Fiscal trust/estate with 645 election skips year of income..

Had a client that elected to go with a Sec 645 election to combine a trust & estate into a fiscal year.

The elected year was 8/1/2020 - 7/31/2021.

We THOUGHT all income was distributed before this date, and filed the return as initial and final.

Or, I should say, my advice to clients generally is to leave a "reserve" in cash, in case there are any outstanding expenses left, and if nothing comes up within a reasonable timeframe, to distribute the reserve to the beneficiaries, and as long as the income generated in the entity in the following year is under $600, a return is not required. As long as they do not think there will be over $600 in income, I will file the previous years return final.

(I'm going to apologize right here if this is incorrect advice. This is what I was taught, and its never been an issue before)

So here is where things get interesting.

Client left the reserve... From 8/1/2021 - 7/31/2022 the account did indeed generate UNDER $600 in income.

However, as interest rates went up, the income int he account did as well. From 8/1/2022 - current date, the account has generated over $600 in income, and so a tax return is required.

So, my questions

1) For the 07/31/2021 FYE return, are there any issues with that was filed final? There were capital losses and final year deductions that passed through on the K-1 that would not have been if the return had not been filed

2) For 07/31/2022 FYE, is a return required, even though the income was under $600?

3) For the 7/31/2023 FYE (not yet ended), where there is income, a tax return is required. My questions is about the 645 election. I know that election is only good for two year after the date of death, and that would have ended with the 7/31/2022 FYE return. So not sure what to do here. Every return with a 645 election I have worked on was finalized before the end of two years.

Thanks all!!!

You might talk to the PR and see if you could nominee it out to the beneficiaries, maybe distribute some cash so this doesn't repeat.

You erred in thinking there should be a reserve for future expenses. The nonclaim period expired 90 days after publishing the notice to creditors, so there can be no remaining claims. The estate should have been closed long ago.

You erred in thinking there should be a reserve for future expenses. The nonclaim period expired 90 days after publishing the notice to creditors, so there can be no remaining claims. The estate should have been closed long ago.

Hmmm, as I was taught by my predecessors, I generally tell the client to keep a reserve for at least 6 months until after the final return is accepted, in case there ends up being a tax due, or issue with the IRS.

How do you give your clients advice regarding that issue?