Section 6166 estate tax deferral: anatomy of the IRS lien

On October 13, 2026, the IRS published a routine Paperwork Reduction Act notice in the Federal Register asking for public comment, due December 14, 2026, on Form 13925, the lien agreement an estate signs when it pledges property to secure deferred estate tax; it is an extension of an existing form with no changes, not a rule change. Still, it is a fair prompt to walk through something most owners of Oklahoma family companies have never seen: what a Section 6166 estate tax deferral actually commits the business to, and what the IRS may ask the heirs to pledge in return.

Oklahoma has no estate tax of its own. The exposure is federal, and for the families where it lands, the asset that pushes the estate over the line is usually the operating company or the ranch that the heirs cannot sell without ending the deferral. That is the tension this piece is about.

Step one: does the estate qualify for Section 6166 estate tax deferral?

Section 6166 lets an executor elect to pay the federal estate tax attributable to a closely held business interest in two to ten equal annual installments. The first installment can be pushed out as much as five years after the date the tax would otherwise be due, so the payment runway can run well past a decade.

The gate is a percentage. The value of the closely held business interest has to exceed 35 percent of the adjusted gross estate. Only the tax attributable to that interest gets the installment treatment; the rest of the estate tax is due on the normal schedule.

What counts as a closely held business

Three shapes qualify under the statute. A sole proprietorship qualifies as an interest in a trade or business. A partnership qualifies if 20 percent or more of its total capital interest is in the gross estate, or if it has 45 or fewer partners. A corporation qualifies if 20 percent or more of the value of its voting stock is in the gross estate, or if it has 45 or fewer shareholders.

Two things trip up planners here. Section 6166 excludes passive assets from the computation, so a holding company sitting on marketable securities does not get the same answer as an operating company with employees. And where a decedent owned pieces of several businesses, they aggregate for the 35 percent test only if 20 percent or more of each is in the gross estate.

The practitioner's wrinkle is that the 35 percent test runs on the values reported on the estate tax return. Owners who spend years arguing for a low valuation of the company for gift and buy-sell purposes sometimes discover that the same low number pushes the business under 35 percent and takes the deferral off the table. Valuation posture and liquidity plan have to be built together.

Step two: what the deferral costs in interest

Section 6601(j) splits the deferred tax into two pieces. The "2-percent portion" accrues interest at 2 percent. Everything above it accrues interest at 45 percent of the regular underpayment rate.

The 2-percent portion is defined as the tentative estate tax on an inflation-indexed base amount plus the applicable exclusion amount, less the applicable credit amount. For decedents dying in 2026, Rev. Proc. 2025-32 sets that base amount at $1,940,000, and the basic exclusion amount for 2026 is $15,000,000 following the 2025 legislation.

One detail matters for cash planning: when the deferred tax exceeds the 2-percent portion, each payment is applied proportionately across both pieces. The estate cannot aim its early payments at the expensive slice.

In our experience the decision between a Section 6166 election and a commercial loan secured by company assets comes down to that blended rate against what a lender will offer, plus the non-financial strings discussed below.

Step three: the IRS decides whether it wants security

Section 6166(k) cross-references the IRS's general authority under Section 6165 to require security for an extension of time to pay. Security is not automatic. According to the Internal Revenue Manual's chapter on special estate tax elections, the IRS decides after the election is made, on the facts of each case, whether a bond or lien is needed. Approval of the installment plan itself sits with the Estate and Gift Specialty Tax function on the examination side, and the campus unit prepares the annual installment billings.

If the IRS wants security, the estate has two routes: a performance bond, which the manual says must be renewed annually, or the special lien under Section 6324A, pledging specific property. The manual treats the two as substitutable in either direction.

An annual surety bond for a multi-year deferral can be hard to obtain for a thinly capitalized family company, so the lien is usually the live option. Our practice treats the question "what property would we be willing to pledge?" as part of the election decision, not an afterthought.

Step four: the Section 6324A lien agreement, line by line

The special lien is a consensual lien. The executor files a notice of election with the IRS office where the estate tax return was filed, and the regulations under Section 6324A allow that election at any time before the full estate tax and interest have been paid. The notice is accompanied by a written agreement, which the IRS collects on Form 13925.

What goes in the agreement

Treasury's regulation is specific about the contents. The agreement must state the decedent's name and taxpayer identification number as they appear on the estate tax return; the amount of the lien; the fair market value of the designated property both at the date of death and at the date of the election; every encumbrance on that property, including mortgages and any special-use valuation lien, at both dates; a clear description of the property and, for anything other than land, a statement of its estimated remaining useful life; and the name and address of an agent who will deal with the IRS for everyone who signed.

That useful-life requirement is why equipment and inventory make poor lien property. The statute says the designated property must be of a kind that can be expected to survive the deferral period. Land and buildings fit. A fleet of trucks does not.

How much property the IRS can ask for

Section 6324A caps what the IRS may require. The designated property cannot be required to exceed the deferred amount plus the "required interest amount," defined as the interest that will accrue over the first four years of the deferral period. Value is measured as of the original due date of the tax, and the regulations are explicit that encumbrances must be subtracted, so a building with a mortgage against it counts only for its equity. If the property offered falls short of that ceiling, the statute lets the IRS accept a bond for the difference.

The designated property does not have to have belonged to the decedent. The regulations say so directly. A child who already owns a debt-free warehouse can pledge it to secure the estate's deferral.

What the lien is and is not good against

Once the agreement is in place, the deferred tax plus interest, penalties, and costs becomes a lien on the designated property. But the lien is not valid against purchasers, secured lenders, mechanic's lienors, or judgment creditors until the IRS files a notice under Section 6323(f); the manual identifies that notice as Form 668-J. The notice does not need to be refiled. The lien arises when the executor is discharged from personal liability under Section 2204, or earlier if notice is filed, and it lasts until the tax is paid or becomes unenforceable by lapse of time.

