Section 645 Election for Revocable Trusts After Death: Form 8855 and Fiscal Year Planning
A revocable living trust generally becomes a separate income tax entity after the grantor dies. Internal Revenue Code Section 645 provides an important exception.
When the requirements are satisfied, the executor of the estate and the trustee of a qualified revocable trust can elect to treat the trust as part of the decedent's estate for federal income tax purposes during a limited election period.
A Section 645 election can simplify fiduciary income tax reporting and can provide access to tax rules normally available to estates, including estate fiscal year treatment, certain estimated tax rules, charitable set aside treatment, S corporation shareholder treatment, and a special rule for certain rental real estate activities.
The election is not automatically advantageous in every estate or trust administration. Its value depends on the assets, income, beneficiaries, expected duration of administration, distributions, and whether an estate tax return is required.
What Is a Section 645 Election?
Internal Revenue Code Section 645 allows a qualified revocable trust, commonly called a QRT, to be treated and taxed as part of its related estate rather than as a separate trust during the election period.
If an executor has been appointed, the executor and trustee generally make the election together.
If no executor has been appointed, the trustee can make the election under special rules that allow the electing trust to file as an estate.
Once a valid Section 645 election is made, it is generally irrevocable.
The election changes the federal income tax treatment of the trust. It does not merge the trust and probate estate under state law, change legal ownership of assets, or alter the trustee's and executor's separate fiduciary responsibilities.
Which Revocable Trusts Qualify?
Section 645 does not apply to every trust that exists after a person's death.
A qualified revocable trust is generally a trust, or portion of a trust, that was treated as owned by the decedent on the date of death under Internal Revenue Code Section 676 because the decedent held a power to revoke the trust.
A trust can also qualify when the decedent could exercise the revocation power only with the consent or approval of a nonadverse party or the decedent's spouse.
A trust does not qualify merely because someone other than the decedent held a revocation power.
For a typical fully revocable living trust created and controlled by the decedent during life, the qualified revocable trust requirement is commonly satisfied.
What Does Executor Mean for Section 645?
The Section 645 regulations use a specific definition of executor.
For this purpose, an executor generally means an executor, personal representative, or administrator who has obtained letters of appointment through formal or informal appointment procedures.
A person does not become an executor for Section 645 merely because that person possesses or controls property belonging to the decedent.
This distinction is important because a trust administration can qualify for a Section 645 election even when no probate proceeding has been opened and no executor has been appointed.
What Changes When a Section 645 Election Is Made?
During the election period, an electing trust is generally treated as part of its related estate for purposes of Subtitle A of the Internal Revenue Code.
When an executor exists, one Form 1041 generally reports the combined income, deductions, and credits of the estate and electing trust.
The combined entity generally receives one $600 estate personal exemption under Section 642(b).
This combined reporting does not mean that all accounting between the estate and trust can be ignored. The executor and trustee still need adequate records, and the estate and trust are treated as separate shares for important beneficiary distribution calculations.
Form 8855 also requires the fiduciaries to agree on an allocation of the combined income tax burden that reasonably reflects the respective tax obligations of the estate and each electing trust.
Benefit 1: One Combined Form 1041
When an executor exists, the executor generally files one Form 1041 under the name and EIN of the estate.
The return includes the income, deductions, and credits attributable to both the probate estate and each qualified revocable trust joining in the election.
The trustee generally does not file a separate Form 1041 for the electing trust during the election period, although special filing requirements can apply in the year the trust terminates or when other exceptional circumstances occur.
The fiduciaries still need to maintain records identifying which income, expenses, assets, distributions, and tax obligations belong to each share.
Benefit 2: Estate Fiscal Year Planning
Fiscal year flexibility is often one of the most useful Section 645 benefits.
Internal Revenue Code Section 644 generally requires an ordinary trust to use a calendar tax year.
A decedent's estate can generally use a fiscal year, and an electing trust can receive estate tax year treatment during the Section 645 election period.
When no executor exists, the regulations expressly allow the electing trust to adopt a taxable year other than a calendar year.
Fiscal Year Example
Assume a taxpayer dies on October 15 and a qualified revocable trust becomes irrevocable at death.
Without a Section 645 election, the trust would generally use a December 31 year end.
With a valid Section 645 election, a qualifying estate or electing trust might instead use a fiscal year ending September 30, subject to the normal rules governing taxable years.
That can affect the timing of Form 1041 preparation, Schedule K-1 reporting, beneficiary income inclusion, distributions, administrative expenses, and fiduciary tax planning.
A fiscal year does not automatically reduce tax. Its principal benefit is timing and administrative flexibility.
Benefit 3: Estimated Tax Treatment
Estates receive special relief from estimated income tax requirements for certain taxable years ending before the second anniversary of the decedent's death.
Treasury Regulation Section 1.645-1 extends the applicable estate estimated tax exception to an electing trust during the relevant period.
The relief is time limited. A Section 645 election that continues beyond two years does not extend the statutory estimated tax exception indefinitely.
