FUNDAMENTALS OF ESTATE PLANNING IN OHIO TAXATION ISSUES IN ESTATE PLANNING

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1 FUNDAMENTALS OF ESTATE PLANNING IN OHIO TAXATION ISSUES IN ESTATE PLANNING Jill M. Scherff Dinsmore & Shohl LLP 255 E. Fifth Street, Suite 1900 Cincinnati, Ohio (513) I. Overview of Federal and State Estate Taxation A. Estate Tax Rates. 1. Federal. In June, 2001, President Bush signed into law the Tax Relief Reconciliation Act of The Act provides for a gradual reduction of the top estate tax rate between the years 2002 and 2009 while at the same time the Act increases the "exemption amount" (which passes free of estate tax) as shown in the table below. For persons dying after December 31, 2009, the estate tax is repealed in its entirety. However, for persons dying after December 31, 2010, the estate tax is reinstated in the same form as in effect on the date the legislation was signed into law unless sometime between now and then Congress acts to prevent the reinstatement or makes other changes. Estate Tax Year Top Estate Tax Rate Estate Tax Exemption % $2,000, % $3,500, Repeal Repeal % $1,000, Ohio. In addition to the Federal estate tax, Ohio imposes a state estate tax. For dates of death on or after January 1, 2002: If the net taxable estate is: The tax shall be: Over $338,333 but not over $500,000 $13,900 plus 6% of the excess over $338,333 Over $500,000 $23,600 plus 7% of the excess over $500,000 B. Determining Your Taxable Estate. 1. Your estate for tax purposes may be much larger than your probate estate. Page 1 of 17

2 2. In addition to your probate assets and some or all of your jointly held assets, your gross taxable estate will include property in which you have a retained life interest, a retained right to select the beneficiaries, or retained incidents of ownership in a life insurance policy on your life. 3. Deductions. Deductions against your gross taxable estate can include debts, funeral and administration expenses, casualty losses not insured against and bequests to a spouse or charities. C. Drafting Death Tax Clauses. 1. Determining the proper tax apportionment clause depends on many factors, including: a. the identity of the beneficiaries; b. the types of assets includible in the gross estate; c. the type of disposition under the will and outside the will; and d. the size of the estate. 2. Discuss with clients the anticipated amount of death taxes and how payment of death taxes will affect what his or her beneficiaries receive. 3. In the absence of a death tax clause in the will, state law will govern. Including a death tax clause in the will illustrates the testator's intent. In addition, if the client relocates to a state with a different tax apportionment law, the client's wishes will still control. 4. Ohio law's apportionment statutes are set forth in O.R.C et seq. D. Marital Deduction and Unified Credit. 1. Federal Estate Tax Marital Deduction. a. General. Section 2056(a) of the Internal Revenue Code provides for an unlimited marital deduction from the taxable estate. It is intended to provide for the deferral of tax until death of the surviving spouse. The code contains three general requirements: a surviving spouse who is a U.S. citizen; the interest must be includable in the gross estate and pass to the surviving spouse; and Page 2 of 17

3 (iii) the terminable interest rule. b. Code Section 2056(b)(1) contains a significant exception to the general rule that a marital deduction is allowed for any interest passing from the decedent to the surviving spouse. The exception is for certain terminable interests which will terminate or fail upon the lapse of time, the occurrence of an event or contingency, or the failure of an event or contingency to occur. In general, a nondeductible terminable interest is an interest in property in which another interest in the same property passes from the decedent to someone other than the surviving spouse or the spouse s estate, for less than a full consideration, and, as a result, such person may possess or enjoy any part of the property after the surviving spouse s interest ends. Section 2056(b)(1)(A) and (b). Examples of nondeductible terminable interest include legal life estates and terms for years. c. There are a number of exceptions to the terminable interest rule: The marital bequest can be limited or conditioned on survival for a period of six months. Section 2056(b)(3). Note Sowder v. U.S., (E.D. Wash 11/10/05). The Will conditioned a gift to the spouse on survival until distribution of the estate. Nevertheless, because of extrinsic evidence of intent that the bequest qualify for the marital deduction, the court construed the bequest to qualify. A life estate, coupled with a general power of appointment will qualify for a marital deduction. Section 2056 (b)(5). (A) (B) (C) (D) The surviving spouse must be entitled for life to all of the income from the entire interest or a specific portion of the entire interest, or to a specific portion of all the income from the entire interest. The income must be payable annually or at more frequent intervals. The surviving spouse must have the power to appoint the entire interest or the specific portion to either himself or herself or his or her estate. The surviving spouse s power must be exercisable by the spouse alone and in all events. The power may be either inter vivos or testamentary. Page 3 of 17

