Estate and Trust election 645 terminates

Technical topics regarding tax preparation.
#1
Posts:
107
Joined:
3-Nov-2022 5:57am
Location:
Mid state
Estate and Trust election 645 terminates

Scenario
Facts:
A. Decedent passes August 20th 2021
B. Decedent had revocable living trust
C. Decedent had a pour-over Will
D. Estate administrator and trustee one and the same
E. Estate on fiscal year
E. Estate made 645 election after appointments
F. Estate holds a qualified plan subject to RMD described in pub 590b - the Beneficiary not an individual and using life expectancy table.
G. Trust has a capital loss carryover
H. Trust has minimal cash balance which generates none or very little income

Circumstances:
The beneficiaries would like to keep the estate open and take advantage of RMD life expectancy table for a non individual for the qualified account. This choice will keep the estate open past the 645 election period to treat the trust as part of the estate. Given the facts above, is the following correct when 645 election terminates on August 19th 2023:

1) trust maintains its existing TIN Under § 1.645-1 as the executor and trustee was appointed before the 645 election.

2) Long term capital loss remains with the trust upon split from the estate. No form or notification to the IRS is required.

3) trust after 645 terminates will have a short year as it will return to calendar year reporting. Even if trust has no income for short tax year 2023, 1041 must file for tax year 2023. Trust will have no reported income from estate for short year as that income was reported under combined 1041 2022 year end return.

3) Taxable Income from RMD taken late in year 2023 to estate will be reported to trust via K1 after close of fiscal year end 2023 which will be reported on trusts 2024 1041.

4) Trust which is now on 2024 calendar year end will issue K1s to beneficiaries who will report on their 2024 1040.

5) inform beneficiaries of the change in reporting the 2024 K1 from estate/trust. For example from reporting 2022 K1 on their 2023 tax return to reporting 2024 K1 on their 2024 return.

6) keeping Qualified plan held in estate is an acceptable reason for keeping estate/trust open for a prolonged period of time 1.641(b)-3

Interested in hearing If above is correct, if not please correct.

Thanks for the input.
 

#2
marknyc  
Posts:
203
Joined:
28-Sep-2022 7:12pm
Location:
NY
Questions/comments:

1. How can the trust have a capital loss carryover if it was a grantor trust during decedent's lifetime and an irrevocable trust taxed as part of the estate 1041 after death?

2. For RMDs, not sure what you mean by "life expectancy table for a non individual." Since the estate is the beneficiary of the qualified plan, RMDs would be based either (1) on the 5-year rule, or (2) over the remaining life expectancy of the decedent as of the year of death if death occurred after the owner's Required Beginning Date.

3. There is no need for an estate to remain open for the sole purpose of collecting and distributing IRA or qualified plan RMDs. Instead, the executor can assign the income interest of the qualified plan to the estate beneficiaries and close the estate. This does not extend the required payout period for the RMDs. see 1.691(a)-4(b)
 

#3
Posts:
107
Joined:
3-Nov-2022 5:57am
Location:
Mid state
Thanks for the comments Mark,


marknyc wrote:Questions/comments:

1. How can the trust have a capital loss carryover if it was a grantor trust during decedent's lifetime and an irrevocable trust taxed as part of the estate 1041 after death?


1- The homestead was part of the probate estate. Once probate court approved homestead status, the homestead was deeded to the trust. The trust sold homestead at loss to the FMV at DOD. Valid? If not, where does the loss carryover? Or not allowed etc?


marknyc wrote:2. For RMDs, not sure what you mean by "life expectancy table for a non individual." Since the estate is the beneficiary of the qualified plan, RMDs would be based either (1) on the 5-year rule, or (2) over the remaining life expectancy of the decedent as of the year of death if death occurred after the owner's Required Beginning Date.


2- I think we are saying the same thing here. Your 2 applies as decedent age was in the 80s. “Use the life expectancy listed next to the owner's age as of his or her birthday in the year of death. Reduce the life expectancy by 1 for each year after the year of death.” Opps , meant to type “ life expectancy table for a Single Life Expectancy."

marknyc wrote:3. There is no need for an estate to remain open for the sole purpose of collecting and distributing IRA or qualified plan RMDs. Instead, the executor can assign the income interest of the qualified plan to the estate beneficiaries and close the estate. This does not extend the required payout period for the RMDs. see 1.691(a)-4(b)


3- pause to think.. before thinking this through completely.. my response. There are many plr that state what you are proposing. For example https://www.irs.gov/pub/irs-wd/0826028.pdf. However how is the executor to assign the income of the qualified plan to the beneficiaries? The only way I’m aware is for the custodian of the qualified plan willing to execute the assignment. Is there another way? If so please educate me.
The custodians that I have communicated will not except a referenced PLR which is understandable because of each PLR stating “This ruling is directed only to the taxpayer that requested it”. So without costly PLR, the custodian will not assign.

If I missed the point, excuse me in advance and please expand and help.
 

#4
marknyc  
Posts:
203
Joined:
28-Sep-2022 7:12pm
Location:
NY
If the 645 election is made, the trust does not file an income tax return. Any gains or losses from the sale of trust assets are included on the estate income tax return, so any carryover losses would belong to the estate. If you want to preserve losses in the trust, the 645 election should not be made and the trust should file its own tax return.

For the assignment of qualified plan income, I think the relevant PLRs mostly address whether the assignment itself generates any taxable income rather than whether or not an assignment of income is permitted. Nevertheless, I agree that many custodians may not cooperate with an effort to have a right to IRA or plan income assigned to the beneficiaries.
 

#5
Posts:
107
Joined:
3-Nov-2022 5:57am
Location:
Mid state
Thanks Mark. Off hand I don’t see any tax advantage of the capital loss remaining with the estate versus trust since the distributions, etc pour to trust then to beneficiaries. I haven’t found case that states where capital loss lands in this situation. The homestead sale was from the trust and reported to the irs as such. I thought one of the reasons to track income, losses, etc originating either from the trust or estate was one of the purposes of tracking incase the trust and/or estate remain after the 645 termination.

Like you mentioned, not ideal. I’ve read transfer to a more friendly custodian, however I haven’t found one. The ones contacted hold significant funds of clients and it does have any influence. Having private in passing conversations with a custodian firm’s attorneys, they acknowledge all the PLRs, topic comes up in their meetings, however at the end of the day decide not to take on the liability. Only takes one negative ruling.

It would be nice if there was a list of friendly custodians available.
 

#6
Posts:
107
Joined:
3-Nov-2022 5:57am
Location:
Mid state
Any other inputs?

Got input that capital loss that occurs under 645 election stays with estate after 645 termination even if it originated from the trust.

Thanks
 


Return to Taxation



Who is online

Users browsing this forum: Anderly, golfinz, Google [Bot], HowardS, JoJoCPA, JR1, ManVsTax, MAPCPA60, MilesR, ode923, rbynaker, RuthC, sjrcpa, SlipperyPencil, taoseno, taxgenie, zl28 and 196 guests