IRC 645 Election: Estate Planning for Qualified Revocable Trusts in Taxable Estates

A powerful but misunderstood post-mortem planning tool for estate planners and fiduciaries is the IRC Section 645 Election to Treat a Qualified Revocable Trust as Part of an Estate. This election can provide significant flexibility in deferring and minimizing income tax, as well as easing administrative burdens on fiduciaries.

The election provides tax advisers to QRTs with several key advantages. The ability to treat a QRT as an estate allows fiduciaries to select a fiscal rather than a calendar year default required under trust reporting. This provides fiduciaries with greater flexibility in timing income and distributions. The election also waives the material participation requirement for purposes of the passive loss rules.

While making a 645 election allows the fiduciary to file a single Form 1041 Income Tax Return, the tax adviser must treat the estate and the component QRT as separate shares for purposes of calculating DNI. This can result in negative tax consequences without careful planning.

Estate planners must be aware of the separate share rule for trusts making a Section 645 election to ensure income and distributions are properly allocated and avoid unnecessary entity-level income tax. Counsel must also recognize potential non-tax reasons that the election may not be appropriate.

Listen as our experienced panel provides a comprehensive and practical guide to using a Section 645 election to provide flexibility and tax minimization benefits on QRTs.

1. Qualified revocable trusts eligible for a Section 645 election
2. Advantages of a Section 645 election
   1. Ability to select a fiscal year for the estate
   2. Waiver of active participation requirements
   3. Allows for longer S corporation stock holding period
3. Mechanics of making the election
4. Income tax impact of “separate share” rule after a Section 645 election
5. Non-tax reasons to make, or not make, Section 645 election for a QRT
6. Illustrations

The panel will review these and other key issues:

• Types of trusts that qualify as QRTs eligible to make a Section 645 election
• Applying the “separate share” rule to DNI calculations and allocations between the QRT and the estate after the election
• Post-mortem tax planning strategies present with a Section 645 election
• Mechanics of making the election with initial income tax filing

Learning Objectives

After completing this course, you will be able to:

• Identify specific advantages with a Section 645 election
• Recognize the application of the separate share rules in calculating DNI to determine the tax impact of an election
• Discern the tax treatment of income and distributions between a QRT and the estate after a Section 645 election
• Determine client scenarios where it would not be advantageous to make a Section 645 election

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex estate plans, tax forms and schedules, supervising other planners/attorneys.. Specific knowledge and understanding of revocable trust rules and structure, specific knowledge of estate and trust Form 1041 Income Tax Return and distributable net income calculations; familiarity with estate elections, separate share rule and distribution strategies..

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).