in a probate where the the job of the personal representative being an executive or or an administrator, a professional fiduciary like me, their job is to collect the assets, pay the debts and distribute uh the the the remaining um
2:30 you know the remaining assets of the estate. So if there is no liquidity in the estate, no cash in the estate or if it's very limited. So this can make the personal representative's job much more difficult. Now it can be something as simple as um paying the funeral expenses for the deedent which um oftent times even if there's a life insurance policy uh that policy will not pay off in time to pay for funeral
3:05 expenses. Now, there are some funeral homes that will uh essentially, you know, agree to wait for their money in one way or another. Most will not. Uh, minimally, somebody's going to have to come up with at least a credit card, right, to pay for the the the the burial if there's a service or whatever. Okay. Uh typically it's going to be uh the the um uh the the family members um you know the surviving family members who who do that. Um rarely will
3:43 a personal representative who's not related to the deedent um agree to front those kind of expenses. Uh and so uh so it could be something as simple as that. Um it could be that there are are debts that have to be paid, there are mortgage payments that have to be made, uh etc. Um and it it could be that the estate is large enough that estate taxes have to be paid. So, if it's um as as you know in the recent tax in the uh tax
4:20 leg in the tax legislation that was passed recently, the um the estate tax exemption was set at about $15 million. Okay? So, that's going to exempt um most estates from estate taxes. But if you've got a $20 million estate or or larger or even a $16 million estate, you are going to owe some estate taxes. And the estate tax rate is high. It's 40%. Now, it's it it's it starts out lower. It's a graduated tax, but it it ramps up to 40%
4:57 pretty quickly. So for planning purposes, if if you've got a 16, let's say you've got a $20 million estate, so subtract 15 u $15 million from that, you've got $5 million. The estate is is going to owe around $2 million in estate taxes. Now, there are adjustments that are made to that. The cost of administrating the estate are deducted. uh if if there are debts on real estate so that may be uh deducted from the gross
5:33 value of the estate right so um I'm not giving you accounting advice as as the you know this the ticker scrolling on the bottom of the screen indicates but I'm just giving you an idea of you know what the estate tax burden could potentially be and you know if you've got an estate worth $20 million. Okay. Uh it's it's likely that it has at least some if not a lot of illlquid assets. So those assets could be real estate. They could be a closely held
6:10 business. Um it could be collectibles, art, cars. Okay? And you say, "Well, what what kind of car adds up to $20 million?" Well, there are Ferraris that I was listening to a podcast a week or two ago, some special edition Ferrari. I I I think it's selling for I think they said something like $10 million. Okay. And because they're only making a couple hundred of them, it's unlikely that the price is going to decline once they're sold. They will probably appreciate over time. So, you know, if
6:46 an estate owns one of those cars, right? Right there, you've got 10 plus million dollars of of value and and and a car, a collectible like that is is an illquid asset, right? Because it can't be readily turned into cash the way uh publicly traded securities can be or bonds can be or for that matter cash, right? The estate has a bunch of cash in it for some reason. So um there's also court costs, there are accounting fees. Okay. So unlike the personal representative who especially in a state
7:24 like California, so um typically I get paid what are called statutory fees which is which means the fees are set by the probate code and I'm not eligible to collect those fees until the probate closes. Now I can apply a personal not just me any personal representative can apply for interim fees. Okay. But if there is not cash to pay them uh the the court may very well ask well okay you're applying for interim fees. There's no cash in the estate. How are you planning
7:59 to pay these fees? Right? And if paying the fees, interim fees to the personal representative would um make it more difficult to operate the estate, uh the court may very well not allow extraordinary fees um because they would view it as a a breach of duty on the part of the personal representative. Okay? So the personal representative and usually his attorney um is also getting what are called statutory fees. again paid when the probate closes. Okay. But other professionals typically want to be
8:36 paid um upfront. That includes the probate referee, interestingly enough, who's who's paid by the court. That includes uh the accountants. It includes appraisers. Okay? So, a probate referee, as I've talked about in other shows, is is essentially an appraiser appointed by the court. However, the IRS, generally speaking, will not recognize the professional qualifications of a probate referee merely because they're a probate referee. Okay? So, if you've got an estate that has a lot of real estate in
