Section 645 Election
Qualified Revocable Trusts

What the §645 election does

IRC §645 allows a qualified revocable trust (QRT) to be treated and taxed as part of the decedent’s estate rather than as a separate trust. The election is made jointly by the executor (or administrator) and the trustee on Form 8855. During the election period, the QRT and the estate file a single combined Form 1041 under the estate’s EIN. The trust ceases to exist as a separate taxpayer.

If there is no probate estate and no executor has been appointed, the trustee makes the election alone. In that case, the QRT is treated as an estate for the entire election period, and the trustee is treated as the executor for all tax purposes.

Why it matters - practical benefits

The election converts the QRT from a trust into part of the estate, and estates have several tax advantages that trusts do not:

• Fiscal year election. The combined entity can elect a fiscal year end. Estates can choose any fiscal year; trusts must use a calendar year under §644. A fiscal year allows deferring income recognition and timing distributions to shift income into more favorable periods.
• Higher personal exemption. Estates receive a $600 personal exemption versus $100 for a complex trust (or $300 for a simple trust). Modest, but it applies every year the election is in effect.
• S corporation stock. The estate can hold S corp stock without needing a separate ESBT or QSST election. During the §645 election period, the QRT is treated as part of the estate, an eligible S corporation shareholder, so no additional election is required to preserve the S election.
• Active participation exception. Under §469(i), an estate can use the $25,000 rental real estate loss allowance if the executor actively participates in the rental activity. Trusts generally cannot qualify for active participation. During the election period, the QRT benefits from this treatment.
• Charitable set-aside deduction. Under §642(c)(2), estates can deduct amounts permanently set aside for charitable purposes, a provision generally unavailable to trusts. During the election period, the QRT benefits from this more favorable treatment.
• §643(e)(3) election. The combined entity can elect to recognize gain on in-kind distributions to beneficiaries, useful for basis step-up planning where the distributed assets have a fair market value different from carryover basis.
• Estimated tax payments. Estates are exempt from estimated tax payments for their first two taxable years under §6654(l). The QRT benefits from this exemption during the election period, no quarterly estimates required.
• Passive activity losses. Under §469(g), suspended passive activity losses are allowed as a deduction on the decedent’s final Form 1040 (to the extent they exceed the basis step-up in the activity). The estate itself does not inherit the suspended losses, but the §645 election simplifies coordinating the final 1040 with the estate’s combined return.

Form 8855 - making the election

• Filed with the estate’s first Form 1041
• Must be filed by the due date (including extensions) of the estate’s first 1041
• Requires both the executor’s and trustee’s signatures, or the trustee alone if no executor has been appointed
• If there is no probate estate, the trustee makes the election alone and is treated as the executor for all purposes under §645(b)(3)
• The election is irrevocable once made

Election period duration

The length of the election period depends on whether the estate is required to file a Form 706 (estate tax return):

• No Form 706 required: The election period ends two years after the date of death.
• Form 706 required: The election period ends six months after the date of final determination of the estate tax liability. “Final determination” can extend well beyond the initial filing, through examination, appeals, or litigation, keeping the election period open for years in contested cases.

During the entire election period, the QRT and the estate file a single combined Form 1041 under the estate’s EIN. All income, deductions, and credits of the QRT are reported on that combined return.

Termination of the election period

When the election period ends, the combined treatment ceases and the trust must resume filing as a separate taxpayer:

• The QRT must obtain its own EIN (if it does not already have one from before the election)
• The trust files its own Form 1041 going forward as a trust: calendar year, trust tax rates, trust rules
• A final allocation of all income, deduction, and credit items between the estate and the trust must be made for the last combined return
• The trust’s first short-period return covers from the day after the election period ends through December 31 of that year

We handle the transition: the final combined return, the EIN application for the trust, the allocation of items, and the trust’s first separate filing.

What we need to open a matter

• Death certificate or date of death
• Trust instrument: the revocable trust agreement and any amendments
• Letters testamentary or letters of administration (if a probate estate exists)
• Estate EIN, or we can apply (EIN application service)
• Trustee and executor identification: name, SSN/EIN, and contact information
• Inventory of trust assets at date of death
• Income received by the trust after date of death
• Whether Form 706 will be required: gross estate value relative to the filing threshold

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