How to Use a 645 Election for Trusts and Estates

It’s easy to forget that income taxes are an important part of estate planning. But for executors and trustees, managing this tax burden is an essential part of handling the transfer of assets.

The Section 645 Election is one tool that can significantly streamline this process. Section 645 of the tax code lets executors combine an estate and its associated irrevocable trust into a single taxable entity. This reduces estate management overhead since you only file one tax return per year, using the same schedule for both entities.

Need help with setting up an optimized estate plan? Talk to a financial advisor today.

Tax Requirements for Estates and Trusts

Winding up an estate and distributing assets usually takes over a year. During this period, the estate must file and pay taxes on any significant income it generates.

At the same time, the revocable trust has become an increasingly popular part of estate planning, as it often allows heirs to avoid probate, fees and inheritance disputes. After death, a revocable trust becomes irrevocable, and must pay annual taxes on its assets.

Many people use a “pour-over” estate plan, placing major assets in a trust and leaving other property to be distributed by will. This efficient system still requires both the estate and trust to file separate tax returns. The estate files based on its fiscal year, while the trust follows the calendar year.

Executors and trustees face double the work, especially if different fiduciaries manage the will and the trust. The year the person dies, the executor also files a final personal 1040, adding a third layer of paperwork.

A financial advisor can help coordinate your estate to minimize taxes.

How a 645 Election Can Streamline Tax Management

How to Use a 645 Election for Trusts and Estates

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Section 645 is often used to combine a trust with an estate as a single entity for tax purposes. Here is how it works.

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To make this process easier, the IRS allows what is known as a Section 645 Election.

If you have a revocable (living) trust at death, it becomes irrevocable and is taxed and managed as a separate entity.

Afterward, the executor and trustee can make a Section 645 Election, treating the trust as part of the estate for tax purposes. Your executor can file one set of taxes which will cover all of the assets, income and losses held by both entities. What’s more, your executor can file these taxes based on the estate’s fiscal year.

Using the estate’s fiscal year can make tax deadlines easier to manage than the trust’s calendar year schedule. For example, if someone dies in November, the trustee won’t need to rush to file taxes for just two months. Instead, the estate can choose a fiscal year-end and file by the following October.

This process also helps reduce some tax requirements and overhead. Trusts must make quarterly estimated tax payments, while estates don’t have to for the first two years after death. Treating the trust as part of the estate can suspend this requirement.

If you need help putting together an estate plan, talk to a financial advisor today.

How to Make a 645 Election

To make a Section 645 Election, the associated trust must be a Qualified Revocable Trust (QRT) as defined by Section 645. This means that the decedent independently owned and controlled the trust at their time of death. Generally speaking, someone is considered to have owned the trust if they had the power to revoke it at any time.

If the trust is a QRT, the executor and the trustee make this election with Form 8855. Both must fill out this form. After making the election, the executor must confirm it on the next estate tax return.

Note that one advantage to this election is that estates have a higher exemption than trusts. A trust does not need to file taxes for income less than $100, while an estate does not need to file taxes for income less than $600. However, if the estate makes a Section 645 Election, it must file its next annual tax return to confirm the election, no matter its income.

A Section 645 Election is irrevocable once made, however it is not permanent. It will continue until one of two conditions is met. First, this election ends once one entity distributes all of its assets and winds up. For example, it is not uncommon for a trust to outlast an estate. If the estate is closed but the trust remains open, the election will end. Second, this election ends at the “applicable date.” While this can change under some circumstances, typically the applicable date is set at the later of either two years from the decedent’s death or six months from the final determination of any estate tax liability.

Remember, tax and estate planning can get complicated. If you need help, talk to a financial advisor.

Pros and Cons of a 645 Election

A 645 election can be a powerful tool for estate planning, offering both strategic advantages and potential drawbacks. This provision allows estates to optimize tax treatment for certain assets, but it also comes with administrative complexities that require careful consideration. Below, we break down the key pros and cons of making a 645 election.

Pros

Tax deferral opportunities: By combining a revocable trust with the estate, the 645 election can delay income tax on trust assets until the estate’s final settlement, potentially reducing immediate liabilities.
Simplified asset management: The election lets executors consolidate trust and estate assets, streamlining administration during probate.
Flexibility in distributions: Trustees gain more control over timing distributions to beneficiaries, aligning with long-term tax strategies.

Cons

Complex filing requirements: Estates must file additional tax forms (e.g., Form 1041) and adhere to strict IRS deadlines, increasing paperwork.
Potential for higher costs: Extended administration periods may lead to higher legal and accounting fees.
Irrevocable decision: Once made, a 645 election cannot be revoked, limiting future planning flexibility if circumstances change.

Bottom Line

A Section 645 election is a tax election which allows you to treat an estate and an associated trust as a single entity for the purposes of filing income taxes. This is an irrevocable but temporary election that can significantly streamline estate management.

Estate Tax Tips

Planning for your estate’s taxes can be complicated. Depending on your level of wealth, you should make sure to prepare for the big three: estate taxes, gift taxes and state-level inheritance taxes.
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.