IRC 645 Election: Estate Planning for Qualified Revocable Trusts in Taxable Estates

Deferral Opportunities, Active Participation Rules and Separate Share Rule Considerations

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Tuesday, January 16, 2018

Recorded event now available

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Program Materials

This CLE/CPE webinar will provide estate planning counsel and advisers with a comprehensive guide to the tax planning opportunities and hazards with making a Section 645 election to treat qualified revocable trusts (QRTs) as estates. The panel will discuss the advantages of electing estate treatment of existing revocable trusts, describe the impact of the “separate share rule” of IRC 663 in calculating distributable net income (DNI), and detail tax allocation strategies.

Description

A powerful but misunderstood post-mortem planning tool for estate planners and fiduciaries is the IRC Section 645 Election to Treat a Qualified Revocable Trust as Part of an Estate. This election can provide significant flexibility in deferring and minimizing income tax, as well as easing administrative burdens on fiduciaries.

The election provides tax advisers to QRTs with several key advantages. The ability to treat a QRT as an estate allows fiduciaries to select a fiscal rather than a calendar year default required under trust reporting. This provides fiduciaries with greater flexibility in timing income and distributions. The election also waives the material participation requirement for purposes of the passive loss rules.

While making a 645 election allows the fiduciary to file a single Form 1041 Income Tax Return, the tax adviser must treat the estate and the component QRT as separate shares for purposes of calculating DNI. This can result in negative tax consequences without careful planning.

Estate planners must be aware of the separate share rule for trusts making a Section 645 election to ensure income and distributions are properly allocated and avoid unnecessary entity-level income tax. Counsel must also recognize potential non-tax reasons that the election may not be appropriate.

Listen as our experienced panel provides a comprehensive and practical guide to using a Section 645 election to provide flexibility and tax minimization benefits on QRTs.

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Outline

  1. Qualified revocable trusts eligible for a Section 645 election
  2. Advantages of a Section 645 election
    1. Ability to select a fiscal year for the estate
    2. Waiver of active participation requirements
    3. Allows for longer S corporation stock holding period
  3. Mechanics of making the election
  4. Income tax impact of “separate share” rule after a Section 645 election
  5. Non-tax reasons to make, or not make, Section 645 election for a QRT
  6. Illustrations

Benefits

The panel will review these and other key issues:

  • Types of trusts that qualify as QRTs eligible to make a Section 645 election
  • Applying the “separate share” rule to DNI calculations and allocations between the QRT and the estate after the election
  • Post-mortem tax planning strategies present with a Section 645 election
  • Mechanics of making the election with initial income tax filing

Faculty

Royal, Priya
Priya Prakash Royal, Esq. LL.M.

Managing Attorney
Royal Law Firm

Ms. Royal practices in the areas of tax, trusts & estates, and business law, representing clients in diverse areas...  |  Read More

Dawson, John
John E. Dawson

Member
Dickinson Wright

Mr. Dawson's practice focuses primarily in the areas of trusts, estates, and asset protection. He has extensive...  |  Read More

Lazo, Christiana
Christiana M. Lazo

Counsel
Ropes & Gray

Ms. Lazo’s practice consists of representing ultra-high net worth individuals, their family offices, and closely...  |  Read More

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