Can a Trust Really Have a Fiscal Year End? – Avoid This Mistake + FAQs

No, in most cases a trust cannot choose an arbitrary fiscal year-end for tax purposes. Under U.S. federal law, virtually all trusts must use a calendar year (January 1–December 31) as their taxable year. The Internal Revenue Code is explicit: “the taxable year of any trust shall be the calendar year.” This means a trust’s year-end is December 31 by default, not any other date.

However, like many rules in tax law, there are a few limited exceptions. Certain special types of trusts are allowed to have a fiscal year (a year ending on a date other than Dec. 31) or are exempt from the calendar-year mandate:

• Tax-Exempt Trusts: If a trust is exempt from tax under IRC §501(a) (for example, a qualified pension trust or charitable entity that isn’t taxed on its income), it does not have to use a calendar year. These trusts can adopt a fiscal year like other tax-exempt organizations often do.

• Charitable Trusts: A charitable trust described in IRC §4947(a)(1) (essentially, certain trusts organized for charitable purposes that aren’t tax-exempt but are subject to private foundation rules) is also exempt from the calendar-year requirement. Such a trust could potentially choose a fiscal year to align with its charitable activities.

• Grantor Trusts: A trust that is treated as wholly owned by a grantor (the person who created and funded the trust) under the IRS “grantor trust” rules (IRC §§671–679) is not required to adopt a calendar year. Why? Because in the eyes of the tax law, a grantor trust isn’t a separate tax entity – all its income is reported on the grantor’s own tax return. In practice, a revocable living trust (a common grantor trust) simply uses the grantor’s tax year. Since most individual grantors use the calendar year, the trust effectively follows that. But if, say, the grantor were a business or a non-U.S. person with a different taxable year, the trust’s reporting would align with the grantor’s fiscal year. The key point is that the IRS doesn’t force grantor trusts onto a calendar year because those trusts aren’t independently taxed.

Outside of these scenarios, a standalone irrevocable trust (one that isn’t a grantor trust) cannot simply pick a fiscal year-end at whim. An irrevocable non-grantor trust is treated as a separate taxpayer and must use a calendar year by law. This is true whether it’s a simple trust (distributing all income annually) or a complex trust (allowed to accumulate income) – both are subject to the same year-end rule.

Federal vs. State Law: It’s important to note that U.S. federal tax law controls the trust’s taxable year for IRS purposes. States generally conform to these federal rules for trust taxation. In other words, if a trust must file on a calendar year federally, the state income tax return will also use the calendar year. Most states do not allow a different fiscal year for a trust if federal law doesn’t. (States piggyback on the federal definition of taxable income and filing period to simplify compliance.) Always double-check your state’s fiduciary income tax guidelines, but you’ll find they nearly always mirror the federal requirement on tax year-end.

Bottom Line: By default, a trust’s tax year-end is December 31. Only a few specific types of trusts or elections permit deviating from that rule. For the vast majority of trusts – especially family trusts, living trusts, and typical irrevocable trusts – the answer to “can a trust have a fiscal year end?” is no (with rare exceptions). Now, let’s dive deeper into the nuances, common mistakes to avoid, and how those exceptions actually work.

Why Most Trusts Stick to a Calendar Year (Federal Rules Explained)

Why does the IRS insist on trusts using the calendar year? The policy is rooted in preventing tax maneuvers and simplifying administration. Estates (the legal entities that exist when someone dies) are given more flexibility – an estate can choose a fiscal year, which often helps in post-death tax planning. But trusts were historically used for income-shifting strategies, so Congress clamped down by locking most trusts to a calendar year. In fact, the law since 1986 has been clear on this point: trusts generally must adopt a calendar year unless exempted.

From a practical standpoint, using December 31 as the year-end means that trust income and deductions align with the calendar that most taxpayers (and financial institutions) use. Interest, dividends, and other income reported on Forms 1099 are all issued on a calendar-year basis, which makes it straightforward for trustees to gather information for the trust’s Form 1041 (the U.S. Income Tax Return for Estates and Trusts). If every trust had a custom fiscal year, banks and brokers would have to issue custom reports, and the IRS would be receiving trust tax returns throughout the year, complicating enforcement.

So, the IRS’s default stance is simplicity and uniformity: trusts report income Jan 1–Dec 31, and the returns are due by April 15. In technical terms, IRC §644(a) sets this rule in stone. The few exceptions (501(a) trusts, 4947(a)(1) trusts, grantor-owned trusts) are cases where either the trust isn’t really taxable (so the rule can be relaxed) or there’s another overriding tax framework. For example, if a trust is essentially a charity or retirement plan (hence exempt or charitable), it might follow the fiscal year convention of those entities. And if a trust is a grantor trust, the IRS is looking through it to the owner, so they let the owner’s tax year dictate things.

