The Sec. 645 election to treat a trust as part of the estate

Editor: Jeffrey N. Bilsky, CPA

Clients who have estate planning documents in place generally have a last will and testament, a living revocable trust, or both. A Sec. 645 election comes into play when a client with a living revocable trust dies. The election streamlines tax reporting and offers numerous tax advantages.

This item discusses the requirements for making a Sec. 645 election, the tax benefits of making the election, and how and when to make the election. It concludes with completed Forms 8855, Election to Treat a Qualified Revocable Trust as Part of an Estate, showing how the election is made for two case scenarios, along with the completed first page of Form 1041, U.S. Income Tax Return for Estates and Trusts, for each scenario.

Effect of a Sec. 645 election

A Sec. 645 election allows a qualified revocable trust (QRT) to be treated as part of a decedent’s estate for federal income tax purposes. Only a QRT may join in a Sec. 645 election. A QRT is any trust that on the date of the decedent’s death was treated as owned by the decedent under Sec. 676, by reason of a power of the deceased grantor to revoke or reacquire the trust assets held by the decedent. If the decedent’s power to revoke is exercisable only with the approval of an adverse party, or if the power was held only by a nonadverse party, the trust will not qualify as a QRT (Regs. Sec. 1.645-1(b)(1)). The election may apply to more than one QRT for a related estate.

If an executor has been appointed for the decedent’s estate, a Sec. 645 election may be made by the executor of the decedent’s estate and the trustees of each QRT joining in the election. If no executor has been appointed for the decedent’s estate, an election to treat one or more of the decedent’s QRTs as an estate may be made by the trustees of each QRT joining in the election, as more fully described under “Making the Sec. 645 Election” below (Regs. Sec. 1.645-1(c)(2)(i)).

Tax benefits of the Sec. 645 election

A Sec. 645 election allows a QRT to take advantage of federal income tax rules that apply to estates but not to trusts. Those tax advantages include:

• Single return rather than multiple returns: The election eliminates the need for filing an estate income tax return and a trust income tax return for each of the decedent’s QRTs. The electing trust reports its income with the estate’s income on a single combined return.
• Fiscal year rather than calendar year: The Code generally limits trusts to filing on a calendar-year basis. The election allows the electing trust to report income in the same tax year as the estate’s income, which may be a fiscal year or a calendar year, depending on which the estate selects. Electing a fiscal year end potentially allows shifting income from one year to another.
• Charitable set-aside deduction: The election allows the electing trust to claim an income tax charitable deduction for amounts set aside for charitable purposes, as well as amounts paid to charities, pursuant to the terms of the governing instrument for the electing trust under Sec. 642(c).
• S corporation shareholder: Generally, a trust must make either a qualified Subchapter S trust (QSST) election or an electing small business trust (ESBT) election to be an eligible S corporation shareholder. A domestic estate, by default, is an eligible S corporation shareholder. The Sec. 645 election allows an electing trust to be an eligible S corporation shareholder — without making a QSST or an ESBT election — until the election terminates. If a trust does not join in the Sec. 645 election, the trust must make a QSST or an ESBT election within two years of the decedent’s death.
• Estimated taxes: An electing trust qualifies for the estimated tax payment exemption, in which estimated taxes are not required for a period of up to two years following the decedent’s death.
• Active participation: The Code waives the active participation requirement under Sec. 469 for estates for two years following the decedent’s death. The election also waives the active participation requirement for an electing trust.
• Reforestation deduction: Estates can amortize reforestation expenditures under Sec. 194(b)(1)(B)(iii). The Sec. 645 election allows an electing trust to similarly qualify for the deduction.
• Foreign trusts and estates: A QRT is not required to be a domestic trust; it may be a foreign trust. If a foreign revocable trust makes a Sec. 645 election and the related estate is a domestic estate, the foreign trust reports its income with the domestic estate on a Form 1041. Form 1040-NR, U.S. Nonresident Alien Income Tax Return, will not be required for the foreign trust during the election period. If a foreign revocable trust makes a Sec. 645 election and the related estate is a foreign estate, the foreign trust reports its income with the foreign estate income on a single combined Form 1040-NR. Information reporting requirements pursuant to Sec. 6048 will continue to apply to a foreign trust even if a Sec. 645 election was made.

Making the Sec. 645 election 

The executor or trustee makes the Sec. 645 election by completing and filing Form 8855. Once made, the election is irrevocable (Secs. 645(a) and (c)).

If an executor is appointed by a court, the executor completes Part I of Form 8855, and the trustee, who may be (but is not required to be) the same person as the executor, completes Part III.

If no executor is appointed by the court, the trustee makes the election on Form 8855 and completes Part I and Part III. If more than one QRT joins in the election, the trustees of each QRT must appoint one QRT as the filing trust whose trustee completes Part I of Form 8855 and is responsible for filing Form 1041 for the combined electing QRTs.

If an executor is appointed after the trustee of an electing trust makes a Sec. 645 election, a revised Form 8855 is required to be filed within 90 days of the appointment if the executor agrees with the trustee’s election. If there is no agreement between the executor and trustee, the election period terminates on the day before the appointment of an executor who was not appointed until after the trustee made the Sec. 645 election.