Benefit 4: Charitable Set Aside Treatment
Section 642(c)(2) provides estates with broader treatment for certain amounts of gross income permanently set aside for qualifying charitable purposes.
During a valid Section 645 election, the electing trust is treated as part of the estate for purposes of the Section 642(c)(2) set aside rules.
The deduction is not automatic. The governing instrument, source of the funds, charitable purpose, and other statutory requirements still must be satisfied.
Benefit 5: S Corporation Stock
A Section 645 election can be particularly important when a revocable trust owns S corporation stock at the grantor's death.
During the election period, Treasury Regulation Section 1.645-1 treats the electing trust as part of the estate for purposes of the S corporation shareholder requirements of Section 1361.
If the S corporation stock will remain in trust after the Section 645 election terminates, the successor trust's eligibility to remain an S corporation shareholder should be reviewed before the election period ends. Depending on the circumstances, another qualifying trust status, such as a qualified subchapter S trust or an electing small business trust, may need to be considered.
Benefit 6: Certain Rental Real Estate Activities
Section 469(i)(4) contains a special rule for an estate that owns rental real estate in which the decedent actively participated before death.
For qualifying estate taxable years ending less than two years after death, the estate can potentially use the special rental real estate allowance subject to the statutory requirements.
Treasury Regulation Section 1.645-1 treats an electing trust as an estate for purposes of this rule.
The Section 469 rule has its own two year limitation. A Section 645 election lasting longer than two years does not extend that separate period.
Does the Revocable Trust Need a New EIN After Death?
Yes.
A qualified revocable trust must obtain a new taxpayer identification number after the decedent's death regardless of whether a Section 645 election will ultimately be made.
The trustee should provide the post death EIN to payors as required.
Can the Trustee Avoid Filing a Short Year Trust Return?
Potentially.
If the executor and trustee intend to make a valid Section 645 election, the regulations allow the qualified revocable trust to be treated as an electing trust from the date of death through the election deadline.
As a result, the trustee generally does not have to file a separate short year Form 1041 for the period from the date of death through December 31 merely because the election has not yet been formally filed.
If the fiduciaries rely on this treatment but ultimately fail to make a valid Section 645 election, the trust can be subject to penalties and interest for failing to timely file the trust return and pay the tax due.
How Is the Section 645 Election Made?
The election is made using Form 8855.
If an executor exists, the executor and the trustee of each qualified revocable trust joining in the election generally sign the election.
If no executor exists, the trustee makes the election. If more than one qualified revocable trust is joining in the election, the trustees designate a filing trustee responsible for filing the combined fiduciary income tax return.
The regulations permit an election for some or all qualifying revocable trusts created by the decedent.
When Is Form 8855 Due?
Form 8855 generally must be filed by the due date, including extensions, of Form 1041 for the first taxable year of the related estate.
The deadline applies even when the combined estate and trust would not otherwise have enough income to require a Form 1041.
If there is no executor, the filing trust is treated as an estate for purposes of determining the relevant first taxable year and election deadline.
Once properly made, the Section 645 election is generally irrevocable.
Can a Section 645 Election Be Made Without a Probate Estate?
Yes.
If no executor has been appointed and the trustee reasonably expects that no executor will be appointed, the trustee of the qualified revocable trust can make the Section 645 election.
The trustee then files Form 1041 treating the electing trust as an estate.
If more than one qualified revocable trust makes the election, the trusts must appoint a filing trustee and use the same taxable year during the election period.
What If an Executor Is Appointed Later?
Special rules apply when a trustee makes the election because no executor exists and an executor is subsequently appointed.
To continue the Section 645 election:
- The newly appointed executor must agree to the election
- The executor and trustees must file an amended Form 8855
- The amended election generally must be filed within 90 days after the executor's appointment
If the executor does not agree or the amended election is not timely filed, the election period terminates on the day before the executor is appointed.
If the election continues, amended fiduciary income tax returns may be required to combine the estate's income with the previously filed electing trust returns.
How Long Does a Section 645 Election Last?
The election begins on the decedent's date of death.
It terminates on the earlier of:
- The day on which the electing trust and related estate, if any, have distributed all of their assets
- The day before the applicable statutory date
If Form 706 Is Not Required
The applicable date is generally two years after the decedent's date of death.
If Form 706 Is Required
The applicable date is generally the later of:
- Two years after the decedent's date of death
- Six months after the final determination of federal estate tax liability
The regulations contain detailed rules for determining when estate tax liability becomes final. Depending on the facts, final determination can involve an estate tax closing letter, resolution of a refund claim, an IRS settlement, a final court determination, or expiration of the applicable assessment period.
Required Form 706 Versus Voluntary Form 706
Section 645 looks to whether Form 706 is required to be filed, not simply whether an estate tax return is filed.
Filing a Form 706 solely to make a portability election when the estate otherwise is not required to file an estate tax return does not by itself convert the Section 645 election period into the longer period applicable when Form 706 is required.