4 (E) The entire interest or the specific portion must not be subject to a power in any other person to appoint any part to any person other than the surviving spouse. (iii) (iv) (v) A QTIP trust, discussed below, qualifies for the marital deduction, if elected. Code Section 2056 (b)(7). An estate trust qualifies for the marital deduction because no interest passes to anyone other than the surviving spouse or her estate. Section 2056(b) (1) (A). Cf. Regs (3)- 2(b)(1), Examples,. If a surviving spouse is given a charitable remainder annuity trust or unitrust interest for life in a split interest trust, the lead interest qualifies for the marital deduction. Code Section 2056(b)(8). d. If the surviving spouse is not a U.S. citizen, the marital deduction is allowed only with respect to property which passes to the surviving spouse in a qualified domestic trust. Code Section 2056(d). 2. Qualifying Terminable Interest Property (QTIP). a. Code Section 2056(b)(7) provides that qualified terminable interest property will qualify for the Federal estate tax marital deduction. Because the opportunity to claim the marital deduction for qualifying terminable interest property is elective, the use of a QTIP arrangement affords significant post mortem planning opportunities. b. The requirements of Code Section 2056(b)(7) are as follows: (iii) The property must pass from the decedent. Code Section 2056(b)(7)(B)(I). The spouse must be entitled to all of the income from the property payable at least annually. Code Section 2056(b)(7)(B)(I). The rules relating to life estate-power of appointment trusts will govern. Regs. Section (b)- 7(d)(2). The spouse should be given the right to make the trust assets income producing. See PLR No person, including the spouse, can have the power to appoint the property to any person other than the spouse during the spouse s life. Code Section 2056 (b)(7)(b)(ii). Page 4 of 17

5 (A) (B) The surviving spouse or someone else can be granted a power of appointment exercisable at the death of the surviving spouse. Distributions of principal could be made to the spouse pursuant to a power held by the spouse or the trustee and the spouse could then use such property for gifts. (iv) The fiduciary must irrevocably elect to claim the estate tax marital deduction by so indicating upon the estate tax return. Code Section 2057(b)(7)(B)(v). c. A QTIP trust may fail to qualify if the trustee is allowed to accumulate income as part of a spendthrift provision. T.A.M , but see PLR d. Taxation of the QTIP property. The QTIP exception to the marital deduction terminable interest rule is designed only to permit deferral of tax until the property leaves the marital unit. Accordingly, transfer tax applies at the earlier of: (A) Disposition by the surviving spouse during life of all or part of the income interest. Code Section 2519; or (B) Death of the surviving spouse. Code Section On the surviving spouse s death, the surviving spouse s estate has a right to recover estate taxes attributable to the inclusion of the QTIP property from the person receiving the property. Code Section 2207A(a). 3. The QTIP Election. a. As noted above, the QTIP election is to be irrevocably made by the executor on the estate tax return. Code Section 2056(b)(7)(B)(v). b. A qualified disclaimer by the surviving spouse renders the executor s election of QTIP treatment ineffective. Rev. Rul , I.R.B. 7. c. The Partial QTIP Election. Regulations Section (b)-7, initially promulgated on September 17, 1982, provides that partial QTIP elections may be made for all or any part of a property otherwise meeting the statutory requirements so long as the consequence is that the elective part reflects its proportionate share of increase or decrease in the whole of the property for purposes of Page 5 of 17

6 applying Sections 2044 or 2519 (providing for the inclusion of property with respect to which a QTIP election has been made in the transfer tax base of the survivor). (iii) (iv) (v) A partial election must be made with respect to a fraction or percentile share of the whole. The fraction or percentile share may be defined by means of a formula which will limit the QTIP to the smallest amount that will result in no Federal estate tax. Regs. Section (b)- 7(h), Examples 7 and 8. See also PLR The election may not be made with respect to specific identifiable assets which are part of a fund or which may subsequently become a part of a fund. PLR allowed an election for specific assets where the specific assets were to be segregated into a separate QTIP trust. The election may not be made with respect to a specific dollar amount. If a partial election is made, the trust may be divided to reflect the partial election, if the governing instrument or local law permits it. Regs. Section (b)(2). 4. Ascertaining the Elector. a. There is no doubt that the statutory reference to executor includes the fiduciary appointed under state law to administer the decedent s estate by whatever title that individual is known. b. In the absence of a judicially appointed executor, the election may be made by any person having possession of the decedent s property. Code Section Regs PLR (trustees of a revocable trust). c. If there are co-executors, unanimity would appear to be required unless the Will gives one or more of the co-executors the power to prevail in case of disputes. 5. Time for making the Election. The QTIP election is to be made by an executor on the federal estate tax return. Code Section 2056(b)(7)(B)(v). There is no indication in the statute that an election made upon a return which is not timely filed will not be effective. Page 6 of 17