9:13 it, for example, and the probate referee is not properly credentialed, you could end up paying for a probate referee and then having to pay for an appraiser as well. And that appraiser is going to want his fees if not upfront, which many appraisers do um at the time of or just prior to delivery of those reports. Okay. And there there could be lots of other needs for liquidity. Um there could be insurance that needs to be paid for on on property on, you know, a collection. If there's a
9:48 like I say if there's a collection let's say there's a collection of cars it would be a breach of fiduciary duty not to maintain insurance on those cars you know what would happen to the inheritance of of the beneficiaries if the cars were stolen and couldn't be recovered or they were recovered but they were damaged right and there were no insurance they were not properly insured. So all of these various costs require payment uh while the estate is making its way through probate and therefore they necessitate uh
10:23 liquidity. So uh there are um there are several uh options that a personal representative uh can consider. There are two somewhat esoteric internal revenue code sections to deal with this. I'm going to talk about them uh after uh I'm going to talk about them later. So, I'm going to talk about some of the more straightforward ones first, okay? And and explain why these may not be good
10:58 options. and then you'll be able to better see why the Internal Revenue Code has has these other other options. Okay. So, uh let's talk about first of all an estate that has a lot of real estate in it. Now, if if that real estate is the deedent's uh primary residence, okay, it it probably wasn't rented out. Okay. And it it but it and if if the uh real estate also includes a second home or so
11:35 then maybe that wasn't rented out either. But if it includes some um income producing property. Okay. So then that property is producing some income. Hopefully there's income over and above expenses. Okay. And so then the money that otherwise would have gone to the deedent now comes to the estate and that could provide some liquidity for the estate. Uh if if the h if the estate has houses, okay, and and for whatever reason um the personal representative
12:10 thinks that um the houses are not going to be sold. So maybe there's only one heir. The heir would like to retain the house and so the you know the um the personal representative is has decided to do that. So then maybe the houses can be the house or houses can be rented out and and that will generate some income some net income over and above the expenses of owning the houses. That's that's a possibility. Although in many places the rental on a house is not um
12:45 is not larger than the property taxes, insurance and maintenance costs and mortgage payment if there is one and so that may not be feasible. Now the the estate may also own uh a property in which a closely held business operates and maybe for various reasons the estate um or the the I'm sorry not the estate the deedent was not charging rent to the business uh for being in that space. Okay. If the business is going to be
13:21 ongoing, so then it may be time to negotiate a a rental agreement between the business and the property in which it's located. And again, that could that could generate some income to the estate and provide um some liquidity. So the first thing one of the first things I would look at is uh you know again generate uh what property does the estate own that can be rented out uh that you know that would generate some net income and provide some cash to the
13:58 estate for some for other expenses. So so that's that's one way of of handling things. Okay. Uh and and it's a pretty pretty obvious one. The next most obvious one is to sell some assets. Okay, so again going back to that example where there's a house and there's a second there's a primary residence, a secondary residence, maybe some income property or maybe there's a property in which a business is operating. Okay, so maybe it makes sense to sell the second home. Okay. And then the proceeds from that sale can provide
14:35 liquidity to the estate for the payment of various expenses. Okay. That that might be one thing to do. Now, the the issue with selling property is uh the estate doesn't want to have to, you know, conduct a fire sale, so to speak. Okay? And often times people think because an estate is selling property, they're going to be able to buy it at, you know, a below market price or a fire sale price. Okay, that is generally not the case, at least in
15:10 my experience. I know I I you know, I don't play that way, I guess, is the best way to put it, right? And and there are a lot of people who get, you know, there are a lot of potential buyers who get very exercised about that, especially I've got one state in partic one one estate in particular where the buyer was supposedly a very close friend of the deedent and he seems to think that that entitles him to buy properties from the estate at significantly below market value. And I explained to him from the
15:45 outset, it it's it's not going to it's not going to work that way. Okay, if you're such a good uh you know, if you were such a close friend of the deedent, you shouldn't want to in essence cheat his his heir, you know, it's it's a rather ludicrous situation. Okay, but but they they come out of the walls if if you know what I mean. And so uh you know if as the per personal representative you decide that it's in the best interest of the estate to sell some property. Okay. So then the
