Irrevocable Trust and 645 election

[Strongsilence-CPA]

Decedent and grantor died March 30, 2023.  The trust has become irrevocable, and it has been funded with stocks. An EIN has been granted.  No distributions have been made.

1.  I am thinking of making the 645 election so that a Fiscal Year can be elected in order to more time to prepare the tax return. But if there is no estate tax return required, can a 645 election be made?

[Strongsilence-CPA]

The Tax Adviser has my answer. Bolded.

 Sec. 645 election will remain in force for (1) two years if no estate tax return is required to be filed, or (2) the earlier of the date the trust and estate have distributed all of their assets or the day before the later of (a) two years following the date of the decedent's death or (b) six months after determination of the estate's final estate tax liability, if an estate tax return is required to be filed (Reg. Sec. 1.645-1(f)). During the election period

[PhoebeRoberts · Accepted solution]

Yes, you can still make the 645 election. All the ones I've had recently, both the trust and estate already had an EIN by the time I got involved; I'd have to re-read the instructions to see if you need to get an estate EIN as well as the trust EIN.

The advantages I see to the election are: 1) better chance that you'll be able to file a first-and-final return and 2) the benes get an extra year to pay the tax. I hate fiscal year entities that are ongoing; they need extensions at times I'm not thinking about extensions, and guesses as to how much of the dividends will end up being qualified.

If it were my client, my advice would be to try to get everything wrapped up by 12/31 if possible. 

[Strongsilence-CPA]

Thank you Phoebe.

[Strongsilence-CPA]

I have prepared about 10 estate returns with a fiscal year end but never made the 645 election. I have not ever received IRS notices that state I could not use a FYE.  I will file a 645 in order to preserve a few other advantages that might be applicable.

• A larger exemption amount ($600 versus $300 for a simple trust versus $100 for all other trusts);
• No requirement to make estimated tax payments until after the second tax year following the decedent's death;
• Deducting medical expenses paid by the trust on the decedent's final income tax return;
• A potentially longer time frame for owning S corporation stock (period of administration versus two-year period for former revocable trusts);

[sjrcpa]

And:

One tax return instead of two.

Trust gets to use a fiscal year instead of calendar.

[Strongsilence-CPA]

@PhoebeRoberts @sjrcpa 

Thinking more about this and I have another question.

This is an irrevocable trust by law because the grantor passed, and the revocable trust became irrevocable.  (The only document that mentions the word irrevocable is the brokerage 1099).  For tax filing, this looks like an estate.  If so, I would check the estate box on page 1 then file it with a fiscal year (12 months from 3/30/23 DOD) without needing to do a 645 election.  I THINK this is correct but I don't do a lot of these.

We are past the time where a 645 election can be made (the deadline was yesterday!  aarggh.)

It is confusing.

[PhoebeRoberts]

Lemme math some. DOD is 3/30/2023. So we want a FYE 2/29/24. That's 12/31 plus 2 months, so unextended 1041 would be due 4/15 plus 2 months is 6/15. Extended due date is 9/30 plus 2 months is 11/30. Bummer.

Why do you think that for tax filing, it looks like an estate? Anything titled in the name of the trust gets reported on the trust's 1041 with a 12/31 year-end. Anything not titled in the name of the trust gets reported on the estate's 1041 with a 2/29 year-end. Both of them are delinquent, sorry out of luck. If the trust made distributions to the beneficiaries during 2023, you're gonna have some sad benes.

The 645 election just lets you combine those two returns into one 1041. Without it, you're stuck filing both returns.

Whatever distinction you're trying to draw with the comments about revocable vs irrevocable isn't relevant, IMHO - or if it is relevant, I don't understand what you're getting at.

[Strongsilence-CPA]

Whatever distinction you're trying to draw with the comments about revocable vs irrevocable isn't relevant, IMHO - or if it is relevant, I don't understand what you're getting at.

A grantor trust that is revocable during life becomes Irrevocable upon death and is reported as a trust on the 1041.  It seemed to me that is this is true by law but is filed as an estate on the 1041 because the grantor died.   I need to understand why a trust remains a trust after death of the grantor.

My goal is to be able to have a FYE of 2/29/24 for the tax deferral. Since the 11/30 deadline passed this is not an option.  I can explain this to my client.

Thank you for your time.

[PhoebeRoberts]

A trust remains a trust after the death of the grantor because there still exists a trust. If no trust existed, there would be no such thing as a 645 election.

[sjrcpa]

I agree with both of Phoebe's answers.

Also, the trust remains a trust because that's how grantor set up their affairs. They wanted a trust.

The trust might provide for different people, for example, than their will does. The will governs what is not in the trust.