Section 645 of the Internal Revenue Code provides for an irrevocable election to treat a qualified revocable trust as part of the decedent’s estate for federal income tax purposes. If a Section 645 election is made by the executor of the estate and the trustee of a qualified revocable trust, several tax advantages that are available to an estate, become available to a trust; advantages that would not have been available to the trust if not for the election.
Two of the advantages of making the election include the following: (1) generally an estate can elect a fiscal year, however, a trust cannot and must be on a calendar year, however, with the election under Section 645, the trust has the ability to elect a fiscal year which makes it possible to shift income from one year to another; and (2) generally rental real estate is passive and losses are not allowed to be taken to offset nonpassive income; however, an exemption to this rule exists which allows up to $25,000.00 in passive rental real estate losses to offset nonpassive income if the owner has active participation in the rental process. An estate is allowed this exemption for active participation; a trust is not; however with the election under Section 645, the trust has the ability to take such losses.
With over 19 years of advising clients as a Certified Public Accountant and attorney, Bradley S. McCann has assisted many fiduciaries in making the Section 645 and many other elections to obtain the most advantageous tax results for those clients.