Navigating Section 645 Elections in Estate Planning: Qualified Revocable Trusts, Requirements, Tax Implications

This CLE/CPE course will provide estate planning counsel and advisers with a comprehensive guide to the tax planning opportunities and pitfalls to avoid when making a Section 645 election to treat qualified revocable trusts (QRTs) as estates. The panel will discuss the advantages of electing estate treatment of existing revocable trusts, describe the impact of the "separate share rule" of IRC 663 in calculating distributable net income (DNI), and detail tax allocation strategies.

Section 645 provides an opportunity to combine the filing of the trust return with the estate income tax return. When properly elected, the trust's income and expenses are reported along with the estate's, using the estate's year-end rather than the trust's required calendar year-end. Since estates often elect a fiscal year-end based on the decedent's date of death, this can significantly delay the filing requirement and the payment of the tax obligation.

Making the election allows many small estates to file a first and final Form 1041. Making the election, however, is irrevocable. While this election can provide significant flexibility, advisers must be aware of the potential tax consequences of failing to properly allocate income and distributions between the estate and its component trust. Also, the election terminates, and at the end of the termination period, beneficiaries could receive two K-1s, sometimes negating any tax benefit received from making the election.

Listen as our panel of trust and estate experts explains the caveats and considerations of making a Section 645 election and the advantages of electing estate treatment of existing revocable trusts. The panel will also discuss the impact of the "separate share rule" of IRC 663 in calculating DNI and detail tax allocation strategies.