Election to Treat a Revocable Trust as Part of an Estate

By Gordon, Ellen | The CPA Journal, December 1998 | Go to article overview

Election to Treat a Revocable Trust as Part of an Estate


Gordon, Ellen, The CPA Journal


Many taxpayers have established revocable inter vivos trusts as estate planning tools for the purpose of avoiding probate, providing trust management, and engagement of assets in the event of legal incapacity. In spite of these and other advantages of revocable living trusts, a number of people have shied away from them because revocable trusts prior to the Taxpayer Relief Act of 1997 were not given equal Federal income tax treatment with a decedent's estate on a number of IRC provisions.

Both revocable trusts and estates can function to settle a decedent's affairs and distribute assets to beneficiaries. However, unless an election is made under the new IRC section 646, estates will continue to have various income tax advantages over revocable trusts, including the following:

Estates are allowed an IRC section 642(c) income tax deduction for all amounts permanently set aside for charitable purposes; post-death revocable trusts are allowed charitable deductions only for amounts actually paid to charities.

IRC section 469(iX4) waives the active participation requirement of the passive loss rules (regarding the $25,000 PAL deduction for rental real estate) for estates ending less than two years after the date of death of the decedent but provides no such waiver for revocable trusts.

Estimated tax payments are not required from a decedent's estate for any tax year ending before the date that is two years after the decedent's death; revocable trusts are not entitled to this waiver unless, under the decedent's will, the estate pours over into the trust.

Effective for estates of decedents dying after August 5, 1997, a new election may be made under IRC section 646 (enacted by the Taxpayer Relief Act of 1997) to treat qualified revocable trusts as part of an estate for income tax purposes. The election makes it possible for trusts to participate in the income tax advantages of estates as outlined above. The IRS has recently issued a revenue procedure that explains the mechanics of making the election (Rev. Proc. 9S13, 1998-4 IRB).

Under IRC section 646(a), if both the executor of an estate and the trustee of a qualified revocable trust elect, the trust will be treated and taxed for income tax purposes as part of the estate (and not as a separate trust).

A qualified revocable trust is any trust (or part of a trust) that the decedent was treated as owning under IRC section 676 by reason of power in the decedent to revoke the trust (or part) without applying the IRC section 672(e) spousal attribution rule [IRC section 646(b)(1)]. Therefore, a trust that is treated as owned by the decedent solely by reason of a power in a nonadverse party would not qualify.

The election is irrevocable and is effective from the date of the decedent's death until two years after his or her death (if no estate tax return is required) or until six months after the final determination of estate tax liability (if an estate tax return is required). In addition, the election must be made not later than the time for filing the income tax return for the first tax year of the estate determined with regard to extensions [IRC sections 6X2) and 646(c)].

Procedures and Requirements for Main the Section 6 & Election

To make the election, a statement must be attached to a Form 1041, US. Income Tax Return for Estates and Trusts. The statement must

identify the election as having been made under section 646;

contain the name, address, date of death, and taxpayer identification number (TIN) of the decedent;

contain the qualified revocable trust's name, address, and TIN.

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Election to Treat a Revocable Trust as Part of an Estate
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