Another special case we’ll explore later is when a revocable trust becomes irrevocable at the grantor’s death. In that situation, an election under Section 645 can let the trust be treated as part of the decedent’s estate, temporarily gaining the estate’s ability to use a fiscal year. This is an advanced strategy (with its own pros and cons), but it’s essentially the one time an otherwise calendar-bound trust might get to ride on a fiscal year for a short period.

Before examining that and other nuances, let’s make sure we understand some key concepts and avoid common mistakes.

Trustee Pitfalls: Mistakes to Avoid with Trust Year-Ends

Even experienced trustees and fiduciaries can slip up regarding a trust’s tax year. Here are some common mistakes to avoid when dealing with a trust’s fiscal year-end:

• ❌ Assuming a Trust Can Choose Any Year-End: Unlike corporations or partnerships, a typical trust cannot simply choose an arbitrary fiscal year. Don’t mistakenly set a trust’s books to end on, say, June 30 or your grandma’s birthday, and assume it’s fine. If you file a trust return on a fiscal year basis without qualifying for an exception, the IRS will consider the return invalid or improperly filed. The trust would then be treated as having a calendar year anyway, and you could face a mess of amended returns. Always default to December 31 unless you have clear authorization (via the tax code) to do otherwise.

• ❌ Missing the Filing Deadline: A trustee who’s confused about the year-end might miss the tax filing deadline. Remember, a calendar-year trust’s Form 1041 is due by April 15 (the 15th day of the 4th month after year-end). If you wrongly assumed the trust was on a fiscal year ending, for example, March 31, you might think the return isn’t due until mid-summer – and you’d be dead wrong. Come April 15, the IRS will consider the return late and start assessing penalties. The late filing penalty for a trust return is steep: 5% of the tax due per month (or part of a month) late, up to 25%, which is in addition to interest and other potential penalties. In short, confusion about the year-end can cost the trust (and you, as trustee) money. Always clarify the trust’s tax year early on to avoid nasty surprises.

• ❌ Relying on the Trust Document’s Language: Some trust instruments (the legal trust agreement) may specify an “accounting year” or might use terms like “fiscal year” for reporting to beneficiaries. Don’t confuse the trust’s internal accounting preferences with tax requirements. A trust document might say “the trustee shall provide an annual report every June” – that does not mean the trust’s taxable year is allowed to end in June. It just means the trustee likes to do accounting on that schedule for the family’s sake. For IRS purposes, that trust still must report income on a calendar year (again, unless it falls under an exception). So avoid the mistake of thinking the trust’s own rules override tax law.

• ❌ Not Electing Section 645 When Beneficial: On the flip side, if a grantor (who had a revocable living trust) dies, the trustee may have a choice that’s time-sensitive – the Section 645 election. Failing to make this election (when it’s beneficial) is a mistake of omission. We’ll detail this more later, but in essence: if you could combine a trust with the estate and use a fiscal year to simplify filings or gain a deferral, consider doing so. Missing the window (the election must be made by filing Form 8855 by the due date of the estate/trust return) means losing the option to use a fiscal year and possibly filing multiple tax returns instead of one. So, not every mistake is doing something wrong – sometimes it’s not doing something you should have.

• ❌ Forgetting State Tax Nuances: While, as noted, states follow federal timing, a trustee should still confirm state filing deadlines. If a trust does use a fiscal year (by a valid exception or election), make sure you understand the state return due date. Often it will be a similar “15th day of 4th month after year-end” rule, but the actual date can differ if the state doesn’t observe certain holidays or has its own quirks. Also, if you made a federal Section 645 election, check if the state requires a separate notification or has an equivalent form. In summary, coordinate the state and federal reporting periods carefully. A mistake here could be filing the state return on the wrong period, which might cause the state to reject the return or issue a correction notice.

• ❌ Lack of Documentation and Professional Advice: Another error is not documenting your decision on the trust’s tax year. If you do qualify for a fiscal year (e.g. a charitable trust using a July–June year), document in the trust’s files why that is allowed (cite the code or IRS letter ruling if applicable). Also, when in doubt, consult a tax professional. Trustees sometimes hesitate to ask an accountant or attorney, but given the personal liability a trustee has, it’s wise to get expert guidance. As the ABA warns, errors in trust management – including tax missteps – can expose a trustee to personal liability. An experienced CPA or tax attorney can quickly confirm the proper tax year and help with any elections.

