2.3.11.1 The Taxpayer Relief Act of 1997 provided for an irrevocable election whereby the trustee of a “qualified revocable trust” may elect to have the trust treated as part of the estate for income tax purposes. I.R.C. Sec. 645. Final Regulations were issued in December 2002.
2.3.11.1.1 To qualify for the election, the trust or portion of a trust was treated as a grantor trust during the grantor’s lifetime under I.R.C. Sec. 676. Thus, the grantor had the power (either alone or with a non-adverse party – like the spouse) to revoke any portion of the trust. The Regulations clarify that if an agent or legal representative of the settlor can revoke or amend after the settlor’s incapacity, then the trust will be deemed a qualified revocable trust even if the settlor becomes incapacitated prior to death.
2.3.11.1.2 The election is available if the grantor died after August 5, 1997. Once made, it is irreversible.
2.3.11.2 The election must be filed not later than the time for filing the estate’s first 1041 (taking into account extensions). Rev. Proc. 98-14, 1998-4 I.R.B. 21.
2.3.11.2.1 The election is made by attaching an original statement with the estate’s initial income tax return.
2.3.11.2.2 A copy of the “Required Statement” must be attached to the first 1041 submitted by the trust after the grantor’s date of death. [This could be due before the estate’s 1041 is due!] No 1041 is due for the trust if (i) the entire trust is a qualified revocable trust, (ii) the personal representative files a 1041 for the estate before the due date for the one for the trust, and (iii) trust items attributable to the deceased grantor are reported on his or her final return without the necessity of a 1041 (under the alternate options). If a 1041 has been filed by the trust without the election, an amended 1041 is required with the election.
2.3.11.3 The Required Statement under the election must be signed by both the personal representative and the trustee.
2.3.11.3.1 If there is no probate estate, and therefore no personal representative, the trustee signs the statement and states that no personal representative exists and none will be appointed.
2.3.11.3.2 If there will be no personal representative, the trustee signs all of the estate’s income tax returns.
2.3.11.4 The duration of the election depends on whether a federal estate tax return is required.
2.3.11.4.1 If no 706 is due, the election lasts for two years after the date of death.
2.3.11.4.2 If a 706 is due, the election lasts six months after the date of a “final determination of the liability for tax.”
2.3.11.4.3 Query: When is a final determination of liability? When the 706 is filed in an unaudited estate? When the limitations on assessment expire? When the Sec. 2032A or 2033A recapture statutes expire if such an election was made?