Even after notice, the lien yields to real property tax liens, to mechanic's liens for repairs or improvements, and to certain construction-financing security interests, although those last two fall away for interests created after the IRS files notice of acceleration. A company that plans to build on the pledged real estate can still get a construction lender ahead of the IRS.

Where the lien applies, the IRS may not demand a Section 6165 bond for the covered tax, and the general estate tax lien under Section 6324 drops away as to that property. One direction is a one-way door: once the lien is elected, the executor cannot later substitute a Section 2204 bond for it, although a bond already posted can be replaced by the lien.

Because the lien is consensual, the Internal Revenue Manual states that the estate has no Collection Due Process rights with respect to it. We covered how the ordinary lien can be discharged or subordinated in a separate piece; the special lien is negotiated on the way in rather than contested on the way out.

Step five: the signatures, and who holds leverage

This is where a tax filing becomes a family governance problem. The statute requires the agreement to be signed by each person having an interest in the designated property, whether or not that interest is in possession. The regulation spells out who that means: owners of remainder and executory interests, holders of general or special powers of appointment, beneficiaries of a gift over if a power is not exercised, co-tenants and joint tenants, holders of undivided interests where the decedent held a joint or undivided interest, and trustees of any trust that holds an interest in the property. Interests are tested as of the election date under local law.

Two categories are excused: an heir whose only connection is the ability to contest the will, and creditors who are creditors and nothing more. A representative authorized under local law may sign for a minor or an incapacitated person.

The regulation then says the thing that matters most: the lien does not arise unless every required party signs. There is no majority vote. If the pledged asset is a ranch held by the surviving spouse for life with remainder to four children, every one of the five has to consent, and a child who is estranged, or who simply wants a better deal on the eventual buyout, can hold up the security the IRS has asked for. If the asset sits in a trust, the trustee signs, and a trustee's fiduciary duty to beneficiaries who get nothing out of the deferral is a real consideration.

An agent is also named in the agreement. The regulation describes the agent as the attorney-in-fact for the consenting parties, obligated to furnish information the IRS requests and to notify the IRS of any event that would accelerate the deferred tax. Picking the agent is choosing who carries the duty to report the family's own missteps.

Step six: the events that unwind the deferral

Section 6166(g) lists the ways the deferral ends early, and the IRS manual repeats them as its acceleration triggers.

The 50 percent disposition test

If dispositions of the business interest, plus withdrawals of money or other property from the business, reach 50 percent of the value of the interest, the unpaid tax becomes due on notice and demand. The manual measures this against the value reported on the estate tax return or as adjusted. The ordinary life of a company runs into this test constantly: a buy-sell agreement that triggers at death, a redemption of the decedent's shares, an LLC restructuring, a sale of a division. None of those is forbidden; each has to be checked against the cumulative 50 percent line before it closes. The way a buy-sell agreement and an LLC's transfer provisions interact at death is a topic we have written about on its own.

Late installments

An installment paid within six months after its due date does not accelerate the balance, but the statute imposes a penalty of 5 percent of the payment for each month or part of a month it is late, and the favorable interest rate is lost on that payment. Miss the six-month mark and the entire unpaid balance can be called. The manual adds that an accelerated account generally cannot be reinstated for reasonable cause.

Undistributed income and the security shortfall

Two quieter triggers also apply. Where the estate has undistributed net income for a taxable year ending on or after the first installment's due date, that income has to be applied against the unpaid installments. And under Section 6324A, if the value of the pledged property falls below the unpaid deferred amount plus the required interest, the IRS may demand additional property or equivalent security; a failure to supply it within 90 days of notice and demand is treated as an acceleration event. The manual lists failure to provide required security alongside the 50 percent and six-month tests.

That security-shortfall rule is where the Federal Register notice reconnects to the real world. The IRS abstract describes Form 13925 as providing valuation information each year after the lien election until the tax is paid in full. The regulations themselves do not spell out an annual filing, so we read the annual update as IRS administration rather than a statutory requirement. Either way, the pledged property's value will be looked at over the life of the deferral, and a decline can bring a demand for more collateral.

How we think about the trade

Seen whole, a Section 6166 election is a loan from the government at a blended rate that is often attractive, secured, when the IRS asks, by specific property the family pledges and by the cooperation of everyone with an interest in that property. In exchange the business operates for years under a disposition limit, a payment calendar with a six-month fuse, and a reporting obligation that runs through a designated agent. The 2 percent rate covers a limited slice of the tax, the rest floats, and the lien, once recorded, is a public filing that a lender or buyer will find in title work. A family that expects to sell the company within a few years may find that a shorter schedule, or no election at all, costs less than an acceleration event in year three with penalty on top.

The planning that makes this manageable happens before death: knowing whether the estate will clear 35 percent, deciding which real estate could be pledged and keeping it free of unnecessary encumbrances, drafting buy-sell and redemption terms that respect the 50 percent line, and choosing trustees and successor owners who will sign when asked. We have described the broader stakes for a family company in a companion article.

If a Section 6166 election is on the table for an estate you are administering, or you own a company large enough that it might be someday, the time to look at the pledge question is while there are still choices about what to pledge. You can reach our firm through the contact page or the Oklahoma City office. A conversation early is almost always cheaper than a demand for more collateral later.

This article is general information about Oklahoma, Texas, and federal law, not legal advice, and it does not create an attorney-client relationship. Facts matter; talk to a lawyer about yours.