16:20 conditions hopefully will be such that you can get uh um you can get market value for the property and and you don't have to uh you know take a big discount. So, I know here in Los Angeles, I'm delaying some property sales. We've had some difficulties here if you've been following the news and and a lot of people a lot of real estate activity basically stopped. Okay. And rather than sell into a very slow market,
16:56 um, I've decided just to put a hold on property sales, um, and let the market sort of reactivate and then go back in and in order to get market prices for the the the assets of the various states where I'm the personal representative. Okay. So all of these are issues that the personal representative uh needs to consider. Okay. Um now the other thing about um in fact both with um renting out property and with um selling assets
17:32 is depending on the extent of the personal representatives authority they may require court confirmation or court approval. Certainly, if you're entering into a long-term lease, okay, that may require court approval. Selling a property, if you don't have if the personal representative doesn't have full authority, would require court approval. Okay? So, all of this has to be factored in. uh and and you know if it's a small property that's only going
18:07 to generate you know a little bit of money uh you know how much of that money if if if court confirmation is necessary. So uh uh if court confirmation is necessary is the cost of going to court to confirm the sale going to be a significant percentage of the value of the property? Now, here in California, that sounds ludicrous because the idea of a a property not having much value seems so foreign. But in other states where property values are much lower, okay, uh
18:42 it it may be, you know, you could have cost of sales of several thousand and maybe you're selling a property that's only worth 20 or $30,000. I mean, you know, uh, and you're going to lose, you know, a third, a quarter, a half of the value of the property by going to court to confirm the sale. So, you know, in that case, it may not make sense uh to sell those particular assets even though, you know, they may have the least utility to the estate. So all of these factors uh need to be weighed in
19:18 order to determine whether renting out a property or uh le I'm sorry or selling a property is the right way uh to uh create uh liquidity. Okay. Uh let's uh let's take a break. When life brings unexpected changes, managing inherited property shouldn't add to your stress. Magnum Properties specializes in probate and trust real estate management. We handle the complexities while you focus on what
19:55 matters most. From property maintenance to tenant relations, from legal compliance to maximizing value, we're your trusted partner through every step. Magnum Properties, Inc. turning property challenges into peace of mind. Call us today at 213-264-4396 or visit magnumprops.com. So this is Trust and Estates Weekly. I'm your host Kevin Bemel and I'm talking about what to do when an estate doesn't
20:31 have liquidity and so it's it's challenged to pay the costs of of administration and and the cost of maintaining assets etc. So uh I I I mentioned before the break I mentioned two ways uh one is to rent out real estate if the estate has some the other is to consider selling some real estate. So, those are those are two of the most common options. Another option is to get a shortterm loan uh against the uh against the assets of
21:06 the estate. Now, this is more difficult. A lot of lenders uh don't want to have loans on property uh going through probate. So, uh, one in particular, uh, US Bank, uh, I can tell you I will never do business with them again because of how they dealt with one particular estate that I administrated. um you know they when when the person who owned who when the deedent died they they called a loan on a property um and
21:41 and and they were just um absolutely unscrupulous in in how they um handled uh the situation. So, and and you know, for my part, I I had a banking relationship with them that I I am in the process of of of terminating as a result. But it highlights that so-called conventional lenders, generally speaking, will not lend on properties in probate. um and and will seek to get out of those loans um I I if they think it's
22:16 it's you know to their best advantage and um and they will shed crocodile tears for their borrower having died basically. So um there are though uh specialty lenders out there uh who who lend on properties in probate. Generally speaking they're shortterm loans. um the rates can be pretty high. So, if you're familiar with hard money loans in the real estate arena, um they'd be more along the lines of of of hard money loans, okay? Um people will will
22:51 sometimes equate hard money loans to loan sharking. It's not typically not quite that bad. Um but the rates are, you know, could easily be 50% higher than uh you know, a regular loan on on a similar type of property. Okay. And again, that they they can typically they will typically be fairly shortterm. Okay. Now, um aside from these private lenders, um the beneficiaries of an estate, um they may also be a source to borrow funds. Okay? especially if it
