Election to treat revocable trust as part of estate for income tax purposes.

• Author: VanderMeulen, Bruce A.

Both estates and revocable inter vivos trusts can function to settle a decedent's affairs and distribute assets to heirs. In the case of revocable inter vivos trusts, the grantor transfers property into a trust revocable during his lifetime. On the grantor's death, the power to revoke ceases and the trustee then performs the settlement functions typically performed by an estate's executor.

Before the Taxpayer Relief Act of 1997 (TRA '97), a decedent's revocable trust (which becomes irrevocable at death) and the decedent's estate were required to file separate income tax returns. However, new Sec. 646 provides an election to treat a "qualified revocable trust" as part of the decedent's estate for Federal income tax purposes. This election is available for estates of decedents dying after Aug. 5, 1997.

The TRA '97 Committee Report states that "a qualified revocable trust is any trust (or portion thereof) which was treated under section 676 as owned by the decedent with respect to whom the election is being made, by reason of a power in the grantor (i.e., trusts that are treated as owned by the decedent solely by reason of a power in a nonadverse party would not qualify)."

Under Sec. 676, the grantor is treated as the owner of the trust if he possesses the power to revoke. Since new Sec. 646(b)(1) specifically refers to Sec. 676, it is clear that, to qualify under Sec. 646, the trust must be revocable. Other trusts treated as owned by the grantor by reason of a reversionary interest (Sec. 673), power to control beneficial enjoyment (Sec. 674), administrative powers (Sec. 675) or the ability to control income (Sec. 677), would appear to be ineligible for this treatment. A power to revoke held by the grantor's spouse and attributed to the grantor under Sec. 672(e) is likewise ignored for this election.

If elected, Sec. 646 treatment applies to tax years ending after the decedent's death and before the date that is two years after such death (if no Federal estate tax return is required) or six months after the final determination of Federal estate tax liability (if a Federal estate tax return is required). These deadlines are prescribed by Sec. 646(b)(2).

It is quite possible for an estate's administration to extend beyond either of these periods. If no Federal estate tax return is required to be filed (generally, if the gross estate and adjusted taxable gifts are under $625,000 (for 1998)), the administration period may extend beyond two years...