Question re: Sec. 645 election period

[TaxesTech]

Still the same case, I really appreciate the insights by this community and it helped me tremendously to work on the case.  I am again stuck with some confusion with regards to the Section 645 election.  Worrying about the election, if made, ended up invalid, I'm hoping to borrow your brain to understand the election period and applicable date correctly. 

Facts summary: 

• The Qualified Revocable Trust is a husband-and-wife joint living grantor trust. 
• Husband died in August 16, 2019, survived by wife. 
• No estate EIN applied subsequent to the death.
• The QRT (Qualified Revocable Trust) needs to file its first Income Tax return for year 2021, with a Florida deadline which is 2/13/2023. 
• The trust's taxable income was generated in October and December, 2021, with two major appreciated asset disposals. 

Actions I plan to take:

• Apply for a EIN for the late husband Estate, for the purpose of "related estate" for the Sec. 645 election.
• Report the revocable trusts' income that is attribute to the decedent on Form 1041, and report the income attribute to the surviving wife on her Form 1040.  
• With Form 1041, I'll attach Form 8855 obtaining executors' approval to be treated as part of the decedent' estate.  Now the election period questions arises: 

Confusion starts here: 

Per the Form 8855 instruction, the Section 645 election needs to be made by the deadline (including extension) of the first Form 1041 filing deadline, which is 2/13/2023.  We are good on that.  

The "Applicable Date" needs to be after two years after the husband's death. If the two year clock starts from the actual date, 08/16/2019, the taxable transactions then fell out of the two year period. But should the clock starts from 12/31/2019, the last day of the year of death?  

Question: 

What does the "election period" govern?  Does that govern the validity of Sec. 645 election, or does that govern that the QRT has to be treated as an irrevocable trust within this two year period? 

Am I correct to think: 

1. the Sec. 645 election is still timely made, thus valid;
2. As the two year election period has passed from 12/31/2023, the QRT should be continuously treated as a revocable trust from the 2022 tax year?  

Thank you again!!

[sjrcpa]

The confusion started here:

https://proconnect.intuit.com/community/tax-talk/discussion/how-to-report-a-cost-basis-step-up-when-...

It is best to keeo everything in one thread.

[TaxesTech]

I think I found the answer here...I think we've missed the timely election date, which should be the QRT's first Form 1041 return deadline, even there were "no sufficient income to require to file that return" per CFR Section 1.645-1(c)(1)(ii).  

https://www.law.cornell.edu/cfr/text/26/1.645-1

It seems to me that this provision defined that the Sec. 645 election due day in this case has nothing to do with the FL 2021 deadline, because it was due April 2020 - even with no taxable transactions back then, we should have filed a zero information return.  We missed the valid election due day. 

I guess our only option now is to file two Form 1041s for both the revocable trust and the estate trust...

I hope to run this thoughts here and see if anyone have different view...Thank you!

[BobKamman]

Did the trust require that two separate trusts be created at the death of the first grantor, with one of the trusts being irrevocable?  Was that done in 2019?  But there was no income in 2020 and 2021?  I really don't understand what is happening here, and I wonder if you do either.  Have you read the entire trust document?

[TaxesTech]

The trust document did not require a separate irrevocable trust to be created at the death of the first grantor.  The trust document says "upon the death of either of us, the trustee  shall continue to administer the Trust as provided in the preceding articles"...., and the Trustee shall receive any amounts devised under the terms of the deceased last will, which defines the surviving spouse receive everything, and the Trustee shall continue to hold the Trust Estate for the benefit of the Surviving Settlor, to the exclusion of all other persons."  

So I guess this Joint Grantor Trust, upon the first grantor die, is treated as both the deceased grantor's estate and the surviving settlor's revocable trust?  

Bob you are right I am not experienced in reading the trust document and did not realize I didn't have one yet.  I just received it today, as a result of receiving your critiques and realized the "trust certificate" and the "Will" combined together could not serve as the trust document as the client claimed.  Thank you.  

The Joint Grantor Trust was using the deceased SSN as the TIN, and did not file any Form 1041 from 2019 to 2020.  I think an EIN needs to be applied for this trust to file its first tax return. 

In this case, how should I report the capital gain with 50% attributable to the surviving wife using her own original cost basis and the other 50% attributable to the deceased husband with a stepping up cost basis?  

P.S., is it correct that after the first Grantor dies, the Joint Grantor Trust survives as a revocable trust, but the structure of the trust becomes Estate Trust within the Joint Grantor Trust in substance?  I wonder if it is correct to apply for an Estate Trust EIN for the decedent to report the Cost basis step-up, and then report 100% distribution to the joint grantor trust now only have one trustee, and report the original cost basis release on the surviving wife's Form 1040.  This way we just need to file one Form 1041 and one Form 1040, no longer need Section 645 to make an election.