• ❌ Overlooking Transition Years: One more nuanced mistake: mishandling the transition when a trust changes status. Example: a grantor trust becomes a non-grantor trust upon the grantor’s death. The trust’s status changes in the middle of the calendar year (at date of death). Many trustees don’t realize that this triggers a short tax year reporting. You typically file one final “grantor trust” report up to the date of death (often just reporting on the decedent’s final 1040 for that portion) and then start a new trust EIN and Form 1041 for the post-death period. If you’ve elected 645, the trust joins the estate’s fiscal year; if not, the trust’s first post-death return runs from date of death to December 31 of that year. Failing to file that stub-period return or getting the dates wrong is a common mistake around year-end issues. Always be mindful in the year a grantor dies (or any year of major change) that you may need to file two partial-year returns for the trust. The IRS even provides guidance: in the year of the grantor’s death, the trust’s taxable year ends on the date of death, and a new taxable year begins the next day. It’s a one-time exception where the “year” is shorter than 12 months.

Avoiding these pitfalls comes down to understanding the rules (which you’re doing by reading this) and staying organized. Use checklists and calendars: mark April 15 (or the appropriate date) well in advance, and if you think your trust might be one of the rare ones eligible for a fiscal year, double-check the law or consult an expert. As one advisor put it, “Standard tax reporting is all completed on a calendar year-end and is therefore easier to track and administer.” In most cases, sticking with the calendar year will keep you on the safe side of compliance.

Now that we’ve covered what not to do, let’s clarify some terminology that often causes confusion in this area.

Key Terms Demystified: Grantor Trusts, Fiscal Years, and More

Before diving further into examples and special cases, let’s break down some essential tax terms and concepts related to trusts and tax years. Understanding these will make the rest of the discussion much clearer:

• Tax Year: The 12-month period for which a taxpayer reports income and expenses. For trusts (and most individuals), the tax year is usually the calendar year (Jan 1–Dec 31). A different 12-month period (e.g. July 1–June 30) is called a fiscal year. Trusts generally must use the calendar year, unless an exception applies. When we talk about a trust’s “fiscal year-end,” we mean any year-end date other than December 31.

• Calendar Year: A tax year that runs from January 1 to December 31. This is the default for trusts by law. If someone says “the 2024 tax year” for a trust, they mean January 1, 2024 through December 31, 2024 (assuming no odd circumstances). The return for that year would be due April 15, 2025. Nearly all trusts you encounter use the calendar year.

• Fiscal Year: Any 12-month period ending on the last day of a month other than December. Common fiscal years include July 1 – June 30 (often used by schools or nonprofits), or a year ending September 30, etc. Estates can choose a fiscal year. A trust can only use a fiscal year if it falls under an allowed exception (like being part of an estate for a while, or being tax-exempt/charitable). One example in an estate context: an estate might choose a fiscal year from April 1 to March 31, meaning each “tax year” covers that period and the estate’s return is due July 15. But a standalone trust cannot do that on its own authority.

• Grantor Trust: A trust in which the grantor (creator) retains certain powers or benefits such that, under IRS rules (IRC §§671–679), the grantor is treated as the owner of the trust’s assets for income tax purposes. In plain English, all the trust’s income gets reported on the grantor’s personal tax return (Form 1040) as if the trust didn’t exist. Revocable living trusts are the classic example – while the grantor is alive, the trust is completely “transparent” for tax purposes. Key point: a grantor trust does not file a separate Form 1041 return (or if it does, it’s an information-only filing with attachment, not a normal tax return). The IRS allows grantor trusts to effectively use the grantor’s tax year. Since individual grantors use the calendar year in almost all cases, the issue of fiscal year usually doesn’t even arise here. But imagine a grantor trust owned by a calendar-year individual – it’s on calendar by default through the owner. Or if the grantor were, say, a fiscal-year foreign corporation (an unusual scenario), the trust would follow that corporation’s fiscal year since the income is being reported there. The main takeaway: grantor trusts are not bound to a calendar year because they aren’t separate taxpayers in the eyes of the IRS.

• Non-Grantor Trust: A trust that is taxable in its own right, separate from the grantor. This is any trust that doesn’t meet the grantor trust criteria. Once the grantor dies and a revocable trust becomes irrevocable, it typically becomes a non-grantor trust (the trust itself now pays taxes, except on amounts distributed to beneficiaries). Non-grantor trusts get their own EIN, file Form 1041, and crucially, must use a calendar year in almost all cases. Both simple trusts and complex trusts fall in this category (those terms just describe how the trust handles distributions of income). Non-grantor trusts are subject to the compressed trust tax brackets and the special rules of Subchapter J of the IRC. Unless it’s a charitable or tax-exempt trust, a non-grantor trust has no leeway to pick a fiscal year.

