What is the 645 election?

Well, a §645 election allows the executor of an estate and the trustee of a revocable trust to elect to treat the estate and the trust as one for tax purposes. Generally, estates have the ability to elect a fiscal year end or a calendar year end, whereas trusts default to a calendar year end.

When must a 645 election be made?

The IRC § 645 election is irrevocable once made. The election must be made on IRS Form 8855 (Election to Treat a Qualified Revocable Trust as Part of an Estate) by the due date, including extensions, of the estate's initial income tax return.

Who can make a section 645 election?

The trustees of each qualified revocable trust (QRT) and the executor of the related estate, if any, use Form 8855 to make a section 645 election. This election allows a QRT to be treated and taxed (for income tax purposes) as part of its related estate during the election period.

What is a 65 day election?

One of the tax planning tools available to fiduciaries of estates and non-grantor trusts is the 663(b) election, also known as the “65-day rule.” Simply put, a 663(b) election allows distributions made to beneficiaries within 65 days of year-end to be counted as prior-year distributions.

How do I choose a fiscal year end for a trust?

Trust Return Due Date

Some trusts must choose a calendar tax year ending Dec. 31. Other trusts can use a fiscal year with an ending date as far ahead as 11 months from the death. In this case, that would be June 14 of the following year.

Introduction to Income Tax of Trusts

Can you make a 645 election if there is no estate?

645 election allows the trustee and the executor to effectively combine a QRT and an estate into one tax return, filed as an estate. Further, even if there is no separate probate estate, this election can be used to file the trust return (or several separate QRTs) as though the trust were an estate.

Does a trust have to file a tax return?

A trust with more than $600 in income during a tax year is required to file a federal income tax return. The trustee files out a Form 1041 reporting the trust's income. Even if it does not report $600 income, a trust must file a return if it has a non-resident alien as a beneficiary.

What is the benefit of the 65-day rule?

The main advantage of this tax rule is that it may provide an opportunity for tax savings. An estate or trust pays income taxes at graduated rates similar to individuals, but for 2021 the top tax rate (37 percent) applies to income in excess of $13,050.

How does the 65-day rule work?

The 65-Day Rule and Tax Planning Opportunities

A fiduciary can make an election to treat distributions in the first 65 days of the next year as paid in the preceding year and therefore pass taxable income out to the individual beneficiary.

What is the 65-day rule for 2022?

In most years, including 2022, the last day to make a distribution count toward the previous tax year is March 6, 2022. If the estate has a fiscal tax year-end, then the fiduciary must make a distribution from the estate to the beneficiaries within the first 65 days after the last day of the preceding tax year.

Does a revocable trust become irrevocable upon death?

Death of the Grantor

A revocable trust turns into an irrevocable trust when the grantor of the trust dies. Typically, the grantor is also the trustee and the first beneficiary of the trust.

What is the difference between estate and trust?

A trust can be created while the grantor is alive, while an estate is created at the moment of someone's death. A trust is intended to be a semi-permanent entity. It exists to distribute assets over time according to a series of rules and conditions, overseen by a trustee. An estate is intended to be temporary.

How do I change my year end with IRS?

File Form 1128 to request a change in tax year. Partnerships, S corporations, personal service corporations (PSCs), or trusts may be required to file the form to adopt or retain a certain tax year.

What is considered income for Form 1041?

Examples of assets that would generate income to the decedent's estate include savings accounts, CDs, stocks, bonds, mutual funds and rental property. IRS Form 1041, U.S. Income Tax Return for Estates and Trusts, is required if the estate generates more than $600 in annual gross income.

What is the year end for a trust?

A trust or estate with a tax year that ends June 30 must file by October 15 of the same year. Form 1041-A: Form 1041-A is a calendar year return which is due by April 15th.

How do you know if a trust is qualified or nonqualified?

A trust may be "qualified" or "non-qualified," according to the IRS. A qualified plan carries certain tax benefits. To be qualified, a trust must be valid under state law and must have identifiable beneficiaries. In addition, the IRA trustee, custodian, or plan administrator must receive a copy of the trust instrument.

Do I have to pay taxes on money from an irrevocable trust?

Grantor—If you are the grantor of an irrevocable grantor trust, then you will need to pay the taxes due on trust income from your own assets—rather than from assets held in the trust—and to plan accordingly for this expense.

What happens to an irrevocable trust when the grantor dies?

After the grantor of an irrevocable trust dies, the trust continues to exist until the successor trustee distributes all the assets. The successor trustee is also responsible for managing the assets left to a minor, with the assets going into the child's sub-trust.

How do you make a 65 day election rule?

In order to use the 65-Day Rule, the trustee must make the 663(b) election by checking the box on line 6 under other information on page two of IRS Form 1041, the trust's fiduciary income tax return. To be valid, the election must be made by filing form 1041 by its due date, including extensions.

How does a beneficiary get money from a trust?

How can a beneficiary claim money from a bare/absolute trust? If a beneficiary of a bare trust is over the age of 18 years then they can simply ask the trustees to pay the money out to them that they are entitled to. As long as there is no other criteria to satisfy, the trustees should not refuse.

What is the 2021 capital gain rate?

For example, in 2021, individual filers won't pay any capital gains tax if their total taxable income is $40,400 or below. However, they'll pay 15 percent on capital gains if their income is $40,401 to $445,850. Above that income level, the rate jumps to 20 percent.

What happens when you inherit a trust fund?

Trust inheritance may be taxable, depending on the type of trust that has been set up. A simple trust is non-grantor trust. The trust itself must report income to the IRS and pay capital gains taxes on earnings. It must distribute income earned on trust assets to beneficiaries annually.

How do trusts avoid taxes?

A Simple Strategy

However, because the grantor must pay the taxes on all trust income annually, the assets in the trust are allowed to grow tax-free, and thereby avoid gift taxation to the grantor's beneficiaries. For all practical purposes, the trust is invisible to the Internal Revenue Service (IRS).

Can the IRS seize assets in an irrevocable trust?

This rule generally prohibits the IRS from levying any assets that you placed into an irrevocable trust because you have relinquished control of them. It is critical to your financial health that you consider the tax and legal obligations associated with trusts before committing your assets to a trust.

What is the income tax rate for a trust?

Trusts and estates pay capital gains taxes at a rate of 15% for gains between $2,600 and $13,150, and 20% on capital gains above $13,150.00. It continues to be important to obtain date of death values to support the step up in basis which will reduce the capital gains realized during the trust or estate administration.