Revocable Trusts After Death and the Section 645 Election

A revocable living trust is invisible for income tax purposes while the grantor is alive. The grantor keeps the power to revoke it, so under the grantor trust rules, specifically IRC 676, the grantor is treated as owning the trust assets. Income goes on the grantor's Form 1040. Most revocable trusts never file a return of their own.

Death changes everything. The power to revoke disappears, the trust becomes irrevocable, and it becomes a separate taxpayer. The successor trustee suddenly has a tax return to file, a new identification number to obtain, and a decision to make about section 645.

Step one: a new taxpayer

After death, the trust needs its own employer identification number. The trustee applies online or on Form SS-4 and gives the new EIN to every bank and brokerage holding trust assets. Interest and dividends earned after the date of death should be reported under the trust's EIN, not the decedent's Social Security number.

If the payers keep reporting under the decedent's number, the IRS will eventually ask why the income was not reported on a return for that number. That is a common source of mismatch notices. See beneficiary K-1 problems and IRS notices.

The trustee should also file Form 56 for the trust.

Step two: the filing requirement

A trust must file Form 1041 if it has any taxable income or gross income of $600 or more for the year under IRC 6012(a)(4). Most funded revocable trusts cross that line in the first year after death.

Without any election, the trust is a separate taxpayer from the estate. Trusts generally must use a calendar year under IRC 644. Estates can choose a fiscal year. Trusts and estates also have different rules on several deductions and elections. When there is both a probate estate and a trust, the family ends up with two returns, two sets of K-1s, and two tax years that may not line up.

What section 645 does

IRC 645(a) provides that if the executor, if any, and the trustee of a qualified revocable trust both elect, the trust is treated and taxed as part of the estate, and not as a separate trust, for all taxable years of the estate ending after the date of death and before the applicable date.

A qualified revocable trust, under IRC 645(b)(1), is a trust that was treated as owned by the decedent under IRC 676 because of a power to revoke. That covers the ordinary revocable living trust.

The election is made on Form 8855, Election To Treat a Qualified Revocable Trust as Part of an Estate. Treas. Reg. 1.645-1 provides the details.

One technical limit is worth knowing. IRC 645(b)(1) tests grantor trust status under IRC 676 without regard to the spouse attribution rule in IRC 672(e). A trust that was a grantor trust during life only because the decedent's spouse held the power to revoke does not qualify. The ordinary living trust that the decedent could revoke personally does.

Deadline and duration

Deadline. Under IRC 645(c), the election must be made by the due date, including extensions, of the Form 1041 for the estate's first taxable year. Once made, it is irrevocable. Miss the deadline and the trust is a separate taxpayer for the duration.

Duration. IRC 645(b)(2) defines the applicable date that ends the election:

• If no estate tax return is required, two years after the date of death.
• If an estate tax return is required, six months after the final determination of estate tax liability.

After the election period ends, the trust goes back to being taxed as a separate trust, generally under its own calendar year.

Who signs

If an executor has been appointed, both the executor and the trustee must make the election. If there is no executor, the trustee can make it alone. When there are multiple trusts, each electing trust's trustee joins.

When there is no executor, the trustee of the electing trust files the combined return. When there is an executor, the estate's Form 1041 includes the electing trust's items, and the trust's and estate's fiduciaries coordinate.

Why make the election

The benefits are practical:

• A fiscal year. The combined entity can use the estate's fiscal year, which can defer income to beneficiaries and match the administration timeline. See Form 1041 for an estate.
• One return instead of two. Simpler accounting and fewer K-1s.
• Estate treatment for certain provisions. During the election period, the trust gets rules that apply to estates. For example, an estate can claim a charitable deduction under IRC 642(c)(2) for amounts permanently set aside for charity, and IRC 469(i)(4) extends the rental real estate loss allowance to an estate for two years after death when the decedent actively participated.
• Estimated tax relief. Estates are exempt from estimated tax for taxable years ending within two years of death. Qualifying trusts that receive the residue get the same two-year exemption under IRC 6654(l)(2)(B), but the election aligns the two.

For many Florida trust-only administrations with no probate, the 645 election is low-cost and simplifies the first two years considerably.

When it may not help

The election does not change who owns the assets or who has fiduciary duties. It does not shelter the trust from the decedent's creditors or from the IRS. It may not be worth the coordination where the trust holds little, where the estate and trust have different beneficiaries with competing interests, or where separate tax years produce a better result. Talk it through with the fiduciaries and the return preparer before the first 1041 is due.

Making the election on time

Form 8855 asks for the decedent's name and identification number, the trust's EIN, the executor's information if there is one, and the signatures of the trustee and executor. When there is an executor, Treas. Reg. 1.645-1 also has the electing trustee agree to provide the executor with the information needed to file the combined return and to pay the trust's share of the tax on time.

The deadline is the due date, with extensions, of the first Form 1041. If the estate uses a fiscal year, that first return may be due earlier than a calendar-year return would be. Get the year decided early, then calendar the Form 8855 date. An election missed by a day is an election that does not exist.

Coordinate with the decedent's other obligations

The trust's first returns are only part of the picture. The trustee may also be responsible for the decedent's final Form 1040, any unfiled prior years, and, for a large estate, the Form 706. If there is no probate, the trustee may be treated as the executor for estate tax purposes. See trustee liability for unpaid trust taxes.

And remember that a refund owed to the decedent individually is not a trust asset unless state law moves it there. See claiming a deceased taxpayer's refund.

A checklist for the first ninety days

1. Obtain the trust's EIN and retitle accounts to the trust under it.
2. File Form 56 for the trust.
3. Decide whether a probate estate will be opened.
4. Decide on the estate's tax year and whether to make the section 645 election.
5. Calendar the due date, with extensions, for the first Form 1041. That is the Form 8855 deadline.
6. Pull the decedent's transcripts and identify any unpaid tax before distributing.

If you are a successor trustee facing your first Form 1041 and a deadline you did not know existed, call (813) 229-7100. Let's talk.