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Trustees and Beneficiaries Can Save Taxes with the "65-Day Rule"

02.03.17

Executors of estates and trustees of complex trusts have an opportunity to reduce 2016 income taxes. Trusts and estates begin paying taxes at the top Federal rate of 39.6% when 2016 taxable income exceeds $12,400, and its tax interest, dividend and investment income, is also subject to the 3.8% net investment income tax, for a total Federal marginal tax rate of 43.4%. Personal Federal tax rates do not reach the top brackets until taxable income exceeds $400,000, and individuals are subject to the net investment income tax at $200,000 - $250,000 of modified adjusted gross income. 

Income distributions made to beneficiaries in a lower tax bracket during the tax year will result in overall tax savings. If sufficient calendar year distributions have not been made to beneficiaries, there is still an opportunity to make distributions using the “65-Day Rule." 

The “65-Day Rule” (IRC §663(b)) allows the fiduciary to designate some or all of the distributions made in the first 65 days of the following tax year to be treated as if they were paid in the prior tax year. This means that distributions made through March 6, 2017, can be used to shift 2016 taxable income to beneficiaries. The election allows the executor or trustee more flexibility and time to evaluate income and to make the decision about the potential tax savings of additional distributions.