7 E. Ohio Marital Deduction. 1. Ohio Revised Code provides that a marital deduction shall be allowed in an amount equal to the value of any interest in property that passes or has passed from the decedent to the surviving spouse, but only to the extent the interest is included in the value of the gross estate. An interest in property shall be considered as passing or as having passed from the decedent to the surviving spouse only if one or more of the following apply: a. the interest was bequeathed or devised to the surviving spouse in the will of the decedent; b. the interest was inherited by the surviving spouse through intestate succession from the decedent; c. the interest is a dower interest of the surviving spouse; d. the decedent transferred the interest to the surviving spouse at any time; e. at the time of death of the decedent, the interest was held by the decedent and the surviving spouse in any form of joint ownership with a right of survivorship; f. the decedent had a power to appoint the interest and the interest was so appointed to the surviving spouse or the surviving spouse acquired the interest as a result of the release or the nonexercise of the power. 2. Ohio Revised Code (B) contains Ohio's QTIP election. Ohio law does not limit the deduction in the case of a life estate or other terminable interest. The Ohio Department of Taxation has put forth the position that paragraphs through (iv) above allow for a marital deduction for a pure income interest in a surviving spouse. 3. Accordingly, if a trust divides into a Family Trust and a Marital Trust, and if the Family Trust provides for an income interest for the surviving spouse, the trustee can elect the Ohio Life Estate Marital Deduction for the present value of the surviving spouse's life estate and the Ohio QTIP Election as to any portion of the interest for which an election is made. F. Unified Credit. In 2008, the unified credit offsets the first $780,800 in tax. A $2,000,000 estate generates a $780,800 estate tax. Page 7 of 17

8 G. Transfer Planning to Reduce the Taxable Estate. 1. Introduction. One common plan for minimizing estate taxes for married persons utilizes a revocable living trust and a pour-over Will for each spouse. 2. Estates Less than $2,000,000. a. If you anticipate the value of your estate (and, if you are married, if you anticipate the value of your combined estates) to be under $2,000,000 at the time of your death(s), you possess no tax motivation to create a credit shelter trust. Why not? Because you (or, if you are married, neither you nor your spouse) will be liable for the Federal estate tax. b. You can still benefit from a contingent revocable living trust for your children. (iii) With this estate plan, the first spouse to die bequeaths all property to the surviving spouse. The surviving spouse bequeaths the property to the living trust. Under the terms of the trust, the property is held for the benefit of the children, grandchildren, etc. for so long as the trust specifies. The trust is created during your life but it is not funded until the death of both you and your spouse. A contingent trust puts the control and management of your property in the hands of a skilled trustee for the benefit of your children or other beneficiaries, but only after the death of you and your spouse. 3. Estates Over $2,000,000. a. If the value of your estate for Federal estate tax purposes will exceed $2,000,000 at the time of your death, you may wish to create a marital deduction/credit shelter trust or "A/B" Trust to minimize the assets that would otherwise be subject to the Federal estate tax on the last to die of you and your spouse. You would create a revocable living trust agreement with a Will which "pours over" the bulk of your estate into your trust. b. The trust agreement would direct the trustee as follows: During your life, as Settlor, you retain complete control over any property transferred to the trust. Page 8 of 17

