Section 645
Perplexed
election allows a Qualified Revocable Trust to be treated
and taxed (for income tax purposes) as part of its related
estate during the election period. Once the election is
made, it cannot be revoked."
I need to get a tax ID. Should I indicate that this is a
QRT? Mother's estate is not so large as to be taxable,
substantially under a million, maybe $500,000 in a stretch.
What is the "election period:?
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Bill
> IRS says: "A trust filing as an estate under
> Section 645 election allows a Qualified
> Revocable Trust to be treated and taxed (for
> income tax purposes) as part of its related
> estate during the election period. Once the
> election is made, it cannot be revoked."
> I need to get a tax ID. Should I indicate that
> this is a QRT? Mother's estate is not so large
> as to be taxable, substantially under a million,
> maybe $500,000 in a stretch.
> What is the "election period:?
If you mother has established a "revocable living trust,"
upon her death it becomes "_irrevocable_." At that point,
the trust requires a tax ID -- to replace the decedent's
Social Security number.
If you are the executor or legal representative for your
mother's estate, see Pub 559. If you're simply winding up
her affairs, and filing a "final return," no new number
should be required. But if there's a trust which continues,
then a Tax ID is required, and the executor would issue K-1s
to beneficiaries for their shares and would file a return
using Form 1041.
Sounds like you would benefit from some advice from a tax
advisor, who should be able to answer your questions and set
you straight on the appropriate course for your situation.
Bill
Perplexed
> nellplo...@yahoo.com (Perplexed) posted:
>> IRS says: "A trust filing as an estate under
>> Section 645 election allows a Qualified
>> Revocable Trust to be treated and taxed (for
>> income tax purposes) as part of its related
>> estate during the election period. Once the
>> election is made, it cannot be revoked."
>> I need to get a tax ID. Should I indicate that
>> this is a QRT? Mother's estate is not so large
>> as to be taxable, substantially under a million,
>> maybe $500,000 in a stretch.
>> What is the "election period:?
> If you mother has established a "revocable living trust,"
> upon her death it becomes "_irrevocable_." At that point,
> the trust requires a tax ID -- to replace the decedent's
> Social Security number.
>
> If you are the executor or legal representative for your
> mother's estate, see Pub 559. If you're simply winding up
> her affairs, and filing a "final return," no new number
> should be required. But if there's a trust which continues,
> then a Tax ID is required, and the executor would issue K-1s
> to beneficiaries for their shares and would file a return
> using Form 1041.
I am winding up her affairs and wish to park a substantial
sum in a savings account at the bank where the revocable
(now irrevacable) living trust has an account. The bank is
insisting on a tax ID (not SSN) for the now irrevacable
living trust. She passed away within the last 6 weeks and I
am uncertain when her affairs will be settled - not more
than 6 months I hope.
If I wish to earn interest on the cash proceeds of her
estate I need a tax ID. The only question on the table is
the election to count the interest as a part of her estate.
I am Mother's personal representative and a trustee. Guess
I need to read Pub 559 to fugure out the difference between
making the 645 election and not making the election.
cbal...@tyyni.net
Make you you don't mix up "estate tax" with "estate income
tax" (more formally known as "fiduciary income tax"). Even
with an estate worth less than the $2 million estate tax
threshold, you could very easily end up in a situation of
needing to file an income tax return for the estate.
The reason for section 645 has to do with fiscal years. A
trust is required in most circumstances to use a calendar
year as its fiscal year. An estate can pick any fiscal year
end that it wishes. By making the 645 election, the trustee
of a decedant's previously revocable trust agrees to report
all of the trust's income on the decedant's estate's income
tax return. This essentially lets the trust adopt a fiscal
year for up to two years after the decedant dies.
Where this is particularly useful in in the case of a
relatively simple estate administration, where the
distributrion of the decedant's estate and trust can be
wound up in less than a year. By making the 645 election,
any income during that time period can all be shown on one
return. Without making the 645 election, the personal
representative would file one return for the estate, and the
trustee might end up filing two returns for the trust.
Whether the election makes sense in your particular case
will depend on when your mother died, and on her sepcific
tax situation.
You make the election by filing Form 8855 with the IRS.
Take a look at the instructions to that form and for Form
1041 for information about EINs. The trust must get its own
EIN as of your mother's date of death, but if you make the
645 election, you will end up reporting the trust's income
under a different EIN.
It may be worth seeing an accountant who has some
familiarity with trust and estate taxation. Fiduciary tax
is one of the more arcane areas of tax law.
--Chris
Stuart Bronstein
> I am winding up her affairs and wish to park a substantial
> sum in a savings account at the bank where the revocable
> (now irrevacable) living trust has an account. The bank is
> insisting on a tax ID (not SSN) for the now irrevacable
> living trust. She passed away within the last 6 weeks and I
> am uncertain when her affairs will be settled - not more
> than 6 months I hope.
The moment your mother died her trust became irrevocable.
The moment it became irrevocable it became a separate
tax-paying entity, requiring its own tax ID number.
Also the moment your mother died her estate became a
separate tax- paying entity.
> If I wish to earn interest on the cash proceeds of her
> estate I need a tax ID. The only question on the table is
> the election to count the interest as a part of her estate.
It seems to me the only reason to do that is that income tax
on the estate would be less than tax on the trust. But both
estates and trusts have the same marginal rates. So what's
the benefit? In fact, if you add estate taxable income to
trust taxable income (if there is any difference) then the
total tax might be pushed into a higher than necessary tax
bracket and income taxes would actually be higher.
