Electing to treat a revocable trust as part of an estate.

• Author: Scarpa, Michele D.

Many taxpayers have a will and revocable trust as part of their estate plan. Frequently, once the taxpayer dies, his or her revocable trust contains most of the estate assets. Before Congress enacted Sec. 645, the estate and the revocable trust each had to file separate returns; the trust could not use the income tax advantages available to the estate. The Taxpayer Relief Act of 1997 added Sec. 645. Under this section, if both the estate executor and the trustee of a qualified revocable trust (QRT) so elect, the trust will be treated and taxed as part of the estate.

The IRS has issued final regulations (TD 9032) under Sec. 645, which replace the proposed regulations issued on Dec. 18, 2000. Many of the proposed regulations' provisions have remained in the final rules; however, there are significant amendments and clarifications. The election continues to make it possible for taxpayers to gain various income tax advantages available to estates, but not otherwise available to trusts. The advantages are outlined below.

Overview

When the election is made, the QRT will be treated and taxed for income tax purposes as if part of the estate (and not as a separate trust).The election applies to all of the estate's tax years ending after the decedent's date of death (DOD) and before the "applicable date." Under Sec. 645(b)(2), the applicable date is:

1. The date two years after the DOD (if no estate tax return is required to be filed); or

2. The date six months after the date of the final determination of estate tax liability (if an estate tax return is required).

   If an estate tax return is required, Regs. Sec. 1.645-1(f)(2)(ii) further defines the applicable date as it pertains to the date of final determination of estate tax liability, as the earliest of.

1. Six months after the IRS issues an estate tax closing letter, unless a claim for refund is filed within 12 months after it issues the letter;

2. Final disposition of a refund claim (as defined in Regs. Sec. 1.6451 (f)(2)(ii)) that resolves the estate tax liability, unless a suit is instituted within six months after the claim's final disposition;

3. Execution of a settlement agreement with the IRS that determines the estate tax liability;

4. Issuance of a decision, judgment, decree or other order by a court of competent jurisdiction resolving the estate tax liability, unless a notice of appeal or a petition for certiorari is filed within 90 days after issuance; or

5. Expiration of the limitations period for assessing the estate tax, as provided in Sec. 6501.

   Under Sec. 645(c), the election must be made no later than the time for filing the income tax return for the estate's first tax year (including extensions). Once made, the election is irrevocable.

   Definition of a QRT. For purposes of the election, Sec. 645(b)(1) defines a QRT as any trust, a portion or all of which was treated under Sec. 676 as owned by the decedent for whom the election is being made, by reason of a power in the grantor determined without regard to the...