• Simple Trust: In IRS lingo, a simple trust is a non-grantor trust that must distribute all its income currently each year, has no charitable beneficiaries, and doesn’t distribute principal/corpus. Many family trusts that say “distribute all net income to my spouse each year” qualify as simple trusts. For tax purposes, a simple trust gets a $300 exemption (instead of $100 for complex trusts) and passes all income out to beneficiaries annually by definition. Importantly, being “simple” does not grant any special privilege regarding tax year – it’s still on a calendar year like other trusts. A simple trust files a 1041 that typically shows all income paid out via Schedule K-1s to beneficiaries. (Think: simple = “simply” distributes income each year.)

• Complex Trust: Basically, any trust that isn’t a simple trust is a complex trust. Complex trusts can accumulate income, distribute or not at the trustee’s discretion, have charitable beneficiaries, and/or make principal distributions. Most irrevocable family trusts become complex trusts if they don’t force out all income. Complex trusts get only a $100 exemption on the 1041 and can accumulate income (which might then be taxed at the trust’s rates). Again, “complex” doesn’t change the tax year rule – it still uses a calendar year. The distinction matters for income distribution deduction calculations but not for choosing a fiscal year. Both simple and complex trusts are non-grantor trusts subject to the calendar year requirement.

• Section 645 Election: A provision in the tax code (IRC §645) that allows a qualified revocable trust to elect to be treated as part of the decedent’s estate for income tax purposes, for a limited period (generally up to two years after death). Why is this relevant? Because by electing this, the trust essentially adopts the estate’s tax attributes – notably, the estate can choose a fiscal year. In effect, a Section 645 election is the main mechanism by which an otherwise calendar-year trust can use a fiscal year temporarily. The trust and estate file a combined Form 1041 during the election period, under the estate’s EIN, choosing either a calendar or fiscal year for the estate. This election must be made by filing Form 8855 (jointly by the executor and trustee) by the due date of the initial returns. We’ll illustrate this with an example shortly. Just remember: 645 is the ticket for a revocable trust to break free from the calendar year – but only in the context of an estate after the grantor’s death.

• Trustee: The person or institution managing the trust. The trustee is responsible for filing the trust’s tax returns and ensuring compliance. The trustee picks the tax year only to the extent allowed by law. For most trusts, the “choice” is already made (calendar year). A trustee’s duties include being aware of these rules and making any necessary elections or filings timely. If the trust is eligible for a fiscal year (say a charitable trust or a Section 645 scenario), it’s the trustee (or executor and trustee together) who would implement that choice and inform the IRS via the tax return. Essentially, the buck stops with the trustee for any mistakes in choosing or reporting the trust’s year-end.

• Beneficiary: A person (or organization) who receives distributions from the trust. Beneficiaries of trusts get a Schedule K-1 from the trust each year, reporting any income they must include on their own tax returns. Why do beneficiaries care about the trust’s fiscal year? Because it affects when they have to report income. The rule is that a beneficiary includes trust income in their return for the year in which the trust’s tax year ends. For example, if somehow a trust had a fiscal year ending June 30, 2023, and it distributed income during July 1, 2022 – June 30, 2023, the beneficiary would get a K-1 for that period and include it in their 2023 tax return (since the trust year ended in 2023). With almost all trusts on a calendar year, beneficiaries simply report trust income in the same calendar year it was received. But in a fiscal scenario (like with an estate’s fiscal year), beneficiaries can get somewhat off-cycle K-1s. It’s important for beneficiaries to know the trust’s year-end so they can anticipate K-1 timing. For calendar-year trusts, beneficiaries expect a K-1 soon after December 31 and use it for that tax year’s filing.

• IRS (Internal Revenue Service): The U.S. tax authority that enforces these rules. The IRS sets the forms (Form 1041 for trusts) and deadlines. It will apply penalties for late filings or misfilings. It’s not uncommon for the IRS to send a notice if, for example, a trust EIN shows no calendar-year return when expected – say a trustee tried to file a fiscal year and didn’t file a return for the stub period ending Dec 31. The IRS also provides guidance: for instance, the IRS Instructions for Form 1041 plainly state, “Generally, a trust must adopt a calendar year”, and then list the exceptions. The IRS is essentially the referee making sure trusts follow the calendar-year rule or legitimately qualify for an exception. If you ever need to change a trust’s tax year, you actually have to ask the IRS (file Form 1128 for a ruling), and those are rarely granted unless you fit one of the built-in exceptions.

