7.2 The Grantor Revocable Trust after the Death of the Grantor

• Library: Revocable Trusts Handbook for Arkansas Practitioners (2019 Ed.)

7.2 The Grantor Revocable Trust after the Death of the Grantor

7.2.1 Necessity for an EIN

When the grantor dies, the tax treatment of his or her revocable trust substantially changes and becomes more complex. The grantor’s power of revocation, which has caused the grantor to be treated as the owner of the trust, lapses and the trust becomes irrevocable.⁴ Once irrevocable, the former grantor revocable trust, referred to in the following as a “grantor irrevocable trust,” becomes a separate legal entity and a new taxpayer, and as such is required by the IRS to have its own EIN. If such trust had its own EIN while its grantor was living, it would need to obtain a new EIN upon the grantor’s death. The Trust is now irrevocable, even though the name of the trust may contain the word “revocable” in its title. The title of the trust does not change.

Since an EIN will be needed for a grantor irrevocable trust, a Form SS-4, Application for Employer Identification Number (EIN) should be filed with the IRS. This form can be readily obtained on the IRS website by entering the search terms “IRS SS-4.” It may be completed and filed online. An EIN may also be applied for online by clicking on the EIN link at https://sa.www4.irs.gov/modiein/individual/index.js, or by calling 1-800-829-4933.⁵

7.2.2 The Effect on Grantor Revocable Trust Tax Reporting

When the grantor dies, a decedent’s estate arises by operation of law. The moment of death determines the end of the grantor’s final income tax year as an individual, and the beginning of an income tax year for both the grantor’s decedent’s estate and the now-irrevocable trust.

A final federal Form 1040 (and its Arkansas counterpart, the AR 1000) should be filed for the calendar year of the deceased grantor’s death and should report all income, deductions and credits of the grantor’s former revocable trust for that calendar year up to the date of the grantor’s death. Beginning with the grantor’s date of death, all income and related deductions and credits must be reported by the grantor’s now-irrevocable trust.

The personal representative, or if none is appointed, then another person charged with the property of the decedent (e.g., the trustee of decedent’s grantor revocable trust) is responsible for filing the decedent’s final federal (and Arkansas) income tax return.⁶

Trustees Note #1: Filing federal and Arkansas individual income tax returns and marking them “final” for a deceased grantor, even if not required from a taxable income level, is a good idea if for no other reason than to report the fact the grantor has died, and date of death, to the taxing authorities. That should avoid possible future year income tax return correspondence and non-filing notices.

Trustees Note #2: It is also a good idea for the personal representative or other person charged with the decedent’s property (e.g., the trustee of the decedent’s grantor revocable trust) to also file a Form 56 with the IRS to notify the Service of the decedent’s death and of the fiduciary relationship. That way, the decedent’s personal representative or trustee will be able to receive tax notices for past year income tax returns that otherwise would continue to be sent to the decedent at his or her address at the time of death. Form 56 is available on the IRS website by searching “IRS Form 56.”

7.2.3 Section 645 Election

I.R.C. § 645 provides that if both the executor (if any) of the grantor’s estate and the trustee of a qualified revocable trust (QRT)⁷ elect § 645 treatment, then the QRT is treated and taxed as part of the grantor’s estate during the election period. If the estate has an executor, the executor files a Form 1041 under the name and EIN of the grantor’s estate. The estate reports all items of income, deductions and credits for both it and the QRT during the election period (with the trustee of the electing trust being responsible for reimbursing the executor for the trust’s share of any tax liability).

On the other hand, if there is no executor and the successor trustee of the QRT wishes to elect § 645 treatment, then the successor trustee files a Form 1041 under the name of the electing trust using the EIN obtained for it after its grantor’s death. It reports on the Form 1041 all of the trust income, deductions and credits during the election period.

To make the § 645 election, Form 8855, Election to Treat a Qualified Revocable Trust as Part of an Estate, must be filed by the due date for the first fiduciary income tax return (Form 1041) for the first tax year of the decedent’s estate. If the estate receives an extension to file Form 1041, the extension likewise applies to Form 8855. The election is irrevocable once made. Form 8855 can easily be located on and downloaded from the IRS website by entering the search terms “IRS Form 8855.”

For more details on a § 645 election, see the Form 1041 Instructions.

Practice Tip: Most § 645 elections are made for two reasons: 1) so that the grantor irrevocable trust can use a fiscal year, rather than a calendar year, for income tax reporting purposes; and 2) so that the grantor irrevocable trust can avoid filing declarations and paying estimated income taxes for its tax years ending on or before two years after its grantor’s death. However, other advantages also result from a trust being treated as a decedent’s estate. See the following discussion.

7.2.4 Form 1041 – When to File

As a new taxpayer, a grantor irrevocable trust likely will have to file annual federal Form 1041 fiduciary income tax returns during its existence. This requirement applies if the trust has at least $600 of gross income, or any taxable income for its respective tax year, and no § 645 election has been made, since such an election would require the deceased grantor’s estate to be responsible for filing the trust’s Form 1041 (see the preceding § 645 discussion).

If a Form 1041 is needed for a grantor irrevocable trust, it and its related schedules and instructions can be located on the IRS website and can be readily accessed by entering the same search term on the Web. The due date for a Form 1041 is the following April 15th for a calendar year filer, and the fifteenth day of the fourth month of the following year for a fiscal year filer.

7.2.5 Form 1041 ES – When to File

Form 1041-ES calculates “estimated tax,” paid when withholding is insufficient or nonexistent. In general, estates and trusts pay estimated tax. With two exceptions, for each tax year after its grantor’s death, an existing grantor irrevocable trust must file a federal Form 1041-ES declaration and pay estimated income tax to the IRS if it expects to owe at least $1,000 in income tax for that year, after...