Section 645 Election
Combining the Trust & Estate
If your loved one had both a revocable trust and an estate, there may be a way to simplify the tax filings , and save money in the process.
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What this is about
When someone passes away who had a revocable living trust, the trust becomes irrevocable , meaning it can no longer be changed. At that point, the trust is a separate taxpayer. It needs its own employer identification number (EIN) and has to file its own income tax return (Form 1041), just like the estate does.
But the IRS allows the trust and the estate to be treated as one entity for tax purposes. This is called a Section 645 election. Instead of filing two separate tax returns, one for the trust and one for the estate, you file one combined return. Everything goes on a single Form 1041.
Even if there’s no probate estate (for example, if all assets passed through the trust), the election can still be made. In that case, the trust is simply treated as if it were an estate during the election period, which opens the door to some real tax benefits.
Why your CPA or attorney might recommend it
There are several reasons this election can be a smart move:
- Simpler administration. One tax return instead of two. One set of estimated tax payments, or none at all, since estates are exempt from estimated tax payments for their first two years. That means fewer deadlines to track and less paperwork for you.
- Fiscal year flexibility. Trusts are required to use a calendar year (January through December). Estates can pick a fiscal year, any 12-month period. If the person died in March, for example, the estate could choose a January 31 year-end. This gives the executor more time and flexibility for distributing income to beneficiaries in a tax-efficient way.
- A slightly higher exemption. An estate gets a $600 personal exemption; a complex trust gets only $100 ($300 for simple trusts required to distribute all income). It’s small, but it’s there.
- Potentially better tax treatment. The combined entity may qualify for deductions and exceptions that a standalone trust wouldn’t, like the ability to deduct rental real estate losses that would otherwise be suspended.
How long does the election last?
It depends on whether the estate has to file a federal estate tax return (Form 706):
- If no Form 706 is required: The election period lasts two years from the date of death. After that, the trust goes back to being taxed as a trust.
- If a Form 706 is filed: The election period can last much longer, up to six months after the estate tax liability is finalized. If there’s an audit or other proceedings, that could be several years.
After the election period ends, the trust needs its own EIN and begins filing its own Form 1041 as a separate taxpayer.
What does this mean for you as trustee?
Here’s what you should know:
- Both the trustee and executor agree. The election is filed on Form 8855 along with the estate’s first income tax return. If there’s no executor, for example, if everything passed through the trust and there’s no probate, you as trustee can make the election on your own.
- You don’t file a separate trust return. During the election period, all income, deductions, and distributions are reported on the estate’s combined Form 1041. The trust doesn’t file its own return.
- Your trustee duties don’t change. You still manage the trust assets, make distributions, and keep records. The §645 election simplifies the tax filing; it doesn’t change your fiduciary responsibilities.
- When it ends, we handle the transition. We’ll obtain a separate EIN for the trust and begin filing its own return. You don’t have to worry about the mechanics.
Do you have to make this election?
No. It’s completely optional. And it’s not always the right choice. If the trust has very little income, or if there’s no probate estate, the administrative simplification may not matter much. In some situations, the costs and complexity of the election outweigh the benefits.
We evaluate whether the election makes sense for your specific situation. If it does, we handle the filing. If it doesn’t, we’ll explain why and make sure the trust and estate are each filed correctly on their own.
Frequently Asked Questions
What is a Section 645 election?
When someone passes away and had a revocable living trust, the trust becomes a separate taxpayer. The Section 645 election allows the trust to be treated as part of the estate for tax purposes. Instead of filing two separate tax returns, the trust and estate file one combined return. This can simplify administration and provide tax benefits like fiscal year flexibility and a slightly higher exemption.
Do I need to do anything to make this election?
The election is made by filing Form 8855 with the estate’s first income tax return (Form 1041). Both the trustee and the executor sign the form. If there is no executor, for example, if all assets passed through the trust and there’s no probate, the trustee can make the election alone. Once made, the election can’t be revoked.
How long does the Section 645 election last?
If the estate is not required to file a federal estate tax return (Form 706), the election period ends two years after the date of death. If a 706 is required, the election period extends until six months after the estate tax liability is finalized, which could be several years if there’s an audit or other proceedings. After the election period ends, the trust begins filing its own tax return.
What happens when the election period ends?
The trust needs its own employer identification number (EIN) and begins filing its own Form 1041 as a separate taxpayer. The trust must use a calendar year (January through December). We handle the transition: obtaining the EIN, allocating income and deductions between the final combined return and the trust’s first standalone return, and making sure nothing falls through the cracks.
Related services
Estate & Trust Income Tax (Form 1041)
The combined return filed during the election period, and the trust’s own return afterward.
EIN Applications
The trust needs its own EIN when the election period ends.
Final 1040 - Deceased Taxpayer
The decedent’s last individual return, separate from the estate and trust filing.