Section 6166 Defers the Tax. An Entity and a Gifting Program Shrink It.

For estate subject to federal estate tax, estate tax is due nine months after decedent’s death, in cash. A farming operation that has spent generations converting income into acreage, equipment, and standing crop often lack liquidity. Section 6166 exists for exactly that reason, and for the estates that qualify it is genuinely valuable.

What is Section 6166?

Where an interest in a closely held business exceeds 35% of the adjusted gross estate, the executor may elect under Section 6166 to pay the estate tax attributable to that interest in installments rather than in a lump sum. To qualify, the closely business interest must constitute an active trade or business, and assets that are merely passive investments, such as excess cash, marketable securities, or other nonbusiness assets, generally are not included in determining the qualifying business value under Section 6166.

The election generally defers principal for up to five years, with interest only during that stretch, then allows up to 10 annual installments, spreading payment across as much as 14 years from original estate-tax payment date. A 2% interest rate applies to the tax attributable to roughly the first $1.94 million of value above the exemption in 2026, a figure indexed annually, with the balance carried at a reduced statutory rate.

But notice what the election does and does not do. It is a payment plan for estate tax payments. The tax has already been incurred, calculated on the full date-of-death value (or alternative value) of the ground, and the election is made by an executor after the client has died, against tests that were effectively decided years earlier. Ground that is cash-rented to a neighbor looks less like an active trade or business than an investment. A family that gradually wound down its own field operations and shifted to cash rent can discover the 35 percent test fails at exactly the moment it was counted on.

Section 6166’s Impact on Estate Planning

A potentially more powerful estate planning tool may be implemented while the client is living, and it starts with how the land is titled. Farmland held in a properly formed limited liability company or limited partnership can be transferred to the next generation in minority, non-managing interests, and those interests may be worth less than their pro rata share of the dirt. Before transferring LLC or LP interests, business owners should consult with their legal counsel to address potential issues with mortgages (such as due-on-sale clauses), homestead concerns, transfer restrictions, and other legal issues.

Generally, a holder of a 15% non-managing interest cannot force a sale of the ground, cannot partition it, cannot compel a distribution, cannot set the cash rent, and cannot readily find a buyer for the interest in the limited liability company or partnership itself. Each of those limitations is a fact a valuation analyst can quantify, as a discount for lack of control and a discount for lack of marketability.

Interests in farmland may discount particularly well, because the asset market value has very little to do with the income it produces. The USDA reported the average U.S. cropland value of $5,830 per acre in 2025 against an average cash rent of $161 per acre. That is a gross yield of about 2.8%, before property taxes, insurance, drainage, and management.

An investor pricing that interest on the cash flow it throws off arrives at a number well below net asset value, and the gap between the two is the analytical heart of the discount. Land that appreciates nearly annually and yields like a short-term bond is precisely the asset class where a well-supported minority-interest discount is largest.

Implementing a gifting program over a period, that discount compounds. Each transfer of a minority interest removes from the senior generation's estate both the discounted value of the interest and potentially every dollar of future appreciation on the ground underneath it. Annual exclusion gifts move units out year after year without touching the exemption. The 2026 annual exclusion is $19,000 per donor, per recipient, and does not cover future interests. Larger transfers draw against the lifetime exemption amount (in 2026 set at $15M per taxpayer) at discounted values, allowing each exemption dollar to shelter more acreage than an outright transfer of land.

A family that begins early enough can push the taxable estate below the level where the nine-month liquidity crisis exists at all — which is a better outcome than an elegant plan for paying a tax across fourteen years.

Gifted property retains the donor’s income tax basis, while inherited property receives a basis adjustment to fair market value at the decedent’s death (often called a “basis step-up") Therefore, potential estate-tax savings should be weighed against the income-tax cost of gifting low-basis property during donor’s lifetime.

How Eide Bailly Can Help

We help agricultural families and their counsel put a value on what an entity-and-gifting strategy is actually worth, what the discounts would likely be on a minority interest in the closely held entity, how much taxable estate a multi-year gifting program removes, and whether Section 6166 would still be applicable or needed if the gifting program runs its course.

For farm or ranch clients whose plan currently depends on the installment election under Section 6166, consider modeling the tax consequences before making future gifts.