Why the 645 Election for Trusts has Become Important under ATRA 2012

Ashburn Estate Planning FirmTrusts are an attractive estate planning option because they provide an asset management vehicle during your lifetime and can provide more flexibility in terms of who receives your assets, and how they receive those assets. Another benefit is something called a “Section 645 election.”

Congress created an opportunity for trustees of a funded revocable trust to utilize certain tax advantages under section 645. When the executor (if there is one), or trustee, of your estate make a Section 645 election, the trust is treated, for income tax purposes, as part of the decedent’s estate for all tax years of the estate ending after the decedent’s date of death and before the “applicable date.”

So let’s say, for example, X is a beneficiary of a trust for which a Section 645 election has been made. The trust and the decedent’s estate have a taxable year of December 1, 2012 through November 30, 2013. X receives a taxable distribution on December 15, 2012. This means X will not have to report any income as a result of the distribution from the trust until 2013, and will have until April 15, 2014 to file an income tax return that would include the income from the distribution. This is extremely important since, if the trustee decides not to utilize the Section 645 election, the distribution would be taxable to the beneficiary in 2012, and the tax attributable to the distribution payable on April 15, 2013, just four months later. So, basically, the Section 645 election allows a deferral of the tax payment of over a year (16 months to be exact).

Taking advantage of a Section 645 election is especially important considering the provisions in the American Taxpayer Relief Act (“ATRA”). Under ATRA, the capital gains and dividend rates increase for individuals making over $400,000 and $450,000 for couples. For those individuals, the capital gains rate jumps from 15 percent to 20 percent. But, if you take advantage of the Section 645 election, you can utilize the lower 2012 rates, as opposed to the new, higher rates.

The process of actually initiating a Section 645 election can be complicated, which is why it is so important you sit down and talk to an Ashburn estate planning attorney, or an estate planning attorney in your area, to figure out how you can take advantage of this important provision.

About the Editors: InSight Law is an estate planning firm in Ashburn, Virginia (VA).The firm’s areas of practice include estate planning, business planning, trust and probate administration, assisting veterans and their family members with obtaining benefits, and medicaid planning. If you have questions, don’t hesitate to contact our office at 703-654-6019. We’re here to help.