• Tax Professional (CPA/Attorney): While not a term in the code, it’s worth noting the role of professional advisors. Preparing a trust’s income tax return can be complex, and professionals are often engaged. They help ensure that if a fiscal year is not allowed, the trust’s books are adjusted to calendar. They can also help execute elections like Section 645. In short, they keep the trustee out of trouble. Many CPAs will automatically assume a trust is calendar year (given the rules) – so if you think your trust is an exception, you need to proactively tell your preparer and substantiate it.

With these definitions in mind, let’s apply them to concrete scenarios. The next section will walk through a few real-world examples of different trust structures and how their tax year-end is determined. This will solidify the concepts we’ve discussed so far.

Real-World Scenarios: How Different Trusts Handle Tax Years

To better understand how these rules play out, let’s look at several common trust situations and see what tax year they end up using. These examples will illustrate the default rules and the exceptions in action:

Example 1: Revocable Living Trust (Grantor Trust) – Calendar Year by Default

Scenario: John Doe creates a revocable living trust and transfers his assets into it. John is the trustee and beneficiary during his lifetime, and he retains the power to revoke or amend the trust at any time.

Tax Treatment: During John’s life, this trust is a classic grantor trust – John is treated as owning all the trust assets for tax purposes. The trust does not need to file a separate income tax return at all. Instead, John simply reports all trust income on his personal Form 1040 each year. John is a calendar-year taxpayer (as are virtually all individuals). Therefore, the trust’s “tax year” is effectively John’s tax year: the calendar year. If the trust’s bank account earns interest in June, it goes on John’s 1040 for that calendar year.

John might not even think about the concept of a fiscal year for the trust, because everything flows through to him. The trust’s documents and accounting might run on any 12-month cycle for John’s convenience, but for IRS purposes, it’s all on the calendar year. The IRS instructions specifically exempt trusts “treated as wholly owned by a grantor (under sections 671–679)” from the calendar-year requirement – because those trusts don’t independently report income. So, if you ask “can my revocable trust have a fiscal year-end other than Dec 31?”, the answer is not really applicable – it uses your (the grantor’s) tax year, which for a living person is the calendar year.

Key point: As long as the trust is revocable and grantor-owned, you don’t file a Form 1041 for it (or you file a Form 1041 saying “grantor trust – information only”). There’s no opportunity or reason to pick a different year-end. The concept of fiscal year becomes relevant only after the grantor’s ownership ends (e.g., at death) or if the trust was never a grantor trust to begin with.

Example 2: Irrevocable Family Trust (Non-Grantor Trust) – Must Use Calendar Year

Scenario: Jane Smith’s will establishes a trust at her death for her children. The trust is irrevocable and is not a grantor trust (Jane is deceased, and no one else has retained powers over it). The trust will pay income to the children and can also dip into principal for their benefit. This is a typical non-grantor complex trust.

Tax Treatment: This trust obtains its own EIN and is a separate taxpayer. By default and by law, it must operate on a calendar-year basis for tax reporting. The trustee will need to file an annual Form 1041 reporting the trust’s income from January 1 to December 31 each year. If the trust earns $10,000 of interest and dividends in 2025 and distributes $4,000 to the children, the trust’s 2025 return will show that income and a deduction for the distributed amount, and it will issue Schedule K-1s to the children for the $4,000 (which they include on their 2025 personal returns).

Could this trust choose a fiscal year like July 1 – June 30? No. There’s no provision in the tax code that allows a standard irrevocable trust like this to use anything but a calendar year. If the trustee attempted to do so, it would violate IRC §644 and IRS rules. In fact, if you tried to file a Form 1041 for the period July 1, 2025 to June 30, 2026, the IRS would likely reject it or ask questions, since their records show the trust should be on a calendar year. You would eventually have to correct it to align to the calendar year.

What about year one? When did this trust’s first tax year start and end? Here’s a nuance: Jane died on March 3, 2025, and the trust was funded on that date. The trust’s first tax year would run from March 3, 2025 (inception) through December 31, 2025 – a short first year. The return covering March–Dec 2025 is due April 15, 2026. After that, it’s full calendar years. The IRS often requires that first short year in such cases because the trust “came into existence” in 2025, and it must conform to the calendar year cycle by year-end.

Simple vs Complex Trust Note: If this trust were a simple trust (mandated to distribute all income annually), the situation is similar – it’s still on a calendar year. The only difference is it would distribute all its income and likely pay zero tax itself, passing everything to beneficiaries via K-1. But the filing periods and deadlines remain the same (calendar year, due April 15). The trust instrument’s terms about distribution don’t change the tax year requirement.

In summary, for any run-of-the-mill irrevocable trust that isn’t grantor-taxed, there is no choice – December 31 is the fiscal year-end. The trustee should mark that date for closing the books, doing any income distributions by year-end if desired, and preparing the annual fiduciary return.

