IRC 645 Elections for Qualified Revocable Trusts: Mastering the DNI Separate Share Calculation Rules

Allocating Between Estate and Component Trust and Timing Distributions to Avoid Unnecessary Tax

Recording of a 110-minute CPE webinar with Q&A


Conducted on Thursday, June 8, 2017
Recorded event now available


This webinar will provide trust tax advisers with a comprehensive and practical guide to the tax calculations, benefits and potential hazards involved with making a Section 645 election to treat qualified revocable trusts (QRTs) as estates. The panel will detail the impact of the “separate share rule” of IRC 663 in calculating DNI, making tax allocations, and reporting the separate shares impact on the Form 1041.

Description

A powerful but misunderstood post-mortem planning tool for estate advisers is the IRC Section 645 Election to Treat a Qualified Revocable Trust as Part of an Estate. While this election can provide significant flexibility in minimizing income tax, advisers must be aware of the potential tax consequences of failing to properly allocate income and distributions between the estate and its component trust.

The election provides tax advisers to qualified revocable trusts with several key advantages. The ability to treat a QRT as an estate allows advisers and fiduciaries to select a fiscal year, rather than defaulting to a calendar year as 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 distributable net income (DNI).

Fiduciaries and compliance professionals must be aware of the application of the separate share rule to trusts making a Section 645 election to ensure income and distributions are properly allocated and avoid unnecessary entity-level income tax.

Listen as our experienced panel provides a comprehensive and practical guide to using a Section 645 election to reduce income tax on qualified revocable trusts.

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 reporting and application of “separate share” rule after a Section 645 election
  5. Illustrations

Benefits

The panel will discuss these and other important topics:

  • 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

Learning Objectives

After completing this course, you will be able to:

  • Identify specific advantages with a Section 645 election
  • Recognize the application of the separate share rules in calculating DNI
  • Discern the tax treatment of income and distributions between a QRT and the estate after a Section 645 election
  • Determine client scenarios where it would not be advantageous to make a Section 645 election

Faculty

John E. Dawson, Member
Dickinson Wright, Las Vegas

Mr. Dawson's practice focuses primarily in the areas of trusts, estates, and asset protection. He has extensive practice experience in estate planning, wills, offshore trusts and revocable living trusts, probate, guardianships, business succession planning, asset protection planning, estate and gift taxation, and all related corporate law in support of entity formation, including corporations, family limited partnerships, and limited liability companies. He is co-author of Asset Protection Guidebook for Attorneys and Accountants, and has taught various Continuing Legal Education courses on probate, estate taxation, asset protection and related topics.

Christiana M. Lazo, Counsel
Ropes & Gray, New York

Ms. Lazo’s practice consists of representing ultra-high net worth individuals, their family offices, and closely held businesses in developing and implementing sophisticated domestic and international tax and estate plans. She has significant experience counseling global clients on inbound and outbound planning, particularly advising families with members in multiple jurisdictions on wealth transfers and on tax-efficient investment and business ownership structures.

Tamara L. Tucker, Counsel
Royal Law Firm, Washington, D.C.

Ms. Tucker focuses her practice on appellate law, business litigation, and equine law. Additionally, she counsels clients on matters involving Virginia Law. She has authored numerous appellate briefs on topics ranging from personal jurisdiction to the doctrine of res ipsa loquitur. She has represented plaintiffs and defendants in dozens of cases involving contract disputes and business torts, including fraud, tortious interference, and business conspiracy. 


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