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.