9 Upon your death, your trust agreement instructs the trustee to divide the trust property into two funds: (A) (B) Fund B, the credit shelter trust, receives an amount approximately equal to the exemption equivalent ($2,000,000). The trustee may hold this property for the benefit of your children. In addition, the surviving spouse may be given a right to all or part of the income from Fund B; to use the principal for his or her health, education, maintenance or support; and to have a power to appoint the final distribution of the principal among certain classes of beneficiaries. The property in Fund A equals the remaining assets in the estate after Fund B is funded. Fund A is created for the benefit of the surviving spouse. The value of Fund A will be included in the estate of the surviving spouse. The surviving spouse may be given complete control over the property in Fund A or may be given a qualified terminable interest in the property (QTIP trust). H. Lifetime Gifts. Gift-giving during your life is a common tool for reducing eventual estate tax liability. During each calendar year, you may give up to $12,000 each to an unlimited number of noncharitable beneficiaries without incurring any gift tax. Spouses may elect to "split" the gifts to certain beneficiaries and thus double the amount of the annual exclusion available to $24,000 per donee. The key advantage to lifetime gift-giving is the removal of $12,000 per donee from your estate in addition to the removal of the future income earned from or appreciation of the property. The disadvantage to lifetime gift-giving is the loss of control over the property. I. Additional Tools for Large Estates to Minimize Estate Taxes. 1. Introduction. Estates over $2,000,000 can further reduce estate tax liability by shifting assets or part of the interest in the assets to beneficiaries in lower tax brackets. Depending on how much control and enjoyment of a certain asset an individual is prepared to relinquish, he or she may use one of several techniques to reduce and freeze the value of his or her estate. 2. Irrevocable Trusts. An irrevocable trust is a trust which, by its terms, you cannot amend or revoke. If you create an irrevocable living trust during your life and transfer property to it, you can successfully remove the property from your taxable estate at death. Page 9 of 17

10 a. Advantages. Estate Tax Savings. Your estate will save federal estate taxes at the time of your death. Income for Family Members. You can designate your parents, children or others as the income or remainder beneficiaries of the trust to ensure continued support for them. However, property placed in an irrevocable trust for the benefit of noncharitable beneficiaries will be subject to gift tax. If the beneficiaries have the present right to enjoy the property, the annual gift tax exclusion may be available ($12,000 per beneficiary for single donors and $24,000 per beneficiary for married donors who elect to split the gift). b. Disadvantages. Limited Flexibility. For a settlor to maximize tax savings, the settlor must give up control of the property to a trustee other than himself or herself. As the trust is irrevocable, the ability to amend the trust to suit future needs of the beneficiaries is lost. Giving your spouse or someone else a limited power of appointment over the property may alleviate some of the inflexibility. Imposition of Gift Tax. If you fund an irrevocable trust with more than $12,000 per noncharitable donee, you will incur a gift tax on the excess. Similarly, if you want the beneficiaries, such as minor children, to have only a future interest in the trust assets, the annual exclusion will not apply and a gift tax will be imposed. 3. Charitable Trusts. a. A charitable trust may permit you to continue to enjoy benefits from the trust property in addition to reducing the size of your taxable estate. b. If you fund a charitable trust during your life, giving yourself and/or your family an interest in the income for your and/or their lives, and leaving the remainder to charity, you will have a current income tax deduction and remove the asset from your taxable estate at death. c. Two charitable trusts recognized by the Internal Revenue Code are charitable remainder annuity trusts and charitable remainder unitrusts. Page 10 of 17

11 J. Post-Mortem Death and Income Tax Planning. 1. Post-Mortem Death Tax Planning. a. If the decedent's estate plan did not take full advantage of the decedent's unified credit, the surviving spouse can disclaim a portion of the property passing to the spouse. Disclaimed property is treated as if it never passes to the disclaimant. Instead, the property passes directly to the persons next in line for the property. For example, if a decedent's will provides for his estate to pass to his spouse, but if his spouse does not survive him, to his lineal descendants, the surviving spouse can disclaim a portion or all of the assets to take advantage of the decedent's unified credit, and the disclaimed assets will pass directly to the decedent's children. b. Internal Revenue Code 2518(b) sets forth the following requirements for a qualified disclaimer: (iii) (iv) (v) The disclaimer must be an irrevocable and unqualified refusal to accept the gift or bequest. The disclaimer must be in writing and must identify the interest being disclaimed and be signed by the disclaimant. The disclaimer must be delivered within 9 months of the transfer. The disclaimant must not have accepted the interest or property or any of its benefits. The interest must pass without any direction on the part of the disclaimant to a person other than the disclaimant. 2. Post-Mortem Income Tax Planning. a. Overview. An Executor has many choices relating to the final income tax return of the decedent, the handling of income in respect of the decedent (IRD), the estate income tax return and the estate tax return. Before considering the various elections and choices available, the Executor must get organized. This includes: determining the assets and liabilities of the estate; collecting prior gift tax returns and income tax returns; collecting life insurance policies and preparing proof of claims; reviewing pension plans, profit sharing plans, IRAs and their beneficiary designations; searching for bank accounts and brokerage accounts; opening safe deposit boxes; determining whether Page 11 of 17

