The Section 645 election lets a decedent’s revocable trust be taxed as part of the probate estate, turning two taxpayers into one for the duration of estate administration. It’s made on IRS Form 8855, it’s irrevocable once filed, and it opens the door to several income tax rules that estates get but trusts don’t: fiscal year reporting, a two-year holiday from estimated tax penalties, the $25,000 rental real estate loss allowance, the charitable set-aside deduction, and a $600 exemption instead of $100 or $300.1Internal Revenue Service. About Form 8855, Election to Treat a Qualified Revocable Trust as Part of an Estate
For most families using a standard living trust, the election is worth making. The benefits are real, the mechanics are manageable, and the only hard deadline is the due date of the first Form 1041 for the combined entity.
Why Fiduciaries Make the Election
Trusts and estates are taxed under the same subchapter of the Internal Revenue Code, but the rules aren’t identical. Estates get several breaks that trusts don’t. The 645 election imports those breaks into the trust for a limited period.
A Fiscal Year Instead of a Calendar Year
Trusts must use a calendar year.2GovInfo. 26 USC 644 – Taxable Year of Trusts Estates can pick any month-end. If the decedent died late in the year, a fiscal year ending the following January or February pushes income recognition forward and buys months of deferral.
No Estimated Tax Penalty for Two Years
Estates are exempt from the underpayment penalty for any taxable year ending within two years of death.3Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax Without the election, the trust has to make quarterly estimated payments like any other trust. The combined entity gets to skip them during the busiest stretch of administration.
$25,000 Rental Real Estate Loss Allowance
For the first two years after death, an estate can claim the $25,000 active-participation rental loss allowance based on the decedent’s pre-death participation.4Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited Making the election extends that benefit to rental property held in the trust. If a surviving spouse also uses the allowance, the $25,000 is reduced by the spouse’s share.
Charitable Set-Aside Deduction
An estate can deduct gross income permanently set aside for charity under the governing instrument, even before the money leaves the account. Most post-1969 trusts can only deduct what has actually been paid out during the year.5Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions The election gives a trust with charitable earmarks immediate access to the deduction.
Higher Exemption and Separate Share Treatment
An estate gets a $600 exemption on Form 1041; a simple trust gets $300 and a complex trust gets $100.5Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions The combined entity files as an estate. And even though one return covers both, the estate and each electing trust are treated as separate shares for computing distributable net income, so a distribution from the estate doesn’t accidentally carry out trust income to beneficiaries.6eCFR. 26 CFR 1.645-1 – Election by Certain Revocable Trusts to Be Treated as Part of Estate
Which Trusts Qualify
A “qualified revocable trust” (QRT) is one the decedent was treated as owning under Section 676 because the decedent personally held the power to revoke.7Office of the Law Revision Counsel. 26 USC 676 – Power to Revoke A trust also qualifies if the revocation power required the consent of a nonadverse party, like a friendly co-trustee. A trust does not qualify if only a nonadverse party held the power, or if the power belonged only to the decedent’s spouse.6eCFR. 26 CFR 1.645-1 – Election by Certain Revocable Trusts to Be Treated as Part of Estate
In practice, the ordinary living trust used in most estate plans qualifies. The status is fixed at the date of death; whether the decedent was actually exercising control in later years doesn’t matter.
Who Signs Form 8855
It depends on whether a probate executor has been appointed.
If there is an executor, both the executor and the trustee of each QRT joining the election must sign. The executor then files the combined Form 1041 and is responsible for paying tax, and the two fiduciaries must agree on a reasonable method for allocating the combined tax burden between the entities.8Internal Revenue Service. Form 8855 (Rev. December 2020) Election to Treat a Qualified Revocable Trust as Part of an Estate
If no executor has been appointed, common in plans built to avoid probate, the trustee can still elect. The trustee completes Parts I and III of Form 8855, and the QRT is treated as an estate for income tax purposes during the election period.6eCFR. 26 CFR 1.645-1 – Election by Certain Revocable Trusts to Be Treated as Part of Estate If an executor is appointed later, a revised Form 8855 with both signatures must be filed within 90 days. A newly appointed executor who disagrees can end the election the day before the appointment.
When a decedent left more than one revocable trust, the fiduciaries can choose which QRTs join and which stay out. Each participating trust’s name and TIN goes on the return, and if there’s no executor, one trustee is designated as the filing trustee for the combined 1041.
The Deadline
Form 8855 must be filed by the due date, including extensions, of the first Form 1041 for the combined entity. That’s true even if the combined entity has too little income to actually require a return.8Internal Revenue Service. Form 8855 (Rev. December 2020) Election to Treat a Qualified Revocable Trust as Part of an Estate
Miss the deadline and the election is gone. There is no formal IRS procedure for late Section 645 elections; a taxpayer who blows the date would generally have to seek relief through a private letter ruling, which is expensive and uncertain. Calendar the date the moment you start administration.
The QRT also needs its own employer identification number after the decedent’s death. The trust can no longer use the decedent’s Social Security number.9Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 With an executor, the combined return is filed under the estate’s name and TIN. Without one, the trustee files under the trust’s new EIN but checks the “decedent’s estate” box on Form 1041 and reports as an estate.
How Long the Election Lasts
The election period runs from the date of death through the day before the “applicable date.”6eCFR. 26 CFR 1.645-1 – Election by Certain Revocable Trusts to Be Treated as Part of Estate
- If no federal estate tax return (Form 706) is required, the applicable date is two years after death. For estates under the federal exemption, that’s the timeline.
- If a Form 706 is required, the applicable date is the later of two years after death or six months after the final determination of estate tax liability. Audits and closing letters can stretch this well past two years.10GovInfo. Election to Treat Trust as Part of an Estate
If all assets are distributed before the applicable date, the election period ends on the date of the final distribution.
What Happens When the Election Ends
Termination triggers a deemed distribution. On the last day of the election period, the share of the combined entity attributable to the electing trust is treated as distributed to a new successor trust; the combined entity gets a distribution deduction and the successor trust picks up the income.11GovInfo. 26 CFR 1.645-1 – Election by Certain Revocable Trusts to Be Treated as Part of Estate Nothing actually moves. The trust keeps holding whatever it held. Only the tax identity changes.
Whether a new TIN is needed depends on the setup. If an executor was appointed, the trust reverts to the EIN it obtained after death and no new number is required. If no executor was appointed, the trust had been using its EIN as the “estate,” so the trustee must get a new TIN going forward.9Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1
After termination, the trust returns to a calendar year, loses the estate-only benefits, and picks up quarterly estimated tax obligations. It also runs headlong into the compressed trust brackets: the top 37% rate hits at a tiny fraction of the income needed to reach it as an individual. Fiduciaries who see the end of the election period coming should plan distributions and income timing before the door closes.