Trust treatment: final regs issued on election to treat revocable trusts as part of estate.

• Author: Foster, Michael D.
• Position: Estate planning

On Dec. 24, 2002, the U.S. Treasury Department issued final regulations under Internal Revenue Code Sec. 645 relating to the election for certain revocable trusts to be included for income tax purposes as part of the deceased grantor's estate, and not as a separate trust (67 F.R. 78371-01).

The final regulations provide the procedures and requirements for making the election; rules regarding the tax treatment of the trust and estate while the election is in effect; and rules regarding termination of the election. They also modify the proposed regulations in a number of ways that can generally be considered pro-taxpayer.

For example, the definition of a trust qualifying to make the Sec. 645 election is expanded.

Also, the final regulations simplify the filing requirements of an electing trust, as well as the procedures for furnishing a taxpayer identification number to payors.

Sec. 645

Pursuant to Sec. 645, if both the executor (if any) of an estate and the trustee of a qualified revocable trust so elect, the "electing" trust--a qualified revocable trust (QRT) that makes the Sec. 645 election--will be included for income tax purposes as part of the estate, and not as a separate trust, during the election period.

The election period begins on the date of the decedent's death and terminates on the day before the "applicable date."

If Form 706 is not required for the decedent's estate, the applicable date is two years after the date of the decedent's death.

If Form 706 is required, the applicable date is six months after the date of final determination of liability for estate tax [Sec. 645(b)].

Form 706 is required if the date of death value of the decedent's gross estate exceeds the Sec. 2010(c) applicable exclusion amount [Sec. 6018(a)(1)].

Qualified Revocable Trust

The final regulations changed the definition of a QRT. The regs state that a QRT is a trust that is treated as owned by the decedent under Sec. 676 by reason of a power that was exercisable by the decedent only with the consent or approval of a nonadverse party or only with the approval or consent of the decedent's spouse. [Treas. Reg. Sec. 1.645-1(b)(1)].

The preamble to the final regulations also clarifies that a trust qualifies as a QRT if the grantor's power to revoke the trust lapses prior to the grantor's death as a result of the grantor's incapacity.

Under the proposed regulations to Sec. 645, issued Dec. 18, 2000, (65 F.R. 79015-01) a qualified revocable trust was defined as any...