John R. Bullis: New death tax ‘portability’ rules

Every person has a death tax allowance or exemption of $5,490,000 this year. If you die with total assets (net of any debts or liabilities) of less than $5,490,000, there is no death tax to pay.

If the husband dies first and his total assets (net of debts) are only $1,490,000, his unused exemption is $4,000,000 and it can be transferred to his wife, if a death tax return is filed. Then she has a total of $9,490,000 death tax exemption. The old rule was the form 706, his death tax return, U.S. Estate Tax Return, had to be filed timely with the “portability” election. The unused portion of the deceased spouse’s exclusion is called DSUE.

IRS recently announced persons in charge of an estate (or trust) of someone who died in the period from 2011 to Jan. 2, 2016, can file a late death tax return and elect the portability benefit for the surviving spouse. But that return has to be filed by Jan. 2, 2018.

For example, if Joe died in 2012 but since his share of assets was only $1,490,000, there was no requirement to file form 706, U.S. Estate Tax Return, so it was not prepared and filed. But now, his surviving spouse, Mary, might want his unused death tax exemption added to her exemption. It can be done — even with a late filed return done by Jan. 2, 2018.

Mary may have won the lottery, got a big inheritance, or had some other event happen that increased her total assets significantly. Or perhaps she expects it could happen. Since the death tax rate is 40 percent, it could be a major benefit for her to get his DSUE (unused death tax exemption).

If you know of someone who is a surviving spouse where the other spouse died in 2011 through 2015, maybe they should consider taking advantage of this new (favorable) ruling.

It is not a big problem to prepare and file form 706. You have the wonderful IRS instructions of only 53 pages and various publications to help you. Or you could ask a CPA to help prepare the return. IRS is not likely to audit that return if the net assets (everything owned less debts and liabilities) is significantly less than the $5,490,000 exemption. You must file a form 706 to get the DSUE.

Another benefit of filing the form 706 is it establishes the tax basis of certain assets like real estate, stocks, bonds and many other assets (but not IRAs, retirement plans or annuities). That new tax basis in community property is the total value of the item, even if the deceased only owned 50 percent of it. If Joe and Mary purchased land for $40,000 and it is worth $140,000 when Joe dies, Mary’s new tax basis is $140,000. She can sell it for $140,000 and have no gain to be subject to income tax.

Did you hear? “The most ability is responsibility. Nothing happens until someone steps forward and says, ‘You can count on me,’” by John Maxwell.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.