65-Day Rule – 2012

For an updated article about the 65-Day Rule in 2015, click here.

For an updated article about the 65-Day Rule in 2014, click here.

For an updated article about the 65-Day Rule in 2013, click here.

March 5

Fiduciaries of estates and complex trusts have the ability 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 2012 is Monday, March 5.

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 distributions made. Therefore, a fiduciary can over distribute what might be necessary to pass out 2011 income to a beneficiary, but elect a smaller amount when the income tax return is prepared. Any amount distributed but not treated as 2011 distributions will naturally be 2012 distributions.

The distributions are then treated as having been made on the last day of 2011.

Remember that fiduciaries pay the highest tax rate (i.e. 35%) on all taxable income over $11,350 in 2011, and only have personal exemption between $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.

Reporting: The Form 1041 do not require any kind of formal declaration of the amount of distributions paid in 2012 and treated as paid in 2011. (However, be sure to keep good records so that the amount is not reported again as a 2012 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)


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