23:29 means that it they're going to be able to retain certain assets that otherwise would have to be sold in order for the estate to have proper liquidity. Okay? And there, by the way, there are lenders out there who specialize in advancing funds to beneficiaries. Okay? And so even if the beneficiaries don't have any cash of their own to lend, it may make sense for them to get an advance on their inheritance, turn around and loan that money to the estate
24:05 on an on an interestbearing basis. That could potentially be a solution to the to an estate's illquidity challenges. Okay. So uh you know again just like with any loan um various estate various assets of the estate would be the collateral. It could be real estate, it could be a business, it could be other assets. Okay. Um and so um this could all be negotiated and worked out. Uh but even even if it's a loan from the beneficiaries uh that that could you
24:41 know it could require court approval. Okay. So I wouldn't undertake such a transaction without proper legal guidance and if necessary uh you know proper direction from from the probate court. Okay. But borrowing uh borrowing money for so so the estate has the cash it needs to operate. That's that's another uh option. Okay. Um, another option um would be uh distributing certain assets um prior to the estate closing
25:21 in order to transfer the obligations or the in essence the cash needs of those properties to one or more of the heirs. Okay. So let's say you've got a house. Okay. And uh the house, let's take an easy case where the the estate is exempt from property uh from uh estate taxes. Let's say it's a $10 million estate. Okay? So estate tax exemption, $15 million. There's no estate tax due. Don't have to deal with the IRS, at least with respect to that.
25:57 Okay? And so it may be that rather than the estate bearing the cost of paying a mortgage and property taxes and insurance and and I'm sorry, let me back up and let's take another let's make it simple again. Let's say there's just one heir as well. Okay? So it's a $10 million estate. There's one heir. He's getting all of all of the proceeds of the probate. Okay? And let's say there's a house in the estate. There's a mortgage on it. it has uh and and and and um so perhaps um the personal
26:34 representative c would petition for early distribution of the house so it goes to the heir and now the heir has the responsibility for paying for the mortgage and paying the property taxes and paying the maintenance. Okay? And maybe he wants to move into the house. Okay? Maybe it was his childhood home. He loves the house. he wants to raise his family there. Okay? And so they move in and they take it over. And hey, that takes a f a cash financial burden off of the shoulders of the estate. It gets the house to the heir uh who who wants it
27:11 anyway. Okay? And it's kind of a win-win situation. Now um uh even with full authority, okay, um the uh the the early distribution of an asset may require court approval. Okay, but it may make sense to do that if it's a you know a a couple of thousand dollars to petition the court and if the petition really makes sense. Okay, so you know there you go. I mean, here in California, right, median home price over $800,000, $850,000, I think it is,
27:46 or something like that. So, uh, you know, you're you're you know, you're able to distribute a valuable asset with maybe a few thousand in court fees. And when you think about it in California, um, an an $800,000 home, the property taxes alone are going to be $9 to $10,000 a year. insurance has gone way up here in California, it's going to be several thousand more dollars uh a year and if there's a mortgage on it, that mortgage could easily have a monthly payment of several thousand dollar, right? So, it may be better to just put
28:22 it in the hands of the heir, let him go ahead and, you know, live in the house and enjoy it um and take that burden off the estate. So the preliminary distribution of assets may be a way of dealing with illiquidity. Um as well um and and so that's that's another option. It's it's kind of like selling an asset, but you're not selling it now. You're you're getting it into the hands of the person who would otherwise um inherit it. Okay. And then uh Okay. So those those are the the sort of
28:58 straightforward strategies. There are others but th those are the most the more straightforward strategies. Now um I mentioned at the beginning of the show I'm going to talk about two um more sort of um esoteric strategies um for uh for dealing with an illquid estate. And these are creatures of the Internal Revenue Code. And so they are they are very complex. There's lots of requirements. I'm not going to get into all of the details. If you think this is
29:35 something that you may want to use, you need to get a qualified accountant to help you navigate these issues or maybe even a tax attorney. Okay? And and um when I say a qualified accountant, I don't mean someone who, you know, helps you with your tax preparation. While there, that's all that's perfectly, you know, good work. Uh someone at that level is unlikely to know enough about the details of these two uh potential