> I am Mother's personal representative and a trustee. Guess
> I need to read Pub 559 to fugure out the difference between
> making the 645 election and not making the election.
If you make the election, the trust's income is taxed as if
earned by her estate. If you don't, it's taxed separately.
That's not the same as whether or not the trust needs a
separate tax ID number.
Check with your tax preparer to determine if this is a good
idea. For me, I can't see any reason why you'd want to do
it.
Stu
Stuart Bronstein
> The reason for section 645 has to do with fiscal years. A
> trust is required in most circumstances to use a calendar
> year as its fiscal year. An estate can pick any fiscal year
> end that it wishes. By making the 645 election, the trustee
> of a decedant's previously revocable trust agrees to report
> all of the trust's income on the decedant's estate's income
> tax return. This essentially lets the trust adopt a fiscal
> year for up to two years after the decedant dies.
Thanks, Chris. I didn't know that. Now it makes sense.
Stu
Drew Edmundson
> Perplexed wrote:
>> I am winding up her affairs and wish to park a substantial
>> sum in a savings account at the bank where the revocable
>> (now irrevacable) living trust has an account. The bank is
>> insisting on a tax ID (not SSN) for the now irrevacable
>> living trust. She passed away within the last 6 weeks and I
>> am uncertain when her affairs will be settled - not more
>> than 6 months I hope.
> The moment your mother died her trust became irrevocable.
> The moment it became irrevocable it became a separate
> tax-paying entity, requiring its own tax ID number.
>
> Also the moment your mother died her estate became a
> separate tax- paying entity.
>> If I wish to earn interest on the cash proceeds of her
>> estate I need a tax ID. The only question on the table is
>> the election to count the interest as a part of her estate.
> It seems to me the only reason to do that is that income tax
> on the estate would be less than tax on the trust. But both
> estates and trusts have the same marginal rates. So what's
> the benefit? In fact, if you add estate taxable income to
> trust taxable income (if there is any difference) then the
> total tax might be pushed into a higher than necessary tax
> bracket and income taxes would actually be higher.
Possible benefits of the Section 645 election:
One return is required instead of two. Which can save
professional fees and simplify things for the executor.
The loss in one entity can be claimed against the income in
the other (e.g. often the estate has a loss in year 1 if the
trust was properly funded before death (little income
earning assets in the estate and big administrative
deductions, executor commissions, etc.).
Often some/all of the estate's income carries to the trust
anyway so why not file one return? It seems common for the
estate to eventually distribute almost everything to the
trust and then the trust makes the distributions to the
heirs/beneficiaries.
But you are right that the election can increase taxes. So
as in much of life, the answer depends on the facts and
circumstances.
--
Drew Edmundson, CPA
Cary, NC
Perplexed
>>> I am winding up her affairs and wish to park a substantial
>>> sum in a savings account at the bank where the revocable
>>> (now irrevacable) living trust has an account. The bank is
>>> insisting on a tax ID (not SSN) for the now irrevacable
>>> living trust. She passed away within the last 6 weeks and I
>>> am uncertain when her affairs will be settled - not more
>>> than 6 months I hope.
>> The moment your mother died her trust became irrevocable.
>> The moment it became irrevocable it became a separate
>> tax-paying entity, requiring its own tax ID number.
>> Also the moment your mother died her estate became a
>> separate tax- paying entity.
>>> If I wish to earn interest on the cash proceeds of her
>>> estate I need a tax ID. The only question on the table is
>>> the election to count the interest as a part of her estate.
>> It seems to me the only reason to do that is that income tax
>> on the estate would be less than tax on the trust. But both
>> estates and trusts have the same marginal rates. So what's
>> the benefit? In fact, if you add estate taxable income to
>> trust taxable income (if there is any difference) then the
>> total tax might be pushed into a higher than necessary tax
>> bracket and income taxes would actually be higher.
> Possible benefits of the Section 645 election:
>
> One return is required instead of two. Which can save
> professional fees and simplify things for the executor.
>
> The loss in one entity can be claimed against the income in
> the other (e.g. often the estate has a loss in year 1 if the
> trust was properly funded before death (little income
> earning assets in the estate and big administrative
> deductions, executor commissions, etc.).
>
> Often some/all of the estate's income carries to the trust
> anyway so why not file one return? It seems common for the
> estate to eventually distribute almost everything to the
> trust and then the trust makes the distributions to the
> heirs/beneficiaries.
>
> But you are right that the election can increase taxes. So
> as in much of life, the answer depends on the facts and
> circumstances.
Thanks folks.
Mom's assets are all in bonds and MM accounts but one of the
bonds will likely be called at par next year - it is to the
advantage of the beneficiaries to keep the trust open until
then. I think I will elect to have it taxed as an estate
and elect the Section 645 designation. I know the trust will
still have assets after Jan 1 now so why not attempt to
simplify life.
For those who suggested that I seek the advise of an
accountant, actually my daughter is a CPA but her focus is
venture capital. She is about to have her 2nd baby and is
in the middle of a change of residence.. she is just hanging
in there with family and professional responsibilities so I
didn't want to add to her burden. So, consider your help as
that which you would give a colleague's Mom when your
colleague is swamped.
Brian
> For those who suggested that I seek the advise of an
> accountant, actually my daughter is a CPA but her focus is
> venture capital.
The advice should have been to seek the advice of an
accountant whose practice includes estate tax law. It does
not sound like your daughter would qualify, even if she
wasn't so busy.