** This article has been revised from its original version which was published on February…
Today (March 6, 2017) marks the last day a fiduciary of a trust or estate can make a distribution from the trust or estate, and still take the 65-day election on the fiduciary income tax return.
The general rule is, if the fiduciary of a trust and/or estate makes distributions to residuary beneficiaries prior to the last day of the tax year, then the net income earned in that year by the trust or estate (or excess deductions in a final tax year) can be distributed to the residuary beneficiaries proportionately. This means that the net income (or excess deductions in a final tax year) will be passed on to the residuary beneficiaries to report on their own individual income tax returns.
Since income is taxed at the highest tax rate for trusts and estates, it is beneficial to the trust and estate to distribute the net income to the residuary beneficiaries in order to avoid or reduce tax liability.
Sometimes the fiduciary of the trust and/or estate is not able to make distributions to residuary beneficiaries prior to the end of the tax year. In this case, the Internal Revenue Code (IRC Section 663(b)) allows a fiduciary of a trust and/or estate the ability to treat distributions made within 65 days of the end of the tax year, as if the distributions were made prior to the end of the tax year for purposes of distributing the net income (or excess deductions in a final tax year) to the beneficiaries.
Making a 663(b) election, or the “65 Day Rule”, can often help to lower the overall tax burden of the trust and/or estate and the residuary beneficiaries. This IRC section states a fiduciary can elect to treat all or part of an amount distributed within the first 65 days of the current year, as paid or credited on the last day of the previous year. Choosing this election allows those to pay the tax on the ordinary income, instead of the trust.
Before making this election, it is important to speak with a knowledgeable tax attorney who can help you to decide whether it would be beneficial to attribute the payment to the year prior or the current year.
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