Example 3: Trust After Grantor’s Death – Using a Fiscal Year via Section 645 Election

Scenario: Maria had a revocable living trust. She passed away on October 15, 2022. Upon her death, the revocable trust became an irrevocable trust for her beneficiaries. Maria’s son is both the executor of her estate and the trustee of the now-irrevocable trust. They decide to make a Section 645 election to treat the trust as part of the estate. The estate (with some probate assets) and the trust (with non-probate assets) will be reported together for income tax purposes.

Tax Treatment Without Election: First, let’s see what would happen without the Section 645 election. The estate could choose a fiscal year (say, ending September 30, 2023, since an estate can do that), but the trust would still be stuck on the calendar year. So the trustee would have to file a Form 1041 for the trust from Oct 15 – Dec 31, 2022 (the stub period after Maria’s death) due by April 15, 2023. Meanwhile, the executor could file an estate Form 1041 for income from Oct 15, 2022 – Sept 30, 2023 due by Jan 15, 2024. This means in 2023 there would be two tax returns (one for the trust’s short 2022 period, one for the estate’s first fiscal year). Then for 2023, the trust would file a full calendar year return and the estate would file its next fiscal year. This is cumbersome: multiple filings, multiple K-1s to beneficiaries, etc. Indeed, if no election is made, the decedent’s trust and estate must be taxed separately – the trust on a calendar year, the estate on either calendar or fiscal. Beneficiaries could end up with overlapping K-1s (one from the trust for Oct–Dec, one from the estate for the fiscal year) in the initial year.

Tax Treatment With 645 Election: Now, since the son did elect Section 645, the trust and estate are combined into one taxable entity for a limited time. Essentially, the trust is treated as part of the estate. The son, as executor, can choose the estate’s taxable year. He opts for a fiscal year to gain some breathing room. For example, he chooses a fiscal year ending September 30, 2023 for the estate (and trust together).

Here’s how it plays out: The estate+trust’s first combined return will cover income from Oct 15, 2022 (date of death) through Sept 30, 2023. That return is due January 15, 2024 (4½ months after Sept 30). This gives a longer period before the first tax filing, allowing more time to administer assets, perhaps sell property, figure out distributions, etc. In fact, in this scenario, the estate and trust might be fully wrapped up by that time, enabling one single “first and final” tax return. If all income and deductions from death to Sept 30, 2023 are reported in one return and then the trust terminates (distributing all assets), you don’t need a second year return. Compare that to the no-election scenario where you would definitely have had to file a short 2022 trust return and a 2023 trust return.

Deferral benefit: Using a fiscal year via the 645 election effectively defers recognition of income. As an example from a tax advisor: if a person dies on December 1, without the election the trust must file (and pay tax on) income up to Dec 31 of that same year. With the election and a fiscal year (say ending Nov 30 of the following year), the trust’s income can be reported on a return that isn’t due until the following March, and any tax payment is deferred accordingly. It doesn’t eliminate tax, but it shifts the timing into the next calendar year. This can be useful if, for instance, significant income comes in right after death – you could push that into the estate’s fiscal year, effectively delaying when beneficiaries or the trust have to pay tax on it.

Important details: The 645 election is temporary. It generally lasts until the earlier of: 2 years after death or the complete administration of the estate (if the estate wraps up before 2 years). After that, the trust “drops out” and becomes a normal trust again (with a calendar year). So, if Maria’s estate isn’t fully closed by the end of the fiscal period including October 15, 2024, the combined treatment ends, and the trust would have to start filing on its own (on a calendar year from that point forward). The regulations say that when the election period ends, the trust’s new taxable year must be the calendar year. In practice, this means one more short year return might be needed to transition the trust back to calendar at the end.

In our example, assume the estate was indeed wrapped up by late 2023. The one return for Oct 15, 2022 – Sept 30, 2023 was filed (due Jan 15, 2024) and that covered everything. No further returns were required since the trust terminated. The beneficiaries got a single K-1 for that period’s income, which they will include in their 2023 individual tax returns (because the fiscal year ended in 2023).

State nuances: Most states honor the Section 645 election for state income tax, but the executor should check state rules. Typically, you’d attach a copy of the federal election form to the state fiduciary return or there may be a checkbox indicating the trust is treated as an estate. The fiscal year chosen federally will usually apply for the state filing as well (so the state return covers the same Oct–Sept period in this example).

