65-Day Escape Hatch

Joe Kristan’s take on the 65-Day Rule (were he calls it both an escape hatch, and a mulligan):

http://rothcpa.com/2017/03/tax-roundup-3117-the-trust-65-day-mulligan-also-farm-averaging-and-trump-speech-links/

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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)

65-Day Rule — 2014

March 6

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


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 2014 is Thursday, 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 2013 income to a beneficiary, but elect a smaller amount when the income tax return is prepared. Any amount distributed but not treated as 2013 distributions will naturally be 2014 distributions.

These distributions are then treated as having been made on the last day of 2013.

Remember that fiduciaries pay the highest tax rate (i.e. 39.6%) on all taxable income over $11,950 in 2013, 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 2013 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.

New in 2013: 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 $11,950 (in 2013). Married individuals 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 2013. (However, be sure to keep good records so that the amount is not reported again as a 2014 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)

Simple Trusts and the 65-day Rule

Do Simple Trusts have to follow the 65-day rule?

No. First, the 65-day rule [IRC §663(b)] is a provision of Subpart B (of Part I of Subchapter J), which directs the operations of complex trusts. Second, the rule applies to the amount of cash distributed from a complex trust for the purposes of determining the Income Distribution Deduction (IDD); simple trusts do not look to cash distributions in determining IDD because ALL accounting is required to be distributed [IRC §651].

So when are simple trust distributions made?

Simple trust distributions should be made as often as required in the trust document, but no less frequently than annually. Where State law fails to specify, then common sense must prevail.

What happens if I don’t make the required distributions from a simple trust?

The answer depends on the amount undistributed. If the required amount undistributed is small, the trustee and beneficiary may decide to overlook the shortfall and leave the small amount in the trust.

For larger amounts, if might be necessary to treat the undistributed amount as part-grantor trust.

65-Day Rule — 2013

March 6

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.


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 2013 is Wednesday, 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 distributions made. Therefore, a fiduciary can over distribute what might be necessary to pass out 2012 income to a beneficiary, but elect a smaller amount when the income tax return is prepared. Any amount distributed but not treated as 2012 distributions will naturally be 2013 distributions.

The distributions are then treated as having been made on the last day of 2012.

Remember that fiduciaries pay the highest tax rate (i.e. 35%) on all taxable income over $11,650 in 2012, 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.

Example: A complex trust earned interest and dividends during 2012 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 $5,374. 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 $874.

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

Reporting: The Form 1041 do not require any kind of formal declaration of the amount of distributions paid in 2013 and treated as paid in 2012. (However, be sure to keep good records so that the amount is not reported again as a 2013 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)

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)

How to distribution excess tax payments

Trusts have the option (under IRC §643(g)) to treat any portion of a payment of estimated tax made by a trust for any taxable year as a payment made by a beneficiary of the trust. The election to allocate must be made on or before the 65th day after the end of the tax year by filing Form 1041-T.

March 7

(The 65th day of 2011 is March 7. See related post here.)

The amount is treated as paid by the beneficiary on January 15 of the following tax year (for the purposes of calculating underpayment of estimated taxes). This election may also be made by an estate in its last taxable year.

This election may be useful for trusts which unexpectedly have little or no tax liability last year, or after distributions were made causing the tax liability to shift from the trust to the beneficiary.

Citation: IRC §643(g)