12 an appraiser is required; applying for a tax ID number for the estate; reviewing the cash requirements of the estate; and establishing deadlines. A final income tax return should always be prepared, even if the decedent would not have been required to file one. It gives the IRS notice that the individual has passed away and that no future returns should be expected. b. Who Files the Final Return? The executor of the estate usually will file any federal income tax return that the decedent would have been required to file if he or she were alive (IRC 6012(b)(1)). This includes the return for the period ending with the date of death. Two individual income tax returns may be required. If the decedent died between January 1 and April 15, before filing the return for the year before his death, the executor will file the return due April 15 of the year of death and also the return due the following April 15. The return must be filed in the revenue district in which the person making the return has his or her legal residence or place of business, not the district in which the decedent resided. c. Additional Tax Forms. The final return should clearly indicate at the top that the person is dead and it should include the date of death. If a Form 56 has not been filed, a copy should accompany the return, with a certified letter of authority. The IRS normally has 3 years from the date an income tax return is filed, or its due date, whichever is later, to charge any additional tax due. The executor, however, may request a prompt assessment of tax which reduces the time to 18 months from the date the request was received. The executor may file a request for prompt assessment using Form The request should be filed separately from the return with the IRS office where the return was filed. If Form 4810 is not used, you must indicate that you are making a request for prompt assessment under Section 6501(d) of the Internal Revenue Code. You must also identify the type of tax and the tax period. You can request the prompt assessment for any tax years that are still open, even though the returns were filed before decedent s death. The executor may also file a request for release of personal liability using Form This request must be made after the returns are filed. If Form 4595 is not used you must clearly indicate that the request is for discharge from personal liability under Section 6905 of the Internal Revenue Code. If the IRS does not notify the executor of an unpaid amount, the Page 12 of 17

13 executor is relieved from liability as to any additional tax 9 months after the IRS s receipt of the application. (iii) If the decedent was making estimated tax payments, a Form 2210 may also be required. If a refund is requested, a Form 1310 should be filed. This can be filed by the executor or the person entitled to the refund. d. Joint or Separate Returns? (iii) If there is a surviving spouse, the executor or administrator may file a separate return for the decedent or he may elect to file a joint return with the surviving spouse, provided the spouse has not remarried before the end of the year. If a joint return is filed, it includes the decedent s income for the time he was alive and the surviving spouse s income for the entire year. If the decedent died after December 31 without filing a return for the year prior to death, and the executor has not been appointed by April 15, the surviving spouse may file the return but if an executor is subsequently appointed, the executor may disaffirm a joint return filed by the spouse and file a separate return. The executor must file the separate return within one year of the original date for filing. If separate returns were filed, either by the decedent and the surviving spouse or by the executor and surviving spouse, the executor can still file a joint return with the consent of the surviving spouse within three years of the due date. How do you decide whether to file joint or separate returns? This is not as easy as it sounds. Often the estate s income tax liability will be lower if a separate return is filed. However, there may be less income tax for the family unit if a joint return is filed. In that case, before filing a joint return look for language in the will allowing the executor to file a joint return without incurring liability. If there is any question about the best tax choice, separate returns should be considered because they can be amended within three years from the date the returns were due. If separate returns are filed and it is later determined that a joint return is best, an amended, joint return can be prepared. However, if a joint return is originally filed, it cannot be later amended and split into separate returns. Page 13 of 17

14 (iv) (v) For purposes of the estate tax deduction for income taxes paid by the decedent, the income liability reported on a joint return may be divided between the executor and the surviving spouse by agreement or, in the absence of an agreement, by local law (Reg (f)). In the absence of evidence to the contrary, the deductible amount is the amount of the joint tax multiplied by a fraction, the numerator is the amount of the decedent s separate tax and the denominator is the amount of both spouses separate taxes. The deduction cannot exceed the decedent s separate liability, reduced by payments already made by the decedent, or the amount the estate is required to pay under an enforceable agreement between the executor (or the decedent) and the surviving spouse. e. Other Reasons to Consider Filing a Joint Return. Carry forward items (A) Capital Losses/Passive Activity Losses. If the decedent had unabsorbed capital losses and/or suspended losses under the passive loss rules, these losses cannot be carried forward to the estate income tax return. On a joint return, however, they can be applied against the surviving spouse s income. (B) (C) Charitable Contributions. Charitable contribution deductions that have been carried forward from prior years because of AGI limitations may be deducted on the decedent s final return subject to these same limitations. Excess deductions cannot be carried forward to future tax years of the surviving spouse. A joint return allows the surviving spouse s income to offset charitable deductions that might otherwise be wasted. IRA Contributions. If a joint return is filed, a nonworking surviving spouse may make contributions to a spousal IRA, based on the earnings of the decedent before death. Post-death contributions may not be made for the decedent without penalty. Page 14 of 17

