Income Tax Returns of Revocable Trusts after the Settlor’s Death

H.B. 262, which eliminates the inheritance tax on all transfers from parents to children who are 21 or younger, also allows revocable trusts to be treated as part of the estate for Pennsylvania income tax purposes if the estate has made that election for federal income tax purposes. The bill passed both houses of the legislature and was approved by the governor as the Act of June 28, 2019, No. 13.

Under section 645 of the Internal Revenue Code, an estate can make an election to treat a revocable trust as part of the estate for federal income tax purposes, but there was no comparable provision under Pennsylvania law. So if an estate made that election, it would still be required to file separate Pennsylvania returns for the estate and trust, which was administratively burdensome. H.B. 262 eliminates this problem.

Section 10.2 of H.B. 262 amends section 331(g) of the Tax Reform Code of 1971, No. 2 of 1971 (72 P.S. § 7331), to read as follows:

“(g) The return for an estate or trust shall be made and filed by the fiduciary.  If two or more fiduciaries are acting jointly, the return may be made by any one of them. If the executor of the estate and trustee of the trust make an election under section 645 of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 645), as amended, to treat the income of the trust as part of the estate, the fiduciary may make and file a joint tax return for the estate and trust under this subsection for the taxable years when the trust income is reported as part of the estate income in accordance with section 645 of the internal revenue code of 1986, as amended. If the income tax liabilities of the estate and trust are filed on a joint tax return under this subsection, the tax liabilities of the estate and trust shall be joint and several. The provisions of subsection (d) shall be applicable to a joint tax return filed under this subsection.”

Section 29 of H.B. 262 makes this new provision applicable to tax years beginning after December 31, 2019.

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