What Every Trustee Should Know About Making the Election To Use the 65 Day Rule

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If you are serving as the trustee of a complex trust, it’s not too late to take action that may reduce the total taxes paid by both the trust and the beneficiaries in 2018. A “complex trust” is a trust that retains current income in the trust, or distributes trust principal, or has a charitable organization as a beneficiary. A “simple trust” is a trust that is required to distribute all of its annual income to the beneficiaries, but no principal may be distributed. Income of the trust is taxable to the beneficiary in the year received.

Trusts pay the highest federal income tax rate of 37% which starts at $12,500 as opposed to $500,000 for a single individual in 2018. Most trust beneficiaries have a lower tax rate than the trust; therefore, income that is distributed to the beneficiaries is then taxed to the beneficiaries instead of to the trust which ultimately results in a tax savings between the trust and the beneficiaries.

One of the tax planning tools available to trustees of estates and complex trusts is the IRC Section 663(b) election, also known as the “65-day rule.” Simply put, a 663(b) election allows distributions made to beneficiaries within 65 days of year-end to be counted as prior-year distributions.

Sometimes a trustee realizes there is excess income remaining after accounting for all expenses and distributions made in the prior year. In addition trustees must wait until February to receive the 1099s to determine if a distribution under IRC 663(b) is beneficial. To manage the tax burden IRC Section 663(b) allows trustees to elect to make distributions to trust beneficiaries in the first 65 days of the new calendar year. Therefore the trustee of a trust that has a tax year ending on December 31, 2018 has until March 6, 2019 to make distributions that count toward 2018. Keep in mind the 65-Day Rule applies only to estates and complex trusts, because by definition, a simple trust’s income is already taxed to the beneficiary at the beneficiary’s presumably lower tax rate.

In order to use the 65-Day Rule, the trustee must make the 663(b) election by checking the box on line 6 under other information on page two of IRS Form 1041, the trust’s fiduciary income tax return. To be valid, the election must be made by filing form 1041 by its due date, including extensions. Once made, the election is irrevocable. If you have any questions or need help preparing an estate or trust income tax return, call Gregory J. Spadea at 610-521-0604.

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