Can a Trust Have a Fiscal Year End?

A trust’s tax year determines its annual accounting period for reporting income and deductions. A tax year is a 12-month period, but the specific end date distinguishes the two primary types. A calendar year-end is the most common, concluding on December 31. In contrast, a fiscal year-end concludes on the last day of any month other than December, offering more flexibility in aligning the tax year with an entity’s natural business cycle.

The General Rule for Trust Tax Years

Most trusts are required by federal tax law to use a calendar year for reporting, meaning their tax year must end on December 31. This mandate was a provision of the Tax Reform Act of 1986, enacted to prevent a tax deferral strategy previously available to beneficiaries.

Previously, a trust could select a fiscal year that ended shortly after the beneficiary’s own tax year began, such as a January 31 year-end. The trust would distribute income to a beneficiary in February, but since that income was earned in the trust’s tax year ending the following January, the beneficiary could delay reporting it for over a year. By requiring a calendar year, Congress eliminated this deferral advantage, ensuring income is taxed to the beneficiary in the same year it is received.

This rule, found in Internal Revenue Code Section 644, applies to both newly created and most existing trusts. For trustees, this means that tax compliance is tied to a predictable schedule, with income tax returns, Forms 1041, due by the standard mid-April deadline each year.

Trusts Permitted to Use a Fiscal Year

Certain types of trusts are exempt from the calendar-year rule and can select a fiscal year-end. A trust exempt from taxation under IRC Section 501(a), such as one organized for charitable or educational purposes, is not bound by the requirement. This allows these organizations to align their tax reporting with their operational or grant-making cycles.

Wholly charitable trusts are also permitted to use a fiscal year. These are trusts described in IRC Section 4947(a)(1) that are not treated as private foundations. Because their income is dedicated to charitable purposes, the income deferral concerns that prompted the 1986 tax reform are not applicable.

In a grantor trust, all income is taxed directly to the grantor on their personal income tax return, and the trust itself does not pay income tax. The trust therefore adopts the same tax year as the grantor. Since most individuals use a calendar year, these trusts almost always operate on a calendar year basis by default.

Estates are not subject to the calendar-year requirement. An estate, which comes into existence upon a person’s death to manage their assets, has the freedom to choose a fiscal year. This flexibility can be advantageous for managing income received after death and aligning tax payments with the administrative timeline of settling the estate. This special treatment for estates provides the foundation for an election available to certain trusts.

Making the Election to be Treated as an Estate

Certain trusts can adopt a fiscal year by making a Section 645 election to be treated as part of an estate for tax purposes. This election is available to a Qualified Revocable Trust (QRT), which is any trust that was treated as owned by the decedent before death due to their power to revoke it. The election combines the trust and the estate into a single entity for income tax reporting.

To make the election, both the executor of the decedent’s estate and the trustee of the QRT must agree and file a specific form with the IRS. If there is no court-appointed executor, the trustee of the trust can make the election alone. This allows the combined entity to use a single Form 1041 and to select a fiscal year.

The required document for this process is Form 8855, Election to Treat a Qualified Revocable Trust as Part of an Estate. The form requires specific information about the decedent, the estate, and the trust, including names, addresses, and taxpayer identification numbers, as well as signatures from both the executor and the trustee.

The completed Form 8855 must be filed by the due date, including any extensions, for the estate’s first income tax return (Form 1041). For example, if the estate chooses a fiscal year ending September 30, its first Form 1041 would be due the following January 15, and Form 8855 must be filed by that date. Making this election allows the trust’s income and deductions to be reported on the estate’s fiscal year schedule, providing flexibility during estate administration.