15 Tax Consideration for Surviving Spouse (A) Commission. Should a surviving spouse who is the executor waive commissions (which constitute taxable income)? Such a waiver may be advisable when he or she will otherwise receive an equivalent amount as a bequest or legacy (which is not taxable). Compare the results of waiving the commission and accepting it, taking into account the income tax bracket of the surviving spouse and the estate tax deduction for commissions paid. (B) Tax Rate. If a surviving spouse meets certain requirements, he or she may be able to use the joint return tax rates for two years following the year of the deceased spouse s death. Three conditions must be satisfied: (1) a dependent child resides in the survivor s household; (2) the survivor was entitled to file a joint return with the decedent for the year of his or her death; and (3) the survivor did not remarry in the tax year in issue. K. Income Tax Issues. A. Income and Deductions on the Final Return. When preparing the final income tax return, only income actually received by the decedent is reported. Income which was earned by the decedent, but not received prior to death, is known as income in respect of the decedent or IRD. It will be reported on the estate tax return and also on the estate income tax return. If there is additional federal estate tax because of the inclusion of IRD, it may be deducted under Internal Revenue Code Section 691(c) when computing the income tax on the IRD. There is usually some delay in transferring assets out of decedent s individual name and into the name of the estate. The Form 1099 for an asset, therefore, may also include income that was earned and paid after the decedent s death. The entire amount may be disclosed on the final return, but only the income received before death will be included as income. If you are preparing the income tax returns, it is helpful to prepare a separate list of all income received in the year of death and show how each entry is allocated between the decedent s final 1040 and the estate s Medical Expenses. As a general rule, medical expenses are deductible only in the year paid. However, medical expenses incurred before death and paid within one year after death may be claimed as deductions on the decedent s final income tax return or on the estate tax return. Before deciding on which return to claim these medical deductions, compare the results of each approach, bearing in Page 15 of 17

16 mind that medical expenses are deductible for income tax purposes only to the extent they exceed seven and one-half percent of adjusted gross income. If after the comparison, you decide to claim these expenses as a deduction on the decedent s final income tax return, the executor or administrator must file a waiver of right to claim the estate tax deduction. (This requirement ensures that a double deduction will not be allowed with respect to any particular medical expense.) 2. Estate Trust Income. If the decedent has an interest in a trust or another estate, his share of income allocable to the tax year of the trust or estate ending in the year of decedent s death is reported on decedent s final return. IRC 652(c) and 662(c). If the tax year does not end in decedent s last year, the income received by the decedent is reported on his final return. 3. S Corporation Income. If the decedent was a shareholder in an S Corporation, the final individual income tax return will include the decedent s share of the S Corporation s income, loss, deductions and credits for the following periods: a. The corporation s tax year that ended within or with the decedent s last tax year (the year ending on date of death); b. The period from the end of the corporation s tax year to the decedent s date of death. 4. Partnership Income. The death of a partner usually closes the partnership s tax year for that partner, but not for the remaining partners. The decedent s distributive share must be calculated as if the tax year ended on his death. B. Option to Treat Revocable Trust as Part of Estate. The executor may elect to treat a decedent's revocable trust as a part of the decedent's estate for federal tax purposes. I.R.C The election is irrevocable and must be made no later than the due date for the first fiduciary income tax return for the estate. 1. Advantages. Allows the trust to use the estate's fiscal year for income tax purposes; allows a trust to recognize loss upon the satisfaction of a pecuniary bequest with assets that have a fair market value less than basis; allows an income tax deduction for payment of the decedent's medical expenses. Page 16 of 17

17 2. Making the Election. The executor and the trustee of each qualifying revocable trust make the 645 election. The election is made on Form 8855, Election to Treat a Qualified Revocable Trust as Part of an Estate. The form will be timely filed if it is filed by the time prescribed for filing the Form _1 Page 17 of 17