Increasingly, more and more individuals are seeking the benefits of a Revocable Living Trust. One of the benefits of the revocable living trust, among others, is the avoidance of probate. However, the avoidance of probate can create an unfavorable tax result because of how Trusts are required to file and report their income to the IRS. The use of a 645 Election can avoid this unfavorable tax result. While living, the income of a revocable living trust is taxed to the Grantor of the trust. Upon the death of the Grantor, the revocable living trust becomes irrevocable, and the trust is required to file a separate income tax return (Form 1041). Trusts are required to use a calendar year-end. For example, if a decedent who had some of all of their assets in a revocable living trust, died on October 15, 2015, a 1040 tax return is filed for the decedent for the period of January 1 to October 15, 2015. If the 645 Election is not made, then the Trust would file a 1041 tax return for the period from October 16 to December 31, 2015. If the 645 Election is made, then the Trust can file on a fiscal year, with a year-end of September 30.
As a further example, if the 645 Election is not used and the beneficiaries received a taxable distribution on December 21, 2015, the distribution would be taxable to the beneficiary in 2015, and the tax attributable to the distribution would be payable by April 2016. On the other hand, if a 645 Election is made and the taxable distribution takes place in December 2015, the beneficiary will have until April 2017 to file a tax return that would include the income.
To make a timely 645 Election, the Trustee must file the election on IRS Form 8855. This form must be filed with the IRS by the due date, including extensions, if any, of the Form 1041, for the first tax year of the Trust.