How estate and revocable trust income tax works after death

Which trusts qualify for the election?

A trust or trust portion qualifies if, at death, the decedent was treated as its owner under section 676 because of a power the decedent held, determined without section 672(e) attribution.

A power exercisable by the decedent with a nonadverse party’s or spouse’s consent qualifies. Ownership solely through a power held by a nonadverse party or spouse does not.

The trustee and executor, if any, use the IRS election form to make the section 645 election. Once made, the election is irrevocable.

Identification numbers and filing requirements

Every qualified revocable trust must obtain a new taxpayer identification number after death, whether or not it elects.

A domestic estate must file a fiduciary income tax return if it has any of the following:

• Gross income of at least $600 for the tax year.
• A beneficiary who is a nonresident alien.
• A qualified investment in a qualified opportunity fund at any time during the tax year.

A domestic trust taxable under section 641 must file a fiduciary income tax return if it has any taxable income or meets any of those three triggers.

A qualified opportunity fund investment requires the IRS qualified opportunity fund reporting form attached to the return.

If the trustee and executor, if any, do not treat the trust as electing, or are uncertain about electing, the trust generally files for the short period from death through the end of that calendar year.

No short period return is required if federal filing requirements do not require one for that period.

The election deadline and responsibility for filing

File the election by the first related estate or filing trust return deadline, including extensions. This deadline applies even when income is insufficient to require a return.

Trustees may elect without an executor if they confirm that none exists and, to their knowledge and belief, none will be appointed. When multiple qualified revocable trusts join, their trustees must designate a filing trustee who accepts responsibility.

If an executor is later appointed, that executor must agree to the election, and a revised election must report the agreement within 90 days of appointment. Otherwise, the election ends the day before the appointment.

With an executor, a required combined return is filed under the related estate’s name and taxpayer identification number. Each trustee must provide timely information for a complete, accurate return and ensure timely payment of the trust’s tax share.

Calendar years and fiscal years

An estate may choose a calendar or fiscal year on its first fiduciary income tax return. Its first tax year must end on the last day of a month and cannot exceed twelve months.

Changing that choice generally requires IRS approval. Election treatment permits an electing trust to use a noncalendar year.

Trusts generally use calendar years. Exceptions include trusts exempt under section 501(a), charitable trusts described in section four thousand nine hundred forty seven(a)(1) and trusts wholly owned by a grantor under the grantor trust rules.

How long does the election last?

The election begins at death and ends when the electing trust and related estate, if any, have distributed all their assets, or the day before the applicable date, whichever comes first.

If Form 706 is not required, the applicable date is two years after death. If it is required, use the later of that anniversary or six months after final determination of estate tax liability.

Final determination means the earliest applicable event below:

• Six months after an IRS estate tax closing letter, unless a refund claim is filed within twelve months after the letter.
• Final disposition of a refund claim resolving estate tax liability, unless suit is filed within six months after that disposition.
• Execution of an IRS settlement agreement determining estate tax liability.
• A court decision or order resolving estate tax liability, unless an appeal or petition for certiorari is filed within 90 days.
• Expiration of the estate tax assessment limitations period.

A refund claim is finally disposed of when all items have been allowed or disallowed. A waiver of disallowance notification filed before disallowance makes the waiver filing date the disallowance date.

Successor trusts receiving distributions under the trust instrument do not inherit the election.

Combined reporting and distributions

During combined reporting, the electing trust and related estate remain separate shares for distributable net income and the distribution rules of sections 661 and 662.

For an intershare distribution subject to those sections, the distributing share reduces its distributable net income by the section 661 deduction it would receive for a distribution to another beneficiary, determined without section 661(c).

Solely for computing distributable net income, the receiving share increases its gross income by the same amount.

For a nongrantor estate or complex trust covered by section 661, the distribution deduction includes currently required income distributions and other amounts properly paid, credited or required to be distributed.

The deduction cannot exceed distributable net income and excludes its tax exempt portion. Beneficiary inclusion under section 662 is also generally limited by distributable net income, and amounts retain their character.

If currently required distributions exceed distributable net income, beneficiaries take proportionate shares. Specific money or property bequests under the governing instrument, paid at once or in no more than three installments, are excluded from these distribution rules.

An amount payable only from income does not qualify as a specific sum. Amounts qualifying for the section 642(c) charitable deduction are also excluded.

Administration expenses and the deduction waiver

Administration costs qualify under section 67(e) when paid or incurred in administration and when they would not have arisen if the property were held outside the estate or nongrantor trust.

These qualifying costs are deductible in arriving at adjusted gross income. Common or customary individual ownership costs do not qualify under this rule merely because a fiduciary pays them.

Expenses allowable under the estate tax provisions for administration expenses or losses cannot also reduce income tax without the prescribed statement and waiver. This restriction covers deductions and offsets against sale prices claimed by the estate or another person.

The statement must confirm that the amounts have not been allowed as estate tax deductions and waive the right to those deductions, within the prescribed time and manner.

Deductions under part II for income in respect of a decedent are excepted from that restriction.

When combined reporting ends

At the close of the last election day, the electing trust’s shares are deemed distributed to a new trust under sections 661 and 662. All attributable income, including net capital gains, enters that distribution’s distributable net income calculation.

A continuing former electing trust resumes calendar year reporting. It must obtain a new taxpayer identification number if there is no executor, and may need one if there is an executor.

Estate administration lasts for the ordinary administrative duties, including collecting assets and paying debts, taxes and bequests. A trust has a reasonable period to wind up after its terminating event.

An executor’s continued appointment or a trustee’s unfinished final accounting does not permit indefinite federal income tax administration. Unreasonable delay causes tax termination.

A reasonable reserve held in good faith for unascertained or contingent liabilities and expenses may remain. That reserve excludes a beneficiary’s claim as beneficiary.

An estate participating in a valid section 645 election cannot terminate under this administration rule before the election period ends.

Two terms to know

Distributable net income: DNI is an estate’s or trust’s taxable income with statutory modifications.

Trust accounting income: This is income determined under the governing instrument and applicable local law. Trust provisions that depart fundamentally from traditional income and principal principles generally are not recognized.

An investor’s perspective on access to capital

Alongside the reporting questions, bring your concerns about available cash and future investments to the planning conversation. One speaker described that investor mindset this way:

"And people are uncomfortable doing that because you always want to find the next deal and you want to put money into the new deal where you're making 20, 30 % returns."

Common questions