Section 645 Elections: Merging Trust and Estate for More Efficient Tax Filings
By Mahoney
The Estate Administration Challenge
Entering the world of estate planning – whether you’re setting up your own estate or helping administer someone else’s – can feel overwhelming. Terms like last will and testament, living revocable trust, and taxable estate quickly pile up, and that’s before you even face the maze of estate tax filing obligations.
Luckily, there is a way to make the tax filing piece of this puzzle easier: by making a Section 645 election under the tax code in this guide, we’ll break own key estate planning concepts and explain a §645 election can streamline the process.
Term #1: Qualified Revocable Trusts
A trust is usually created with the purpose of minimizing how many of your assets must undergo “probate”. Probate is the legal process of officially transferring assets from your estate to your heir(s) after your death. Handled in a court of law, probate is often lengthy, expensive, and emotionally draining. It is also a matter of public record.
For these reasons, it is often preferable to place assets into a revocable trust while you are still alive. Most revocable trusts provide the owner (also called the “grantor”) with continued control over the assets inside the trust until their death. After death, the terms of the trust document govern final disposition of the assets, usually outside any court proceedings. In this way, final distribution to the heir(s) is simpler, more efficient, and less subject to drama.
This brings us to what may be the most common term when discussing a §645 election: “qualified revocable trust” (QRT). You may have also heard the term “living trust” which is often used interchangeably. A trust must be a QRT to be eligible for a §645 election.
If the QRT continues to hold income-generating assets after the creator’s death, yearly tax filing obligations are required using IRS Form 1041.
Term #2: Taxable Estate
When an individual passes away, their “estate” in the context of tax law encompasses all the assets and liabilities they owned at their time of death.
An estate may have two types of tax filing obligations, one of which can be simplified with a §645 election:
- Estate Tax Return (Form 706): Required if the estate’s value exceeds federal or state thresholds.
- Income Tax Return (Form 1041): Required if the estate holds income-generating assets not immediately distributed to beneficiaries. These filings can be simplified with a §645 election.
Why make a §645 Election?
While the tax filing obligations of QRT(s) and a taxable estate may seem manageable individually, they can add up quickly, especially when these filings are undertaken while the decedent’s family and friends are actively grieving. A decedent may have held income-producing assets both inside and outside of a trust, adding complexity and hassle to the situation. This is where a §645 election, Election to Treat a Revocable Trust as Part of an Estate, comes in: when this election is in effect, the QRT and estate income tax returns are consolidated into one yearly tax filing.
On top of this, §645 elections have many other benefits that some taxpayers may find enticing, including but not limited to:
- Ability to Select a Fiscal Tax Year: For income tax filing purposes, estates can select either a calendar year-end (12/31) or a fiscal year-end that is not more than 12 months after the descendant’s death. Normally, a trust is only allowed a calendar year-end. However, when a §645 election is made, the QRT is allowed to pick a fiscal year-end instead. Doing this can often streamline the number of income tax returns needed during the estate’s administration.
- Estimated Tax Payment Exemption: A taxable estate is not required to make estimated tax payments for up to two years after the decedent’s death. An electing QRT gains the benefit of this exemption.
- Eligible S-Corporation Shareholder: Under normal circumstances, a trust must make special elections to hold S-Corporation stock. However, since a domestic estate is an eligible shareholder, an electing QRT can hold stock without issue for as long as the election is in effect.
- Charitable Deductions: Amounts specifically set aside by the estate to be given to charities can be reported as a charitable deduction on an electing QRT tax return.
How to make a §645 Election
If an estate executor is in place, they will make the §645 election. If an executor is not in place, the responsibility falls to the QRT’s trustee(s).
The election is made by completing and filing IRS Form 8855 with the QRT’s first income tax return. Once made, the election is irrevocable. The election will last for two years from its original effective date (generally, the decedent’s date of death). After two years, if the estate and QRT have not been fully administered, the two entities will be pulled apart and separate income tax returns will need to be filled. The QRT would also lose its fiscal year and would revert to a calendar year.
Conclusion
A §645 election can be a powerful estate planning tool that can simplify tax filing, reduce administrative burdens, and provide flexibility during a difficult time. If you’re navigating estate administration, consult with a qualified tax advisor to determine this election is right for your situation. For more questions, reach out to Manager, Tyler Sauve, CPA on our Tax & Business Solutions Team.
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