If an executor is not appointed and there is only one QRT making the Sec. 645 election, that QRT’s trustee will file Form 1041 and use the QRT’s employer identification number (EIN) on the income tax return. The trustee checks the box for the decedent’s estate in line A. The trustee also checks the box at line G and enters the QRT’s EIN on line G as well. If multiple QRTs are joining in the election, the trustee of the appointed filing trust will file the income tax return using that trust’s EIN. The trustee then enters the EIN for the electing trust with the highest total asset value on line G of Form 1041. In addition, the trustee of the appointed filing trust attaches a statement to Form 1041 providing the name and EIN of each electing trust and the name and address of each trustee.

If an executor is appointed, the executor files the income tax return on behalf of the related estate and uses the estate’s EIN. Line G of Form 1041 includes the EIN of the electing trust with the highest total asset value. The executor must also submit a statement as described above if multiple QRTs join in the election.

Be aware that the related estate and electing trust(s) are treated as separate shares for purposes of computing distributable net income and applying distribution provisions (Regs. Secs. 1.645-1(e)(2)(iii) and 1.663(c)-4(a)). Also, all QRTs must obtain new EINs following the death of the decedent, whether or not a Sec. 645 election is made (Regs. Sec. 301.6109-1(a)).

Sec. 645 election due date and expiration

The executor and trustee (or the trustee if an executor is not appointed) must make the Sec. 645 election no later than the filing due date, including extensions, of the Form 1041 for the first tax year of the related estate, or for the first tax year of the QRT if it is making the election. The due date for filing the election applies even if there is insufficient income to file a Form 1041 for that first tax year (Sec. 645(b) (2); Regs. Sec. 1.645-1(c)).

Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, is used to request an automatic 5½-month extension of time to file Form 1041. If a QRT’s trustee is making the Sec. 645 election and needs an extension, the name and EIN of the electing trust will appear at the top of Form 7004, and form code 04 (estate other than a bankruptcy estate) will apply.

The election expires two years after the date of the decedent’s death if a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is not required. However, if a Form 706 is required because the gross estate exceeds the filing threshold, the election expires six months after the date of the final determination of the estate tax liability or two years after the date of the decedent’s death (if later) (Regs. Sec. 1.645-1(f)). Of course, the election will terminate on the day in which both the electing trust and the related estate (if any) distribute all their assets, if earlier than the above termination periods.

The final determination of estate tax liability is defined as the earliest of:

• Six months after the issuance of an estate tax closing letter, unless a claim for refund is filed within 12 months after the issuance of the letter;
• A final disposition of a claim for refund that resolves the estate tax liability, unless a suit is instituted within six months after a final disposition of the claim;
• A settlement agreement with the IRS that determines the estate tax liability;
• Court orders, judgments, decrees, or decisions that resolve the estate tax liability, unless a notice of appeal or a petition for certiorari is filed within 90 days after the issuance of the court order, judgment, decree, or decision; or
• The expiration of the statute of limitation, as provided in Sec. 6501. 

At the end of the election period, the electing trust’s share is deemed to be distributed to a new successor trust (if there is one). If the electing trust continues in existence after the election period terminates and an executor was appointed, the trustee will file Form 1041 under the name and EIN of the electing trust, using a calendar year. If an executor was not appointed, the trustee must obtain a new EIN for the electing trust and file Form 1041 under the trust’s new EIN (Regs. Sec. 1.645-1(h)(2)(ii)).

Recall that an estate is an eligible S corporation shareholder for which neither a QSST nor an ESBT election is required. When the Sec. 645 election period expires for an estate or electing trust that held S corporation stock, the receiving trust (if there is one) is treated as a testamentary trust that can continue to qualify as an eligible shareholder for another two years before making a QSST or an ESBT election (Sec. 1361(c)(2)(A)(iii)).

Case scenarios and completed Forms 8855

The case scenarios below illustrate the mechanics of making the election and completing Form 8855 and the first page of Form 1041.

Scenario 1: Decedent Z, a U.S. citizen, died May 15, 2023. She had a last will and testament, as well as a living trust, The Decedent Z Living Trust, which meets the “qualified” revocable trust requirement. On June 15, 2023, the court appointed the surviving spouse, Spouse Z, as the executor of the estate. The trust document named Spouse Z as the successor trustee for the living trust. The executor resides at 1234 Suburban Lane in Anytown, WA 98765. Decedent Z’s Social Security number (SSN) is 111-22-3333. A new EIN was obtained for the decedent’s trust, which is 12-3456789. An EIN also was obtained for the estate, which is 11-2233440. View the sample pages of Form 8855 and Form 1041 for Scenario 1.

Scenario 2: Decedent Z, a U.S. citizen, died May 15, 2023. She only had a living trust, The Decedent Z Living Trust, which meets the “qualified” revocable trust requirement. The trust document named Spouse Z as the successor trustee for the living trust. He resides at 1234 Suburban Lane in Anytown, WA 98765. Decedent Z’s SSN is 111-22-3333. A new EIN was obtained for the decedent’s trust, which is 12-3456789. A probate case was not opened, and no executor was appointed. View the sample pages of Form 8855 and Form 1041 for Scenario 2.

Editor notes

Jeffrey N. Bilsky, CPA, is managing principal, National Tax Office, with BDO USA LLP in Atlanta. Contributors are members of or associated with BDO USA LLP. For additional information about these items, contact Bilsky at jbilsky@bdo.com.