65-Day Rule — 2015

March 6

Fiduciaries of estates and complex trusts have the option to treat certain distributions as having occurred last year. An election can be made with respect to distributions made within 65 days after the end of a tax year. The 65th day of 2015 is Friday, March 6.

Fiduciaries are allowed a deduction for amounts actually paid. During this 65-day period, a fiduciary can compute its fiduciary accounting income and distributable net income and compare these amounts to distributions already made during the year. If necessary, additional distributions can be made to balance the allocation of income between the fiduciary and beneficiary.

The election can be made on all or part of the additional distributions made. Therefore, a fiduciary can over distribute what might be necessary to pass out 2014 income to a beneficiary, but elect a smaller amount when the income tax return is prepared. Any amount distributed but not treated as 2014 distributions will naturally be 2015 distributions.

These distributions are then treated as having been made on the last day of 2014.

Remember that fiduciaries pay the highest tax rate (i.e. 39.6%) on all taxable income over $12,150 in 2014, and only have a personal exemption of either $100 (for complex trusts) or $600 (for estates). It may be advisable to make distributions to beneficiaries in a lower tax bracket for overall tax savings.

Example: A complex trust earned interest and ordinary dividends during 2014 of $20,000, and paid investment advisory fees of $2,000. If no distribution is made from the trust, the trust will pay federal income tax of $5,486. If the trustee makes a distribution to an income beneficiary in the 25% tax bracket, then she would have additional income tax of $4,500. The net tax savings is $986.

Net Investment Income Tax

In addition, fiduciaries must pay the Net Investment Income (NII) tax (at a rate of 3.8%) on the lesser of investment income or AGI over $12,150 (in 2014). Married individuals (who file jointly) must pay the NII tax only if their AGI exceeds $250,000.

While taxes are not always the driving force behind trust administration decisions, they should always be considered.

Reporting: The Form 1041 does not require any kind of formal declaration of the amount of distributions paid in 2014 and treated as paid in 2014. (However, be sure to keep good records so that the amount is not reported again as a 2015 distribution.) There is a check box on the bottom of page 2 of the Form 1041 which must be checked when a §663(b) election has been made.

Timing: A §663(b) election must be made on a timely filed return (including extensions). The election becomes irrevocable once the due date of the return has passed [Reg. §1.663(b)-2.1]

Simple trusts are not required to consider actual distributions when determining the trust’s Income Distribution Deduction, as all accounting income is required to be distributed. If some amount of accounting income has not been distributed during a calendar year, then it should be distributed as soon as administratively possible, without regard to a hard 65-day limit.

Citation: IRC §663(b)

Increased Estate Tax Exemption for 2015

English: Dartboard with darts. Suomi: Tikkataulu.The Treasury Department will not give official numbers until November, but I have made the following projections for 2015 estate and gift tax exclusion amounts:

  • The Basic Exclusion Amount (IRC §2010(c)(3)) used to compute the Unified Credit Against Estate Tax will probably be $5,420,000; this would be an increase of $80k (or 1.5%) over 2014’s exclusion amount;
  • This Basic Exclusion Amount of $5,420,000  is equivalent to a Unified Credit of $2,113,800;
  • The Gift Tax Annual Exclusion amount (IRC §2503(b)) should stay at $14,000.

These predictions assume that Congress makes no changes to the estate and gift tax laws before the end of the year.

Final Misc. Itemized Deduction Regulations

The IRS has issued, effective today, final regulations for trusts and estates to follow on the proper treatment of expenses subject to the 2% floor for miscellaneous itemized deductions.


Individuals and fiduciaries must reduce certain expenses, and not deduct the full amount, under IRC §67(a). These expenses include tax preparations fees, professional dues, home office expenses, and investment costs. IRC §67(e) says that expenses incurred by a trust are not limited if they “would not have been incurred if the property were not held in such trust or estate”. There has been must discussion about what expenses “would not have been incurred”.

The issue was litigated and reached the US Supreme Court who said (in 2008) that investment advisory fees incurred by trusts ARE subject to the 2%-floor limitation. Around that time, the IRS released temporary regulations regarding the deduction of certain expenses by trusts and estates. Those regulations are final and effective as of last Friday (May 9, 2014).


The final regulations confirm that trusts and estates must subject expenses to the 2%-floor limitation any miscellaneous itemized deduction which “commonly or customarily would be incurred by a hypothetical individual holding the same property” [see Reg. §1.67-4(a)].

The regulation’s next section elaborates on the meaning of “commonly” and “customarily”. It discusses costs considered “ownership costs” (which are generally subject to limitation since an individual would incur the same costs); “tax preparation fees” (which EXCLUDE from limitation the cost of estate tax returns, all fiduciary income tax returns, and a decedent’s final Form 1040); “investment advisory fees” (which are generally subject to limitation, except for advice specifically identifiably as not likely to be incurred by an individual); and “appraisal fees” (which exclude from limitation the costs associated with appraisal’s for an estate’s or trust’s income tax return, or a GST tax return).

Other costs which are fiduciary in nature are not subject to the limitation; these include probate court fees and costs; fiduciary bond premiums, and other costs listed in the regulation. Not mentioned, but not subject to limitation, are trustees fees.

Bundled Fees

Finally, the regulation addresses the problem of bundled fees. If a trust or estate pays a single fee for services which are subject to limitation and services which are not subject to limitation, then the single fee must be separated and the appropriate part made subject to the limitation. The regulation permits any reasonable method of allocation to divide the single fee.


The final regulation apply to tax years beginning on or after May 9, 2014. Previously issued (temporary) regulations have been removed. IRS Notices issued in 2008, 2010 and 2011 have been superseded by these final regulations.

See: TD 9664

Domestic vs. Foreign: Asset Protection Trusts

Sam Phillips at Donlevy-Rosen & Rosen, P.A. discusses the differences between Domestic Asset Protection Trusts (DAPTs) and Foreign Asset Protection Trusts (FAPTs).

A battle is raging between US-based attorneys over the use of Domestic Asset Protection Trusts (DAPTs) or their offshore counterparts (Foreign Asset Protection Trusts or FAPTs). Fifteen states (and counting) have enacted some form of asset protection trust legislation, but the efficacy of these DAPTs has been called into question since inception.

Gerry W. Beyer (of the Wills, Trusts & Estates Blog) reports that this was a focus of the 48th Annual Heckerling Institute on Estate Planning (held last month in Miami, FL).

Link: “Domestic Asset Protection Trusts Can Fail” says Estate Planning Expert