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Post-mortem: Sec. 645 Election Tax Planning Opportunities.

electing to treat a qualified Revocable Trust QRT as part of a decedent's estate under Internal Revenue Code Sec. 645 provides many planning opportunities during the period of administration and winding up of its affairs. This election is available even if there is no requirement for the decedent's estate to the a fiduciary income tax return, or if no executor has been appointed by the court. In making this election, the OK I can receive the lavorable tax attributes afforded estates under the federal tax code.

Qualified Revocable Trust

A QRT is defined in Sec. 1.645-l(b) of the final regulations as any trust or portion thereof' that on the date of the decedent's death was treated as owned by the decedent under IRC Sec. 676 In reason of a pow er held by the decedent [determined without regard lo Sec. 672(e) |. Sec. 676 deals with the power to revoke that is exercisable by the decedent, or with the approval or consent of a non-adverse party or with the approval or consent of the decedent's spouse.

This definition covers most living grantor trusts of a decedent that become irrevocable on the grantor's death. Following the death of the grantor the QRT becomes a taxable en lit) and must report its income on a fiduciary income tax return rather than the decedent's individual income tax return, and must report its income using a calendar year-end.

In making the Sec. 645 election, the QRT elects to be included in the lax return for the decedent's estate and receives at least (or a few years lite tax benefits afforded estates.

Some of those benefits allow an estate to:

* Elect a fiscal year-end.

* Have a S600 exemption.

* Not make estimated lax payments.

* Be eligible to hold S corp stock by meeting special trust rules.

* Claim rental losses under the passive activity rules if certain requirements are met.

* Get a deduction for charitable set asides, which is not available to trust.

Filing Form 8855

This election is made by filing a form 8855 with the IRS. I he election is to be filed by die executor ol decedent's estate and the trustee of the QRT. If there is more than one QRT then those QRTs wishing to participate in the election must also join in signing the election. If there is no court appointed executor, then the trustee of one of the QRTs must sign the election in place of die executor as filing trustee. This trust becomes the filing trust, but it also must sign the election as an electing QRT and use its own taxpayer identification number in Part 1 and Pari III of Form 8855.

It can be a bit confusing to have to sign in two places on Form 8855, but the trustee of the filing trust is taking on the filing responsibilities of executor of the estate as well as electing to be part of the estate's lax return as an electing trust. The filing trustee is responsible for filing the estate's income lax returns and remitting the combined income tax payment. If more than one QRT wants to join in making the election, then it may do so by signing the Form 8855 in Part III. Each QRT joining in the election must file for its own taxpayer identification number before making the election.

If an executor is appointed after filing the original election, the newly appointed executor must consent to die election by tiling a new form 8855 within 90 days of his or her appointment. If the executor doesn't consent, the election is terminated effective die date of the appointment and Lite estate must file a short period return for lite year of termination. For instructions on what filings need to be made for a later appointed executor, see the instructions for Form 1041.

The election must be made by the due date, including extensions, for die filing of the estate's first return. This applies even il the combined estate and QRTs do not have sullicient income to be required to file a return. Once made, the election is irrevocable.

The election expires on the day before the "applicable date," which is two years after the decedent's death if no Form 706 is filed. If a Form 706 is filed, the applicable date is six months after final determination of the estate's estate tax liability.

Separate Share Rules

Once the election has been made, and if there is an estate and more than one QRT die separate share rifles under See. 663(c) will apply to die electing group and. as such, each entity's income and deduction will be accounted for separately including computing' each distributable net income. The electing group's tax liability will need to be allocated to each separate share on a reasonable basis. The executor and the trustee of each electing trust are responsible lor seeing that their entities share of the combined tax gets paid. the responsibility for filing and remitting any taxes falls on the executor or the filing trustee.

During the election period, the combined Form 1041 includes all items of income, deduction and credits for the estate and all electing trusts. The decedent's estate box should be checked in item A. Beginning with Form 104Is filed (or 2013. die executor must check item G and provide the taxpayer identification number of the electing trust with the highest asset value. Also die executor must attach a statement to die Form 1041 providing die name of the electing trust, the taxpayer identification number of the electing trust and and the name and address of the trustee of the electing trust.

At the expiration of the election period, each electing trust that continues must begin lo file its own returns on a calendar year. The trust will have to file for a new taxpayer identification number following the termination unless the trust was an electing trust, bin not the filing trust, or the trust was a filing trust and an executor was later appointed and the trust's taxpayer identification number was not used for filing the estate's income tax return.

If the estate is to continue after the expiration, it will have to file a final return for the combined group and then file a separate return for the remainder of its elected tax year. It does not need to obtain a new taxpayer identification number. If. on termination, there was no executor appointed during the term of the election, lite filing trust will have to file a find return for the electing group indicating that this is a final return and the electing group is no longer in existence.


A Sec. 645 election should lie considered whenever an initial fiduciary return is required alter the death of a grantor having a QR I'.. The ability to make a fiscal year election, to make no estimated tax payments or to lake advantage of the other estate attributes available can allow lor the timing of income recognition, reduce administrative costs by reducing the number of returns thai are required to be filed, the availability of the charitable offset and the eligibility to hold S corp stock are valuable attributes for post-mortem planning.

A Sec. 645 election should be considered whenever an initial fiduciary is required.

want more?

Interested in staying current on topics like this and other pertinent estate planning issues? Visit CalCPA's Estate Planning and Trusts website for a list of articles, forms and resources you may find useful:

Also, look out for our Estate Planning Conference taking place on June 113-14 in Los Angeles, San Francisco and via webcast.

John R. Woodford, CPA is a member of the CalCPA Estate Planning Committee and partner at Robertson, Woodford and Summers, LLP. You can reach him at
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Title Annotation:estate planning
Author:Woodford, John R.
Publication:California CPA
Date:Mar 1, 2014
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