30:11 um uh methods uh to be able to properly execute them with any sense of of that they're being done correctly. So I'm talking about IRC section 61 uh 66 and 303. Okay, both of these deal with a situation where one of the assets of the estate is a closely held business. Okay. So, uh the term closely held refers to a
30:46 business whose owner with an ownership that's not traded on public markets. Okay. So, uh, AT&T, Meta, uh, Tesla, um, uh, Alphabet, these are all companies that have been in the news of late, and they're all traded publicly. These are publicly traded companies. They have thousands, tens of thousands, maybe hundreds of thousands of shareholders. Okay? A closely held business, by contrast, is not publicly traded. It's owned
31:22 generally speaking by a relatively small number of owners or even just one owner. Okay. Uh the ownership interests do not trade on any kind of in any kind of public forum. Okay. Hence the name closely held. Now the thing about a closely held business is it's very illquid meaning it's it's not easy to sell them. Whereas selling, you know, a 100 shares of uh Alphabet, all you just call up a broker and say sell the shares
31:57 and they're sell sold at whatever the prevailing price is that day. Uh if if if a an estate holds an interest in a closely held business, you can call up a broker, but they're going to say, "Sorry, can't help you." At least not a you know, a stock broker or a financial advisor. Okay. Now there are business brokers and they they specialize in selling closely held businesses. Okay. But even even for them to sell a partial interest in a business
32:32 can be difficult and it's probably going to be sold at a substantial discount to the overall value of the business. Okay. And it's because of that that the IRS or really Congress came up with these two uh Internal Revenue Code sections that um basically are helping the um an estate that owns part of or all of a closely held business deal with the potential tax consequences, estate
33:08 tax consequences, so that the business won't necessar necessarily have to be sold in order to pay the estate taxes. Okay? So, in other words, it's it's there to help the continuity of ownership of closely held businesses. Uh among them, family businesses. Okay? A lot of family businesses are closely held because they're owned by family members with the intent that they're going to be passed down, you know, generation to generation. Okay. So let's look first at uh Internal Revenue Code section 6166.
33:43 Okay. So, this applies in an estate that that owns a clo a closely held business or uh part of a closely held business where that interest exceeds 35% of the adjusted gross value of the estate. Okay. Now, adjusted gross value is a term defined in the IRC, the Internal Revenue Code. Okay? Uh and and that, you know, starting right there,
34:20 you can see why an accountant is necessary because they have to know how to calculate the adjusted gross value of the estate. Okay? And then the value of the business is going to have to be determined or the value of the interest in the business is going to have to be determined. And then if it's 35% I'm sorry if it's over 35% then the use of of of section 6166 may work as a way to deal with the illquidity of an estate. Okay. What does
34:55 it do? It allows the personal representative of an estate to defer estate tax payments attributable to the value of the business for up to 10 years. Okay? So it essentially creates an installment plan for paying the portion of estate taxes that are due to the value of the business. Okay. Now only the personal re uh representative can make this election. So let's say you
35:32 have a situation where there are three owners of the business. Okay. Um the estate and and two surviving owners. The surviving owners have no authority to elect a 6166. only the personal res uh sorry personal representative does on behalf of the estate. Okay. So now that doesn't prevent the co-owners from suggesting that that's what you know the personal rep representative should do and in fact if they think that is the case they
36:08 should discuss it with him and and and and you know all cooperate together. Okay. Um the idea is to avoid a fire sale of the business or the sale of an interest in the business to you know some unknown party. Now that makes it difficult if not impossible to operate the business on a going concern. Okay. So uh let's see. All right. So let's um uh first now there are several tests as to whether um 6166
36:45 can be elected. First of all the deedent um has to have owned an interest in a closely held active trade or business. Okay. Um that's number one. It was e he either had to have been a sole proprietor meaning the sole owner of the business. in this case sole proprietor I don't mean that from a legal standpoint in the sense that there was no separate entity okay the business could have been maybe conducted as an LLC um but in in this instance if the owner if the
37:22 deedent was the sole member of the LLC in effect it was kind of like a sole proprietor he was sole he was a sole proprietor as opposed to the business being a sole proprietorship he was the sole owner of the business. Okay. So the the uh deedent either has to be the sole owner of the business or if the business was a partnership uh he the deedent has to have owned 20% or more of the capital interest in the partnership or or um it needed to be a partnership with 45 or fewer partners.
