An executor or trustee can elect to treat discretionary income distributions to beneficiaries within 65 days after the close of the estate or irrevocable non-grantor trust’s tax year as if those distributions were made in the prior tax year. The Section 663(b) election is made on a timely filed tax return for the preceding year, is irrevocable, can be for all or only a portion of the distributions within the 65-day period, and is elected on a yearly basis.
Utilizing the 65-day rule can be a tax-efficient strategy given that trusts and estates are subject to compressed income tax brackets, where the highest rates kick in at just over $13,050 in 2021—as opposed to individual brackets at $523,600 if single or $628,300 if married filing jointly. Thus, fiduciaries can avoid up to a 40.8% income tax—including the 3.8% net investment income tax—by distributing income to beneficiaries in significantly lower tax brackets. With potential new tax legislation on the horizon—including proposed new surtaxes up to 8% for trusts and estates with income in excess of $200,000—the 65-day rule could be even more tax-efficient in the future.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Justin Miller is J.D., LL.M., trust and estate practitioner, accredited estate planner, certified financial planner. He is a San Francisco-based partner and national director of wealth planning at Evercore Wealth Management, an adjunct professor at Golden Gate University School of Law, and a fellow of the American College of Trust and Estate Counsel.
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