Election to treat qualified revocable trust as an estate and the separate-share rules.

• Author: Lantz, March D.

A qualified revocable trust (QRT) is any trust (or part of a trust) that was treated as owned by a decedent (on that decedent's date of death) by reason of a power to revoke that was exercisable by the decedent (without regard to whether the power was held by the decedent's spouse). Although many practitioners are familiar with the special election to treat a QRT as an estate under Sec. 645, they may not be aware that this election can result in some complicated accounting and tax consequences as well as some interesting tax planning opportunities because of the separate-share rules. This item outlines the mechanics of the election and the treatment of items under the separate-share rules.

Most people seek the benefits of a revocable living trust (RLT) to avoid probate, though the RLT can afford additional benefits not covered in this discussion. When a grantor of an RLT dies, the RLT becomes irrevocable at death and requires a separate income tax return (Form 1041, U.S. Income Tax Return for Estates and Trusts) to report trust income earned after death. Trusts are required to use a calendar year end, no matter when the tax year begins.

In some instances, the decedent may not have been diligent about retitling assets into the RLT and may end up with a probate estate. The probate estate would have to file a separate income tax return (Form 1041) to report estate income earned after death. An estate may use a fiscal year end of its choosing, not to exceed a one-year period after death.

Example: A person dies Feb. 10,2013--the estate can choose to end its fiscal year at the end of any month after death, including, but not after, Jan. 3 I, 2014. Most RLTs are QRTs because the grantor retained the right to revoke the trust. When the decedent has both a QRT and a probate estate, the Sec. 645 election allows the trustee and the executor to effectively combine a QRT and an estate into one tax return, filed as an estate. Further, even if there is no separate probate estate, this election can be used to file the trust return (or several separate QRTs) as though the trust were an estate. Note that this election is valid for only two years following the decedent's date of death, so the practitioner must also consider the anticipated length of trust and/or estate administration before making the election.

In making the election, certain tax planning advantages are gained by filing as an estate, rather than as a trust:

* The material participation...