37:59 Okay? or if it was a corporation, the deedent had to own 20% or more of the voting stock or again had fewer than 40 45 or fewer shareholders. Okay, so um there has to the the the um interest that the estate has in the business has to be significant. If if an estate has a 5% uh or let me use a different example. If the estate has a 2% interest in a in a business, let's say it owns 2% of the
38:34 voting stock, okay, that's not going to meet the 20% threshold, nor is well it may meet the 45 or fewer um shareholders. Um but you know, at 2% that seems to imply there's a lot of shareholders, okay? So it may not meet the shareholders at all. And so then 6166 couldn't be used. But then again that that 2% interest in the business it may not be a very large asset. And so um you know it the the sale of that interest to
39:10 other shareh other shareholders or to the business itself um wouldn't necessarily uh result in a in a you know a huge uh discount per se. Now, I'm going to take a a moment to to digress. Um, and that is and I I did a show on this in the last gosh, I think couple of weeks. This discussion should highlight why businesses need to have succession plans. Closely held businesses need to have succession plans. Okay. among them among the the provisions should that
39:46 should be considered is h what will happen to the ownership of a deceased owner. Okay. Is there going to be some sort of buyout mechanism um as part of the um as part of the estate planning for all for all of the uh owners and as part of the part of the business continuity planning? Right. Right. Um does the business want to end up um in you know being partly owned by let's say um the deedants's spouse or the
40:23 deedants's children or other relatives? Maybe not. Maybe there needs to be a mechanism by which um when one of the co-owner co-owners dies um the the that the deceased owner's interest is purchased by the company or by the other owners and there's a set formula that's been agreed to. In which case all the personal representative would need to do is see to it that that uh process is is handled correctly. And now uh you know
40:58 it it to the extent that the ex the uh estate was illquid and there's this this provision in the business continuity planning that could also be a solution or at least a partial solution to the lack of cash in the estate. Okay. But in the absence of that um 6166 may be a good way to go. Okay. So uh um again so again um generally speaking the deedent has to own 20% or more of the business or if it's a
41:33 partnership or corporation uh 45 or fewer partners or shareholders. Okay. the the again the interest in the interest the business interest must comprise more than 35 or at least 35% of the adjusted gross value of the estate. Okay. And um the election has to be timely made. Generally it's an election made on the form 706. That's the estate tax return. Um and and there there are extensions available for filing the estate tax return just like with a a you
42:08 know personal uh tax return or for that matter business tax return. Okay. But that election does have to be made and again uh you know this is something you know I I would certainly seek accounting guidance on to make sure that it was done correctly. Okay. And there aren't problems going forward. Okay. Um now the um the deferral of the uh of the payment of the portion of estate taxes attributable to the business isn't tax isn't interest free.
