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Tax Savings Election for Trust and Their Beneficiaries

02.20.15

Fiduciaries of estates and complex trusts have the flexibility to treat certain distributions as having occurred in the prior year. An IRC Section 663(b) election can be made with respect to distributions made within 65 days after the end of a tax year or Friday, March 6, 2015. Any amount covered by this election is treated as being distributed in the immediately prior tax year.This election allows flexibility and planning opportunities for the trust and its beneficiaries.

The election provides a deduction for the trust for the immediate prior tax year. However, the beneficiary will need to pick up the income in the same year.

The election can be made on all or part of the additional distributions made within the 65 day period. 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 be 2015 distributions.

Due to fiduciaries paying the highest tax rate (i.e. 39.6%) on all taxable income over $12,150 in 2014, it may be advisable to make distributions to beneficiaries in a lower tax bracket for overall tax savings.

Starting in 2013, fiduciaries are subject to the Net Investment Income (NII) tax (at a rate of 3.8%) on the lesser of investment income or adjusted gross income over $12,150 (for 2014). Married individuals must pay the NII tax only if their Adjusted Gross Income (AGI) exceeds $250,000. Because of the difference in the amount of income that is exempt from NII tax, an IRC Section 663(b) election may also provide an NII savings.

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.