In short, they are qualified to allow an election between making them part of the estate or have them be their own taxable entity. To recap, a revocable trust is established during the grantor’s life time and is subject to the grantor trust rules requiring that all the income from the trust must be reported on the grantor’s individual tax return. At the grantor’s death, however, the trust become irrevocable and the trust generally becomes its own separate taxable entity.
While there are non-tax advantages of revocable trusts, estates enjoy a few tax advantages that are not generally available for revocable trusts. These are:
- “The material participation requirement for the passive loss rules is waived (i.e., participation is treated as active) in the case of estates but not trusts for a two-year period after the owner’s death (see Sec. 469(i)(4));
- The charitable set-aside deduction under Sec. 642(c) is allowed;
- The estate may use a fiscal year end and possibly defer income to a future tax year; and
- Use of the fiscal year end may allow enough time to file only one tax return and finalize matters efficiently.”
Marcy D. Lantz. Election to Treat Qualified Revocable Trust as an Estate and the Separate-Share Rules
At the time of the grantor’s death, the executor and trustee may jointly elect to file Internal Revenue Service Form 8855 to “elect to treat a qualified revocable trust as part of an estate” provided the trust is qualified.
Fortunately, qualification is not difficult. Most Revocable Living Trusts are QRTs because the grantor retained the right to revoke the trust. IRC Section 645(b)(1) “The term “qualified revocable trust” means any trust (or portion thereof) which was treated under section 676 as owned by the decedent of the estate referred to in subsection (a) by reason of a power in the grantor (determined without regard to section 672(e)).”
See also: What’s the difference between a grantor and non-grantor trust?
