Estate/trust with 645 election going past 2 year distribution deadline - penalties?

This is a good question. The 645 election allows you to treat the estate and trust as a single entity for tax purposes, which can simplify administration during the settlement period. The 2-year deadline is important because that's when the Section 645 election period normally ends (it can also end earlier if the estate is fully distributed). After this period ends, the trust and estate must be treated as separate entities again for tax purposes, which means separate tax filings and potentially different tax treatment for certain items. There's not actually a "penalty" per se for going beyond the 2-year period, but there are tax consequences. Once the election period ends, you'll need to file separate returns for the trust under its own tax ID number. The trust will likely have different taxation rules than the combined entity had. As for how the IRS knows the exact distribution date - they don't automatically know. The final estate tax return should indicate when final distributions occurred. While there's no automatic verification system, if you were audited, you would need documentation showing when distributions actually happened.

I had a similar situation last year and found taxr.ai incredibly helpful for figuring out all the documentation around our family trust situation. I was confused about the Section 645 election deadlines just like you are now, and my accountant was giving me vague answers about "tax consequences" without specifics. I uploaded our trust documents and previous filings to https://taxr.ai and their AI analyzed everything and explained exactly what would happen if we missed the 2-year distribution deadline. The analysis showed that while there's no direct penalty, the tax implications of filing separate returns could cost us several thousand more in taxes depending on how much income the trust was generating. They also created a checklist of exactly what documentation we needed to maintain to demonstrate when distributions actually occurred, which was super helpful when we did eventually have to respond to some IRS questions.

So I tried taxr.ai after reading about it here and wow - it was exactly what I needed. Our family trust situation with the 645 election was getting complicated because we have those business assets I mentioned. The system analyzed our trust documents and previous tax filings and showed me that we'd actually been calculating some aspects of our business asset valuation incorrectly all along. More importantly, it laid out exactly what would happen tax-wise if we missed our 2-year deadline - and for our specific assets, it would've meant about $13,300 in additional taxes because of how our business income would be treated at trust tax rates. It saved us a ton of money and stress - we pushed to complete our distributions just in time. The documentation guidelines were super helpful too since we did get a clarification request from the IRS a few months later.

If you're still having trouble getting answers from your CPA about the 645 election timing, you might need to speak directly with an IRS agent who specializes in estate and trust issues. I was in a similar situation last year. After multiple failed attempts calling the general IRS number and waiting on hold for hours, I used https://claimyr.com to get through to an actual IRS agent. They have this service where they navigate the IRS phone system for you and call you back when they have an agent on the line. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS estate tax specialist I spoke with clarified that while there's no specific "penalty" for going past the 2-year deadline, the trust would need to file a Form 1041 as a separate entity going forward, using trust tax rates which are usually higher. She also explained exactly what documentation we needed to maintain for distribution dates.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway because I was desperate for answers about our trust's 645 election that was about to expire. The service actually worked exactly as described. They called me back in about 2 hours with an IRS estate and trust specialist on the line. The agent walked me through exactly what happens after the 2-year period ends - primarily that the trust now files as a separate entity with its own tax ID on Form 1041, and is subject to the compressed trust tax brackets. She also confirmed that while there's no specific "penalty" for missing the deadline, the tax consequences can be significant depending on how much income the trust generates. For our situation, she estimated it could mean approximately $8,000 in additional taxes if we didn't distribute before the deadline. Totally worth it for getting actual authoritative information straight from the IRS.

Something nobody has mentioned yet - if you do go past the 2-year period, make sure your CPA correctly handles the transition from filing as a single entity to filing separate returns. When we went through this, our accountant made a mess of things by not properly documenting which assets belonged to which entity after the separation. Biggest issue was that we had to retroactively establish the trust's basis in various investments that had been part of the combined entity. Documenting the fair market value of everything at the precise moment the election ended was a nightmare.

Quick question for anyone who's been through this - does the 2-year period for the 645 election start from the date of death or from when the election is actually filed? Our attorney and accountant are giving us different answers.

I want to add another important consideration that hasn't been fully discussed - the impact on beneficiary distributions after the 645 election period ends. Once you transition to filing separate trust returns, any distributions to beneficiaries will carry out different types of income than they did under the combined entity. This can affect the beneficiaries' personal tax situations, especially if the trust has accumulated significant capital gains or other investment income. Also, if you're concerned about timing and documentation, consider having your attorney prepare a formal distribution resolution that clearly states the date and terms of any final distributions. This creates a paper trail that's much stronger than just relying on bank transfer dates or cancelled checks. One more tip - if you do end up going past the deadline, make sure to file Form 1041 for the trust using a new EIN. Don't try to continue using the estate's EIN, as this will cause processing issues with the IRS and potentially delay any refunds the trust might be entitled to.

Based on all the discussion here, it sounds like you need to weigh the actual tax impact against the stress of rushing distributions. The key insight from everyone's responses is that there's no direct penalty for going past the 2-year deadline - the main consequence is having to file separate returns with higher trust tax rates. Here's what I'd recommend: calculate the approximate additional tax cost of missing the deadline by a month. If your trust doesn't generate much income, the extra cost might be minimal and worth the peace of mind of doing distributions properly rather than rushing. But if you have significant investment income or business income like some others mentioned, those compressed trust tax brackets could cost thousands. The documentation points raised by Santiago and others are crucial either way. Make sure you have clear paper trails for whenever you do complete distributions - formal resolutions, bank records, everything dated properly. One thing I didn't see mentioned - have you considered doing partial distributions now to reduce the trust's income-generating assets, then completing the rest after the deadline? This could minimize the tax impact of the higher trust rates while giving you more time to handle the final distributions properly.