42:44 So the IRS will charge interest on that. Okay? Your accountant can tell you what that currently would be, but there will be interest payments due. But that may be better than selling the interest at a fire sale. Okay? So, let's just take a real uh simple example. Actually, before I do that, let's let's take a quick quick break. Probate and Trust TV, your curated source for the most useful and insightful content on estate planning and trust and probate administration,
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43:54 when an estate is illquid. And I I was talking about using uh Internal Revenue Code section 6166 to defer payment of taxes on an interest in a closely held business. Um that an estate could potentially qualify for that if it owns uh 20% or more of a business. um and if the value of that interest in the business is uh 35% or more of the adjusted gross value of the estate. Okay, so let's let's take a a
44:31 very a simplified example, okay, just to give you a sense of how the numbers uh might work out. Okay. So, let's say that a deedent owns a a a manufacturing company and it's valued at $10 million and the total adjusted gross value of the estate is $25 million. Okay, so a couple things right off. One is at $25 million adjusted gross value, the estate is taxable because the estate tax exemption is $15 million. Okay. So,
45:08 there's going to be a, you know, approximately a $10 million um $10 million, I should say, of the value of the estate is subject to estate taxes. Okay. Um, in this case, also, the value of the business at $10 million against a $25 million adjusted gross value for the estate makes up 40% of the value of the estate. So it meets that 35% threshold. The owner is the sole owner. Okay. So that complies with the
45:43 minimum 20% ownership of of a business um by the deedent. Okay. So both of those are met. So it appears again in this simplified example that that section 60 that the personal representative could elect to take advantage of 616 section 6166. Okay. So, let's say he makes that election now with uh with $10 million in um adjusted gross estate value over and above the $15 million estate tax
46:18 exemption, right? That means that there's $10 million of tax that's taxable at 40%, meaning roughly four mill there's a $4 million estate tax bill. Okay. Now, since the business makes up 40% of the adjusted gross value of the estate, 40% of that $4 million could potentially be deferred. Okay? So, in other words, $1.6 million of the $4 million could be deferred. Now, you can
46:55 see right away then that let's say the estate is short on cash. Well, by by making a 6166 election, the cash needed to pay estate taxes has gone from $4 million to $2.4 million. Okay? The other 1.6 being deferred over as much as the next 10 years. Okay? And so instead of having to payund I'm sorry, $1.6 $6 million essentially upfront, the estate could pay $160,000
47:31 a year plus interest, right? Which which is a a lot lower cash outlay. Okay. Okay. And so if if a if if a 6166 election is made. So then and it's it's essentially at the option of the personal representative, you know, whether to to um defer the payments over 10 years. They could do it over five years, eight years, whatever whatever the personal representative thinks is right. Obviously, there's a trade-off between a longer time period and and larger overall interest payments. Okay.
48:06 There's also greater interest rate risk because the IRS changes the interest rate it charges on these kinds of installment uh plans periodically. Okay. So, you know, although the estate could elect to uh to extend it over 10 years, it may decide not to for various reasons. Okay. Um and and that may have to do with in in this case it's it's there's only one owner, but especially if there's if there's more than one owner, right? So then um the timing of
48:42 those payments may depend in part on distributions of profit from the business. Okay. And so um you know that that may need to be worked out in conjunction with the people who are going to continue to run the business. Okay. Now um the the use of 6166 could impact when the probate closes. I say could because it depends it you know the all of these things have to be worked out. Okay. Um, but you know,
49:17 maybe there'll be some preliminary or early distribution of other assets while this is worked out. If for whatever reason the probate can't close while the 6166 um deferred uh tax payment agreement is is being worked on or being paid off, I should say. So, all of these need to be aware, but you can see it's it's very complex, okay? but it can provide some s significant liquidity relief to an estate. Okay. So that's that's 6166. Okay. All right. Uh now the other one I
49:53 mentioned is Internal Revenue Code IRC section 303. Okay. And this applies when a deedent owns shares in one or more closely held corporations. Okay. So now we're this is more specific. It's not any kind of business. It's specifically a corporation. Okay. Now um the strategy is that the corporation um can redeem shares uh to provide for liquidity for taxes and in
