Form 8939 Notice and Guidance Concerning Transfer Certificates and the Section 645 Election

By Matthew J. Ahearn and Brian M. Malec

This is our final post concerning Notice 2011-66, in which we will address transfer certificates and the Code section 645 election. Please check back here as we will delve into Rev. Proc. 2011-41 and the optional safe harbor guidance under Section 1022 in future posts.

Transfer Certificates

An estate tax lien automatically attaches to a decedent’s gross estate for a period of 10 years from the date of death, unless the estate tax is sooner paid in full. IRC §6324(a)(1). A transferee of property included in the gross estate under Code sections 2034 – 2042 is personally liable for the estate tax to the extent of the value of such property. IRC §6324(a)(2). With respect to a non-resident, non-U.S. decedent, the IRS may issue a Transfer Certificate to permit the transfer of property included in the gross estate without liability for the estate tax. Treas. Reg. §20.6325-1(a). The IRS will issue a Transfer Certificate when the estate tax imposed has been fully discharged or provided for. Treas. Reg. §20.6325-1(c). The purpose of the Transfer Certificate is to assure the custodian in possession of the decedent’s property that such property can be released without concern of liability for estate taxes and penalties arising from these assets. For 2010 non-resident, non-U.S. decedents whose executors make the Section 1022 election, the Notice provides that a Transfer Certificate is not required and will not be issued by the IRS.

Section 645 Election

Under section 645, a trustee of a qualified revocable trust and executor of an estate may elect to treat the qualified revocable trust as part of the estate for income tax purposes. This election can be beneficial because permits the tax items of a trust to be combined with the tax items of an estate and also allows the trust to report on the estate’s tax year. Because an estate can elect a fiscal year (while a trust must generally report on a calendar tax year), making the section 645 election will permit the qualified revocable trust to report on a fiscal year.

The section 645 election applies for all tax years ending after the date of the decedent’s death and before the “applicable date”. Generally, the applicable date is (i) 2 years after the decedent’s date of death, if an estate tax return is not required to be filed, or (ii) 6 months after a final determination of the estate tax. The Notice provides that the section 645 election will terminate 2 years after the date of the decedent’s death in the case of an estate which makes a section 1022 election by filing Form 8939. If the executor does not make a section 1022 election, the standard rules should continue to apply for determining when the section 645 election will terminate.