Trustees managing taxes? Use the 65 day rule

Your Guide to State, Local, Federal, Estate + International Taxation

65 day rule, trust, trustee, taxesTrustees trying to manage the tax burden of a complex trust should be familiar with the 663(b) election, also known as the 65 day rule. Making this election can often help to lower the overall tax burden of the trust and its individual beneficiaries.

Trusts pay tax at the highest tax rate of 39.6% when income exceeds the very low amount of $12,400 for 2016. Compare this to the individual tax brackets. A married couple doesn’t pay a 39.6% tax rate until joint income exceeds $466,950.

When the individual beneficiary’s tax rate is lower than the trust tax rate, additional income distributions made to these beneficiaries and the “transfer” of the resultant tax liability to the beneficiary may result in a net tax savings between the trust and the trust beneficiaries.

If the trustee finds there is excess income remaining after accounting for the year’s distributions, the 663(b) election or “65 Day Rule” allows the Trustee to treat distributions made within the first 65 days of the following year AS IF the distributions were made in the prior tax year.

So for example, a trustee could make additional distributions through March 6, 2017 and elect to treat the distributions as if they were made in 2016 and are a distribution of 2016 income to the beneficiary.

The 663(b) election is made on the second page of Form 1041. Be sure to keep track of which distributions were “included” in the prior year if the election is made.

The 663(b) election or “65 Day Rule” allows trustees additional flexibility to manage the tax liability of a complex trust and its beneficiaries.

Melinda Nelson, CPA