50:30 expenses without um without those um uh um dispersements being subject to dividend tax treatment. Okay. So, um, again, this is a very sophisticated maneuver. It needs to be it it it the personal representative has to be the one who elects to do this. Okay. To be candid, I've I've never done a section 303. Um, so I I can only speak speak to you about it from an academic standpoint. Um, but um, were I to do
51:08 something like this, again, I would get I would have my accountant involved. I would probably have the, you know, I might have a tax attorney involved depending on the dollars at stake and I would I would definitely be working this out in conjunction with um the other own the you know the other owners of the business. Okay. So what 303 what section 303 allows is for essentially a buyback of the deedence stock without triggering income tax on the redemption. So it treats it as a
51:43 sale but not as a dividend. And and this can be um this can be beneficial because if it's treated as a sale, it might be subject to capital gains taxation um as opposed to or the as opposed to taxation as ordinary income the way it would be if it were taxed as like dividends. Okay. It also could mean that um the business would not have to be sold. Okay. because um you know let's let's say that you've got a majority
52:20 stockholder right um so it may be that if that that closely held stock needs to be sold in the end the entire company would have to be sold okay or the the the minority owners may end up with a majority owner who the heck knows who this guy is and that kind of stuff which could be put them in what they would feel to be a very bad situation. Okay, so this is a way of dealing with business continuity in the absence of continuity planning. Okay, so I go back to um what I said a little while ago about
52:56 you you can see that these special tax code provisions are there um to help businesses that have not planned properly and that's really the bottom line. Okay. So, um, so just some eligibility requirements. I'm not going to get as deep into 303 as I did with 6166, but they have to be closely held corporations, publicly held uh, uh, stock and publicly traded companies does not qualify for section 303 treatment. Okay? And they have to be domestic
53:31 corporations, meaning US-based corporations. Okay? The value of the deedent stock has to be 35% or more of the the value of the deedence adjusted gross estate or 50% or more of the taxable estate. Okay. Now you saw in the previous example we said the gross the adjusted gross value of the estate was 25 million but the taxable estate was only 10 million. Okay. So there is a big difference potentially because of the
54:06 $15 million exemption. And so there's two different tests here that can be used to see if if an estate qualifies for section 303 treatment. Okay. Um now the redempt there is a limit on the the redemption of the stock and that is it it must be no more than the sum of federal and state um uh estate taxes or so-called death taxes plus the financial and administrative expenses. Okay. So if
54:41 there are other expenses to the estate maybe there's maintenance of other properties and things like that. Okay. additional redemptions cannot be made to cover those costs. This is only really for some a way of of seeing to it that the the need to pay estate taxes doesn't require a negative event for the business. But other expenses to the estate, this this won't provide liquidity for that. Now, of course, money is fungeable. So the fact that you
55:16 can you can get liquidity to pay estate taxes maybe the estate has other liquidity has other liquidity it can use that other those other funds for maintaining other assets. Okay. So that's the fungeability of of of of money of cash. Okay. So that's that's basically um how 303 works. Uh, you know, again, it's it's a complex strategy that requires uh a knowledgeable accountant, an experienced accountant, an accountant who's done this before, okay? And maybe
55:51 even legal advice. Okay? So, those are some of the ways of of dealing with illquidity in an estate. Um, I the list is not exhaustive. Um, there are other things that you can do. Um but but those are the most common and perhaps two of of the more creative options. So I thank you very much for joining me today, especially my live viewers. If you like the show or you found it interesting, um please pass it along to a colleague or family member. Um I'd really appreciate that and you know, of course, always
56:27 looking to grow my audience and help more people. Uh, tomorrow at 10:00 a.m. Pacific time is my show, Business Lessons from the Military. On Wednesday at 10 a.m. Pacific time is my show, People Making Money. That's the schedule for the rest of the week. So, once again, thank you very much for joining me. Um, if you have any thoughts, comments, uh, criticisms, all my, uh, social media links will be in the show notes when it when the show posts on YouTube. Always happy to hear from you. And again, thanking you so much for joining me. Wishing you a wonderful rest
57:02 of the day. Signing off as I always do. Marie darling, you are my bell. Courage at all times, my friends.