Takeaway: This example shows the only realistic way a typical family trust can have a fiscal year-end: by piggybacking on an estate via a Section 645 election after the grantor dies. It’s a temporary measure to simplify and defer, often resulting in just one combined tax return instead of two or three separate ones. The trade-off is complexity in making the election and ensuring all deadlines (like filing Form 8855 and the combined return) are met. As advisors caution, a fiscal year-end requires careful tracking of deadlines since standard tax reporting is on a calendar cycle. But when used correctly, it can be quite beneficial, as illustrated by the extended time to file and possibly only one final return.

Example 4: Charitable Remainder Trust – (Generally) Calendar Year, but Exempt Status Matters

Scenario: The Albert Family Charitable Remainder Unitrust (CRUT) was established as part of an estate plan. It pays 5% of its value annually to a lifetime beneficiary (Alice), and upon termination, the remainder goes to charity. Under IRC §664, this trust is a tax-exempt entity (except for certain undistributed income).

Tax Treatment: A charitable remainder trust is a unique creature. For most purposes, it is exempt from income tax (it’s like a hybrid of a trust and a charitable organization). It does file a return – Form 5227, not Form 1041 – to report its activities, and if it has unrelated business taxable income, it would file a Form 1041 on that portion. Importantly, since a CRUT is exempt under section 664, which falls under the umbrella of §501(a) exemption by reference, it is not required to use a calendar year (by virtue of the exception for 501(a) trusts). However, many CRUTs do use the calendar year anyway, often because the lifetime beneficiary is an individual who wants their K-1 (yes, CRUTs also issue something similar to K-1 for the taxable portions of the payout) on a calendar basis, and also for simplicity.

But suppose the CRUT’s trustee, in coordination with the charitable remainderman, decides to use a fiscal year to better align with the charity’s reporting (maybe a June 30 year-end). Because the CRUT is a charitable trust that is tax-exempt, it likely could adopt July–June as its fiscal year without running afoul of the rules. This is a bit of an advanced point – many practitioners still default CRUTs to calendar years because the rules around their taxation are complex enough. It’s worth noting that another type of charitable trust, a charitable lead trust that is not fully exempt (often a grantor trust or complex trust with charitable payouts), might not get the same leeway unless it meets the definition of a trust that purely holds charitable interests.

For our purposes, key point: Trusts that are either tax-exempt or entirely charitable in nature can have non-calendar fiscal years. The decision would hinge on administrative convenience or alignment with the activities of the trust. Always verify the trust’s status: just having a charity as a beneficiary does not automatically free you from the calendar year (e.g., a complex trust that gives to both family and charity is still a non-grantor trust subject to calendar year). It’s the explicit classification under the tax law that matters.

These scenarios show that for most typical trusts (Examples 1 and 2), the fiscal year-end is simply the calendar year-end – there’s no choice in the matter. Example 3 showed the special post-death election that temporarily changes that rule, and Example 4 touched on charitable or exempt trusts which follow their own set of rules.

To recap these in a different format, here’s a handy comparison table of various trust types and whether they can have a fiscal year:

(Table: Different types of trusts and whether they can have a fiscal (non-December) year-end. As shown, only certain special trust categories or elections permit a fiscal year. All other trusts default to a calendar year-end.)

Federal vs. State: Are There Any State-Specific Year-End Rules?

As mentioned earlier, state fiduciary income tax laws largely conform to federal law regarding the tax year of a trust. Almost all states say that a trust’s taxable income is computed on the same basis as federal taxable income, which inherently means using the same accounting period as for federal.

For example, California explicitly follows federal treatment for taxing trusts and their beneficiaries. A non-grantor trust in California will report on Form 541 for the same calendar year as its federal Form 1041. If a fiscal year is allowed federally (say due to a Section 645 election or a tax-exempt trust), California will allow it as well, but the state return’s due date will adjust accordingly (California, like federal, sets the due date as the 15th day of the fourth month after the end of the taxable year). In practical terms, a California trust on a calendar year files by April 15; if that trust were allowed and chose to have a taxable year ending June 30, the California return would be due October 15. The California Franchise Tax Board provides instructions mirroring this timeline for any trusts or estates on a fiscal year.

Other states are similar. New York, Illinois, Texas (though Texas has no income tax on trusts), etc., all either explicitly or by implication follow the federal tax year. It simplifies things for everyone — the trustee doesn’t have to maintain two sets of books (one for federal, one for state) on different year-ends.

Caution: One thing to watch at the state level is if the state taxes the trust at all. Some states determine a trust’s residency (and taxability) based on factors like the trustee’s residence or where the trust was created. If a trust isn’t considered resident in a state, it might not owe tax there, but still might have to file as a nonresident trust if it has in-state income. These issues are separate from the tax year, but just part of the trustee’s overall compliance burden. Regardless, if the trust does file in a state, it will use the trust’s federal taxable year on that state return.