The Estate and Trust Remain Separate Shares for DNI
The Section 645 election combines the electing trust and estate for income tax return purposes, but it does not eliminate the separate share rules.
Treasury Regulation Section 1.645-1 requires the electing trust and related estate to be treated as separate shares when computing distributable net income, or DNI, and applying Sections 661 and 662.
The fiduciary cannot simply calculate one pool of DNI and assume that every beneficiary distribution draws proportionately from that amount.
For a broader discussion of DNI and beneficiary reporting, see trust distributions and beneficiary taxation.
What Happens When the Section 645 Election Ends?
The end of the election period involves more than simply changing the name on the next Form 1041.
Treasury Regulation Section 1.645-1 contains a special deemed distribution rule.
At the close of the last day of the election period, the share comprising the electing trust is generally treated as distributed to a new trust in a distribution governed by Sections 661 and 662.
The combined estate and electing trust can receive an income distribution deduction to the extent permitted by Section 661, and the successor trust generally includes the corresponding deemed distribution in income under Section 662.
This termination year calculation should be identified before the final Section 645 Form 1041 is prepared.
What Tax Year Does the Trust Use After the Election Ends?
A continuing trust generally returns to the calendar year after Section 645 treatment ends.
If the related estate continues after the election period, the estate generally keeps the same taxable year it used during the election period.
The former electing trust may also need a new EIN.
When there is no executor and the electing trust was the filing trust, a continuing trust generally must obtain a new EIN when the election ends. Other EIN results depend on how the trust and estate were reporting during the election period.
When Is a Section 645 Election Most Useful?
A Section 645 election may be particularly useful when:
- The decedent's revocable trust owns substantial income producing assets
- Both a probate estate and revocable trust require administration
- A fiscal year would improve reporting or distribution timing
- The trust owns S corporation stock
- The estate or trust owns qualifying rental real estate
- Charitable set aside treatment may be relevant
- The administration is expected to continue beyond the end of the calendar year
- The fiduciaries want to coordinate estate and trust Form 1041 reporting
- Beneficiary distributions and DNI require coordinated planning
When Might a Section 645 Election Provide Limited Benefit?
The election is not automatically preferable.
Its benefits may be limited when:
- The trust will terminate and distribute all assets shortly after death
- The trust produces little or no taxable income
- There is no probate estate and calendar year reporting creates no practical problem
- Fiscal year treatment offers little timing benefit
- The added accounting required to track separate estate and trust shares outweighs the administrative savings
- The trust's assets or beneficiaries create tax issues that are not improved by estate treatment
Frequently Asked Questions
What does a Section 645 election do?
It allows a qualifying revocable trust to be treated and taxed as part of the decedent's estate for federal income tax purposes during a limited election period.
What form is used to make the election?
The election is made on Form 8855.
Does the trust need a new EIN after the grantor dies?
Yes. A qualified revocable trust must obtain a post death EIN even if a Section 645 election is expected.
Can the trust use a fiscal year?
A valid Section 645 election can permit estate fiscal year treatment during the election period. When no executor exists, the regulations expressly allow the electing trust to adopt a taxable year other than a calendar year.
Is probate required to make a Section 645 election?
No. The trustee can make the election under the no executor rules when no executor has been appointed and the applicable requirements are satisfied.
When is Form 8855 due?
It generally must be filed by the due date, including extensions, of Form 1041 for the first taxable year of the related estate or filing trust.
Can the Section 645 election be revoked?
Generally no. Once a valid election is made, it is irrevocable.
How long does the election last if no Form 706 is required?
The applicable date generally is two years after death, although the election can terminate earlier if the electing trust and related estate distribute all of their assets.
Does filing Form 706 for portability extend the Section 645 election?
Not merely because a Form 706 is filed. Section 645 distinguishes estates based on whether an estate tax return is required. A voluntary Form 706 filed solely for portability does not by itself create the longer election period applicable when Form 706 is required.
What happens when the election ends?
The regulations generally treat the electing trust share as distributed to a new trust. Special DNI rules apply, including inclusion of net capital gains attributable to the electing trust share. A continuing trust generally returns to a calendar year and may need a new EIN.
Coordinate the Election With the Rest of the Estate and Trust Administration
A Section 645 election affects more than the preparation of Form 8855.
The decision can affect fiscal years, Form 1041 reporting, Schedule K-1 timing, estimated taxes, beneficiary distributions, S corporation ownership, rental real estate, charitable deductions, and the tax consequences when the election terminates.
Estate, Trust and Inheritance Tax ServicesFinal Takeaway
A Section 645 election can provide significant administrative and tax flexibility after the owner of a revocable living trust dies.
The principal benefits can include combined Form 1041 reporting, estate fiscal year treatment, access to certain estate tax rules, and additional time to coordinate distributions and beneficiary reporting.
The election is temporary and irrevocable once made. The Form 8855 deadline, selected fiscal year, estate tax filing requirements, separate share rules, and termination year DNI calculation should all be considered as part of the election decision.
