Qualified Revocable Trust?

[curb1]

What is the name of your state (only U.S. law)? Oregon

Can someone be specific about the election for a Qualified Revocable Trust?

This is what I found, but could anyone add more detail? What specific main reasons are there for the election? Is it normally elected?

Advantages
When someone dies, there are often substantial costs to probate and to administering the estate. By combining assets in a revocable trust with the overall estate of the deceased, the estate can avoid being subject to multiple layers of administrative costs.

 

[tranquility]

Unless you have specific advice from your tax professional or attorney, I don't think you should make the election. Our clients generally don't. The one who did had some appreciated property in the trust that was going to charity and it was going to give him an advantage to get the deduction immediately but wait on the distribution. I suppose it might be easier to just do one return, but, not that much easier. Perhaps some advantage of fiscal year/calendar year accounting in certain situations.

 

[curb1]

Thank you. This is a simple situation. Everything is in the trust (no probate). Not worried about fiscal-year advantages, or charitable deductions, no need to defer reporting of income, all assets are fully depreciated.

I just didn't want to not make the election and have someone say it is a "no-brainer" and should be done every time. I haven't discovered a good reason (in this case) to make the election.

 

[tranquility]

The only one I recall we did at our office, I wasn't even involved with. And, we do a lot of trust/estate work. It is not that common. (Although we tend towards clients with income/real property.)

 

[curb1]

I did find this which might help anyone reading this.


Reasons for Making the Election

Once an election is made, a QRT can take advantage of the differences between the income tax treatment of estates and revocable trusts, as follows:

1. Estates are allowed a charitable deduction for amounts permanently set aside for charitable purposes, while postdeath revocable trusts are allowed a charitable deduction only for amounts paid to charities.

2. Estates are entitled to the $25,000 passive-loss deduction for active rental real estate activities; trusts are not. The election will allow active rental losses realized by the trust to be deducted on the estate income tax return. Caveat: If the election is made, the trust income, added to the estate income, could exceed the $150,000 adjusted-gross-income limit for estate income tax returns and the deduction.

3. The active participation requirement under the passive loss rules is waived for estates (but not for revocable trusts) for two years after the owner's death, for activities in which the decedent actively participated.

4. A trust must use a calendar year for Federal income tax purposes, while an estate can have a fiscal year-end. By using a fiscal year, income-deferral techniques can be used. By making the election, the trust can now have a fiscal year, providing additional deferral opportunities. This could be advantageous if the trust has significant assets.

5. The Federal income tax exemption for estates is $600, while the exemption for trusts required to distribute all of their income is currently $300; it is $100 for all other trusts.

6. Estates do not have to make estimated tax payments for the first two years after the DOD, while trusts are required to do so.

7. An estate may own S corporation stock, but only certain trusts may do so if the appropriate elections are made. A trust must meet the Sec. 1361(c)(2) requirements to qualify as an S shareholder. If the Sec. 645 election were made, a QRT would be able to own S stock even if it does not fall within one of the trust categories under Sec. 1361. Note: A QRT would only be treated as part of the estate until the "applicable date."

8. An estate distribution may be a direct skip; however, a trust distribution may be a taxable distribution or a taxable termination that can affect the timing and amount of the generation-skipping-transfer allocation needed to produce a desired inclusion ratio.

9. Estates can qualify for amortization of reforestation expenditures; trusts do not.

Conclusion

The Sec. 645 election has significant advantages. The final regulations, which clarified and changed provisions from the proposed regulations, are generally pro-taxpayer. For planning purposes, the decision to make the election should be made as soon as possible by the trustees and executors, and before making major trust distributions (as these could jeopardize potential income tax planning). Trustees, executors and their advisers should consider all the consequences in making this election.

FROM MICHELE D. SCARPA, CPA, BLUM SHAPIRO & COMPANY, EC., WEST HARTFORD, CT