MCLE SELF-STUDY ARTICLE WHEN SHOULD AN IRC SECTION 645 ELECTION BE MADE? ALMOST ALWAYS!

Written by Lindsey Kernan, Esq.^* and Simon A. LeBleu, Esq.^{** 01}

I. SYNOPSIS

During the lifetime of a grantor, the grantor is not deemed a separate taxpayer from the grantor’s revocable trust. As such, the grantor and the trust are considered one-and-the-same for income tax purposes, and trust income is reported on the grantor’s personal income tax return.⁰² After death, the grantor’s estate and trust (now irrevocable due to the grantor’s death) become separate taxable entities for which separate income tax returns must be filed.⁰³

Despite the estate and trust administration processes often going hand in hand (and often involving the same fiduciary), the estate and related trust are, absent an election under Internal Revenue Code section⁰⁴ 645 ("Section 645"), subject to disparate tax rules that are beneficial to the estate, but disadvantageous to the trust. As addressed below, estates have the advantage over their related trusts of: the ability to elect a fiscal year, the ability to obtain income tax charitable deductions for amounts permanently set aside for charity (as opposed to a requirement that amounts actually must be paid), the ability to defer making a qualified subchapter S trust ("QSST") or electing small business trust ("ESBT") election for estates holding S Corporation shares, a higher income tax exemption, and a passive loss deduction.