The ABC of Section 645 Election for Trusts in NJ
Navigate Through the Positive Aspects of Section 645 Elections in New Jersey Estate Planning with Our Monmouth County Attorneys
Many individuals are intimidated by the cost and complexity of forming a trust to protect their assets. However, while the fees associated with forming a trust are often well-worth the benefits received in tax advantages, Medicare protection, and legal protection, forming a trust that is enforceable and prioritizes tax planning can be very complex. In this area of estate and tax planning, it is easy to fall into a place where you simply don’t know what you don’t know. That is why it is so important to utilize the services of an experienced estate planning attorney who understands what type of trust is best for you and how it can be optimized to your benefit and the best interests of your beneficiaries as well. One potential option for maximizing the tax benefits of your trust is a Section 645 election.
Section 645 Election as a Way to Maximize Tax Efficiency in NJ
Section 645 of the Internal Revenue Code or an Election to Treat a Qualified Revocable Trust as Part of an Estate can present several administrative and tax benefits. Not all trusts are eligible for Section 645 election, which applies only to qualified revocable trusts and excludes irrevocable trusts. This provision allows the assets in certain revocable trusts to be treated as part of the decedent’s estate, rather than as separate trust assets, for federal tax purposes. Usually, when calculating federal income taxes on a descendant’s estate, trust assets are excluded, but making a Section 645 election at the time the trust is created can simplify taxes and, potentially, allow for additional tax deductions and a lower tax rate on the assets in the trust.
Don’t Miss Out on Any of the Possible Advantages of a Section 645 Election
One of the most significant potential tax advantages of a Section 645 election concerns reducing the capital gains tax liability of beneficiaries of the trust by allowing the assets to “step-up” and be valued at the fair market value of the assets at the time of the decedent’s’ death rather than the decedent’s adjusted basis in the assets. Without Section 645 election, when a beneficiary sells a trust asset, they will be required to pay capital gains taxes on the difference between the sale price and the decedent’s adjusted basis in the asset.
Another benefit is that estimated tax payments are deferred until the second year after the decedent’s death when a Section 645 election is made, alleviating the immediate burden of taxes from beneficiaries, and allowing them more time for financial planning. Trusts also generally have a low exemption amount or amount of money that can be received by a beneficiary of the trust without being subject to taxation. A Section 645 election brings the exemption amount up from the standard exemption of $300 to $600.
For trusts that hold passive income generating businesses and other investments, Section 645 election provides the benefit of a two-year deferral of the active participant requirement. Under the standard IRS rules, if you have a passive loss, you can only offset it against passive income. The active participation requirement states that an individual must be involved in the business or investment activity in order to offset passive losses and take certain deductions. This involvement does not need to be substantial but must be “meaningful and bona fide.” Examples of involvement could be administrative management or decision making regarding the business or investment activity.
This requirement can be a burden to beneficiaries, especially those not previously involved as active participants. A Section 645 election provides beneficiaries with a two-year waiver of this requirement, giving them time to plan and adjust their involvement in the income-generating businesses held in the trust, so they can deduct passive losses. Trusts with a Section 645 election also receive the benefits of being able to deduct any medical expenses that were paid by the trust for the decedent, which may lower the taxable income of the trust for the beneficiaries. These expenses may include medical bills, prescription medications, home aids, hospice care, and more.
Finally, rather than being held to the standard tax calendar year, Section 645 allows trust executors to use a fiscal year schedule to optimize their tax planning strategies and better meet the needs of beneficiaries.
Optimizing the Use of a Section 645 Election for Your Trust in NJ
Before making a Section 645 Election, you must confirm that the trust in question qualifies for this beneficial tax treatment. The trust must be a qualified revocable trust that is regarded as owned by the decedent through grantor power under Section 676 of the IRS code. We recommend that you work with a knowledgeable estate planning attorney to determine if the trust will qualify for Section 645 election. There may be reasons why a different type of trust, like an irrevocable trust, better suits your circumstances and overall estate planning goals, even if it will not be eligible for Section 645 election and its accompanying benefits.
If your attorney determines that a qualified revocable trust is the best option for you and your beneficiaries, they can apply for Section 645 election by filing form 8855 with the IRS. Your attorney can also explain the benefits and implications of this election to your beneficiaries and provide ongoing support to ensure compliance.
Get Experienced Estate Planning Advice Regarding Section 645 Election Decisions in New Jersey
Determining if a trust is the best option for your estate planning goals, choosing which type of trust meets your needs, and considering all of the tax implications of your estate plan involves many complexities and nuances. An experienced estate planning attorney at our Ocean County County law firm, with deep knowledge and understanding of the tax implications of your estate plan, can help you navigate this process and create a strategy that serves you during your life and protects your legacy, wishes, and beneficiaries in the future. Contact The Bronzino Law Firm today at (732) 812-310 for a free consultation to discuss your specific needs and goals with a skilled estate planning attorney. We can help in Bay Head, Wall, Stafford, Sea Girt, Toms River, Beachwood, Holmdel, and other communities and elsewhere in Monmouth and Ocean County, and your interests are our paramount concern.