Bottom line: You generally won’t find a state that, say, forces a trust onto a fiscal year if federal is calendar, or vice versa. The alignment is kept for consistency. Always verify in the state’s fiduciary income tax instructions, but you’ll likely see language like “Use the same tax year on the state return as used on the federal return.” This consistency is a relief — it means all the intricacies we discussed at the federal level carry over uniformly to the state filings.

Key Takeaways for Trustees and Beneficiaries

• Most Trusts = Calendar Year: If you remember nothing else, remember this: the vast majority of trusts must use a calendar year-end (Dec 31) for tax reporting. If you’re a trustee and you’re not sure what to do, default to a calendar year. It’s what the IRS expects in almost all cases.

• Few Exceptions: Only trusts that are essentially treated as something else (an estate, a charity, or a pass-through to an owner) get to deviate. If your trust doesn’t clearly fall into one of these special buckets, it doesn’t have a fiscal year option. Don’t try to get creative where no creativity is allowed.

• Section 645 is Powerful: For revocable trusts post-death, the Section 645 election is a useful tool to unify estate and trust administration. It not only allows a fiscal year but can reduce the number of tax returns and take advantage of other estate tax rules (higher exemption, no estimated taxes for two years, etc.). If you’re handling an estate with a trust, consider this election in consultation with a tax professional.

• Penalties for Mistakes: As highlighted, messing up the tax year can lead to late filings. The IRS penalty for late filing a trust return is 5% per month up to 25%, which can add up quickly. Beneficiaries won’t be happy if their K-1s are late or amended because the trustee got the year wrong. Avoid these headaches by getting it right the first time.

• Trustee’s Duty: Filing and paying taxes is a fundamental duty of a trustee. Courts have held trustees liable for penalties and interest if they bungle tax filings. Always mark your calendar: if it’s a calendar-year trust, April 15 (or the next business day if it falls on a weekend/holiday) is the deadline for Form 1041. If you’ve elected a fiscal year for an estate/trust, mark that due date and don’t rely on standard prompts since it’s an unusual date.

• Seek Professional Guidance: Trust taxation can be complex. The term “Ph.D.-level” isn’t far-fetched – entire treatises and courses cover Subchapter J (the taxation of trusts and estates). If you’re unsure about your trust’s status or think your trust might be an exception (e.g., part of an estate or a foreign situation), consult a qualified CPA or tax attorney. A one-hour consultation can save you from costly errors.

• Communicate with Beneficiaries: If you do have a scenario where the trust’s year-end is not the calendar year (perhaps due to a 645 election or a weird grantor situation), let the beneficiaries know. For instance, in a 645 election with a fiscal year ending September 30, beneficiaries might not get K-1s for the trust’s income until after that fiscal year, which could be later than they expect. Managing expectations will help them plan their own tax filings.

By understanding these rules and guidelines, you can confidently answer the question, “Can this trust have a fiscal year-end?” in any situation that comes your way. In most cases, the answer will be “No, it must use a calendar year,” but now you know exactly when and why a trust can break that mold.

Lastly, to reinforce our discussion, let’s tackle some frequently asked questions on this topic in a concise Q&A format.

FAQs: Trust Fiscal Year Questions Answered

Q: Can a trust choose its own fiscal year-end for taxes?
A: No. Under U.S. federal tax law, almost all trusts must use a calendar year (ending December 31) as their tax year. Only a few special types of trusts or elections allow a different fiscal year.

Q: Do all trusts have to use a calendar year-end?
A: Yes – with rare exceptions. By default, every trust’s taxable year is the calendar year. Exceptions include tax-exempt or charitable trusts and trusts that join an estate via election. If no exception applies, it’s calendar year.

Q: Can a revocable living trust have a fiscal year?
A: No. A revocable living trust is a grantor trust, so it doesn’t file its own return or have its own tax year. It uses the grantor’s tax year (which is almost always the calendar year).

Q: Can an irrevocable trust file using a fiscal year?
A: No (in general). An irrevocable non-grantor trust must file on a calendar-year basis by law. The only time it could use a fiscal year is if it’s being treated as part of an estate (or if it’s a tax-exempt/charitable trust).

Q: Does a Section 645 election allow a trust to have a fiscal year?
A: Yes. By electing IRC §645, a qualified revocable trust is combined with the decedent’s estate and can adopt the estate’s fiscal year. This is temporary (up to two years after death) and meant to simplify post-death filings.

Q: Do state tax laws let a trust use a different tax year than federal?
A: No. State fiduciary income tax filings conform to the federal tax year. If a trust uses a calendar year federally (which it usually must), the state return uses the same year. Fiscal year trusts, where allowed federally, are honored by states similarly.