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FILING RETURNS: Congress has increased the gift and estate tax. This makes the exemption high enough that many farms are below that threshold, so the first spouse to die will have some of their exemption amount left. It is portable, so decisions regarding how to handle the exemptions require help from tax professionals.

Tax implications of portable estate exemptions

Should you file a gift and estate tax return on portable exemptions?

By Joe Koenen

Income taxes are complicated, and at times above the average person’s ability to comprehend. However, these issues do affect farmers and ranchers. Recent changes in estate taxes makes it important to understand what is different, and what farmers and ranchers need to do.

In 2010, Congress increased the gift and estate tax exemption — and more importantly, made the exemptions portable between spouses. For 2017, that exemption is $5.49 million per person, or $10.98 million for a husband and wife. It is updated each year due to inflation.

The main point of concern for clients is this exemption amount is portability between spouses. It is elective, however, and not automatic; this means the executor of the estate — either the surviving spouse or other heirs, or their tax preparer — has to elect it.

This exemption is high enough that many farms are below that threshold, so the first spouse to die will have some of their exemption amount left. Let’s look at an example.

Joe and Molly Farmer own 640 acres worth $3,000 per acre, and $175,000 worth of livestock and machinery. Joe Farmer dies in March 2017, leaving an estate of $1.0475 million (his half). Since the Farmers had farmed since 1967, the basis in their land was $192 per acre, or $122,880. $120,000 worth of cows are home-raised. Here is Joe’s situation at death:

• Land. $61,440 (basis in land), $960,000 value today

• Livestock. $0 basis (raised cows), $120,000 value today

• Machinery. $0 basis (depreciated out), $55,000 value today

• Total. $61,440; $1,135,000 value today

Molly Farmer and her tax preparer are not required to file an estate tax return because she is under the threshold — but should she? Here are few scenarios to consider.

Although current law would not require Molly or her tax preparer to file a Form 706, Part 6, Section A (gift and estate tax return), Molly and her heirs (Joe and Molly’s children) have a lot at stake.

The estate’s executor of Joe — possibly Molly or her children— needs to file and opt in. Molly keeps $4.355 million of Joe’s exemption for her estate. Granted, that amount does not look critical now; if land continues to rise, Molly remarries or she adds to the operation for the kids, though, it could be critical later, when Molly dies.

The $1.073 million basis step-up is even more critical to Molly and her heirs. This portability election must be done within nine months after the decedent’s date of death, or the last day of an extension if the estate filed an extension.

What if Joe had died in March 2016 instead? IRS Revenue Proclamation 2017-34 now provides an opportunity for Molly and the estate. The simplified method, as it is known, is available to the executor (appointed or non-appointed) if the following conditions are met:

1. The decedent died after Dec. 31, 2010. and was a U.S. citizen on that date. A spouse must have survived the decedent.

2. The executor was not required to file an estate tax return.

3. The executor did not file an estate tax return. In order to claim this relief, it must be done by Jan. 2, 2018, or on the second anniversary of the death of the decedent. If those deadlines are missed, a request for relief must be filed and a letter ruling gone through. The executor, not the tax preparer, must make this election. While a tax person or lender can advise, the executor must do it.

In our March 2016 example above, the executor would have until March 2018 to make the election. Molly (through her executor) needs to be certain it is done before that time frame.

Koenen is a University of Missouri Extension agricultural business specialist based in Kirksville, Mo.

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