Section 645 election for revocable living trust

[jomew]

My father-in-law passed away in Feb 2023. He had a revocable living trust. We have completed his decedent return using 1040 for Jan - Feb 2023. The trust had income in Mar - Apr from a rental property. After Apr, the rental property was deeded to my husband.

I understand that in addition to filing a 1040, I'm supposed to file a 1041 for my father-in-law's estate and a 1041 for his trust. But given that the income from the estate and trust are the same - rent from the property - I am thinking that I should make a section 645 election so that I only need to file one 1041. 

Does this logic make sense? If yes, then for purposes of form 8855 do I put the name of the trust in both part 1 and part 2?

[tagteam]

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@jomew wrote:

..........given that the income from the estate and trust are the same - rent from the property......

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Threshold question is whether the estate had income from the rental property.

Did the estate have income or was the rental held in the revocable trust (which became irrevocable upon his passing and would not have been part of his estate for federal income tax purposes).

[jomew]

The rental property was held in the trust.

My father-in-law did receive 1099-INT and 1099-R (pension) but we reported that income on his final 1040-SR so for purposes of the estate's 1041, there is no income if we count the rental income as belonging to the trust.

[tagteam]

In that event, there would be no need to file a 1041 for the estate and, therefore, no need to make a 645 election.

[jomew]

Got it. I was under the impression that I needed to file the 1041 regardless of whether there was income or not. So on the 1041 for the trust, under A (entity type) I would only need to select "grantor type trust" then - although I had also read on a tax site that once the grantor is deceased the trust reverts to a non-grantor trust...in which case, none of the options under A would then apply.  Can you confirm this?

Thanks!

[tagteam]

Yes, the revocable (grantor) trust becomes a nongrantor trust upon the passing of the grantor (generally).

[jomew]

If that's the case, then I don't think any of the entity types under A on form 1041 apply then. Is it okay to leave A blank on the form or am I absolutely required to pick one of the items? 

I would have originally picked "decedent's estate" but based on the feedback above, I no longer need to file 1041 for an estate so would not check that. It is also no longer a grantor trust since the grantor is deceased. It's also not a simple trust because we never made any distributions.

[tagteam]

You need to check a box and it's either a simple or complex trust depending upon the terms of the trust.

See https://www.irs.gov/instructions/i1041#en_US_2023_publink1000286059

[jomew]

Thanks for all your help so far. Hopefully one last question. Since the rental property was held in the trust and then subsequently inherited by/deeded over to my husband...is this considered a distribution of the trust's corpus and therefore, do I need to create a K-1 for the rental?

[tagteam]

If your husband now owns the property (holds title in severalty - he is the sole owner), then he should be reporting the income and expenses from the rental on his individual income tax return (1040).

Did the trust, itself, collect any rental income and/or incur any rental expenses?

[jomew]

The rental property was only deeded to him in May 2023. From Mar - Apr the property generated income and we are attributing this income to the trust (his father passed away in Feb).