Re: Section 645

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Perplexed 18 years ago

> IRS says: "A trust filing as an estate under

>> Section 645 election allows a Qualified
>> Revocable Trust to be treated and taxed (for
>> income tax purposes) as part of its related
>> estate during the election period. Once the
>> election is made, it cannot be revoked."
>> I need to get a tax ID. Should I indicate that
>> this is a QRT? Mother's estate is not so large
>> as to be taxable, substantially under a million,
>> maybe $500,000 in a stretch.
>> What is the "election period:?
> If you mother has established a "revocable living trust,"
> upon her death it becomes "_irrevocable_." At that point,
> the trust requires a tax ID -- to replace the decedent's
> Social Security number.
>
> If you are the executor or legal representative for your
> mother's estate, see Pub 559. If you're simply winding up
> her affairs, and filing a "final return," no new number
> should be required. But if there's a trust which continues,
> then a Tax ID is required, and the executor would issue K-1s
> to beneficiaries for their shares and would file a return
> using Form 1041.

I am winding up her affairs and wish to park a substantial sum in a savings account at the bank where the revocable (now irrevacable) living trust has an account. The bank is insisting on a tax ID (not SSN) for the now irrevacable living trust. She passed away within the last 6 weeks and I am uncertain when her affairs will be settled - not more than 6 months I hope. If I wish to earn interest on the cash proceeds of her estate I need a tax ID. The only question on the table is the election to count the interest as a part of her estate. I am Mother's personal representative and a trustee. Guess I need to read Pub 559 to fugure out the difference between making the 645 election and not making the election.

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Stuart Bronstein 18 years ago

The moment your mother died her trust became irrevocable. The moment it became irrevocable it became a separate tax-paying entity, requiring its own tax ID number. Also the moment your mother died her estate became a separate tax- paying entity.

It seems to me the only reason to do that is that income tax on the estate would be less than tax on the trust. But both estates and trusts have the same marginal rates. So what's the benefit? In fact, if you add estate taxable income to trust taxable income (if there is any difference) then the total tax might be pushed into a higher than necessary tax bracket and income taxes would actually be higher.

If you make the election, the trust's income is taxed as if earned by her estate. If you don't, it's taxed separately. That's not the same as whether or not the trust needs a separate tax ID number. Check with your tax preparer to determine if this is a good idea. For me, I can't see any reason why you'd want to do it. Stu

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Drew Edmundson 18 years ago

Possible benefits of the Section 645 election:

One return is required instead of two. Which can save professional fees and simplify things for the executor.

The loss in one entity can be claimed against the income in the other (e.g. often the estate has a loss in year 1 if the trust was properly funded before death (little income earning assets in the estate and big administrative deductions, executor commissions, etc.).

Often some/all of the estate's income carries to the trust anyway so why not file one return? It seems common for the estate to eventually distribute almost everything to the trust and then the trust makes the distributions to the heirs/beneficiaries.

But you are right that the election can increase taxes. So as in much of life, the answer depends on the facts and circumstances.

-- Drew Edmundson, CPA Cary, NC

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Re: Section 645

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