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)