The 65-Day Rule: Post Year-End Tax Planning for Estates and Certain Trusts

What Is the 65-Day Rule and How Might You Use It to Reduce Your Estate or Trust Tax Liability?

Found in Tax Code 663(b), the 65-Day Rule, formally known as the 65-Day Election, is a critical election for estate or trust tax planning strategies. Taking advantage of this rule could result in significant tax savings.

What Is the 65-Day Rule in Tax Planning?

The 65-Day Rule, found in Tax Code 663(b), allows fiduciaries to make distributions within the first 65 days of the new tax year. This year, the deadline to make distributions is March 5th, 2024.

Up until this date, fiduciaries can elect to treat distributions as though they were made on the last day of 2023. 

There is still time to use the 65-Day Rule for 2023 tax planning if you are a fiduciary of an estate or a complex trust (a trust that is not required to distribute income annually). 

How Does the 65-Day Rule Work?

Estates and trusts are entities that can earn taxable ordinary income and generally are subject to income tax on that taxable income. 

However, if an estate or trust distributes cash or other assets to beneficiaries of the estate or trust, the taxable income is carried out to the beneficiaries and taxed at the individual level, which can provide for federal income tax savings. 

This is because the estate or trust receives tax deductions against its taxable income for qualified distributions to beneficiaries. Estate and trust federal tax brackets are compressed relative to individual tax brackets.

Let’s look at an example. For 2023, estates and trusts are subject to the highest tax bracket of 37% federally at taxable income over $14,450, while married couples filing jointly are subject to the 37% tax bracket at income levels over $693,750. 

In addition, the 3.8% net investment income tax applies to a trust or estate’s undistributed net investment income, with a threshold of $14,450, making the total marginal tax rate 40.8%.

A fiduciary can make distributions throughout the year and if they are equal to or in excess of the estate or trust’s “distributable net income”, the individual beneficiaries will be taxed on this income. 

However, if distributions are below “distributable net income” the estate or trust would be taxed on the portion of income that was not distributed to the beneficiary.

Who Benefits From the 65-Day Rule?

The 65-Day Rule is specifically for complex trusts, not simple trusts. According to the IRS, a complex trust is one that may accumulate income, distribute amounts other than current income, and make deductible payments for charitable purposes.

Advantages of the 65-Day Rule: Federal Income Tax Savings

The 65-Day Rule provides some administrative relief and creates a tax planning opportunity to potentially reduce federal income taxes because of the estate or trust’s compressed income tax brackets. 

A fiduciary can make an election to treat distributions in the first 65 days of the following year as paid in the preceding year and therefore, distribute taxable income to the individual beneficiary. 

This can be a powerful tool that allows for post-year-end tax planning on a cash basis for the taxpayer and can be used to lower federal income tax. This should be an option that is reviewed when all transactions are accumulated for the year.

Are There Any Consequences of Making the 65-Day Election?

The 65-Day Rule can provide some excellent tax relief for complex estates and trusts. There are no consequences when making the 65-day election. However, the 65-Day Rule may not be appropriate for all estates and trusts.

It’s important to speak to your tax planning advisor before making the 663(b) Election.

Tax Planning: What You Should Do Next

If you are a fiduciary or advisor of an estate or complex trust and you are either starting or closing out the accounting for 2023, now is a good time to:

• Review income and distributions that have been made.
• Review the tax consequences of any contemplated distributions and who will be responsible for the income tax.
• In the next month, you should be receiving income tax reports, such as brokerage statements and Forms 1099, making this a good time to contemplate any potential distributions within the first 65 days of 2024.

Important Things to Remember About the 65-Day Rule

Be aware that once the 65 days have passed, distributions can’t be attributed back to the prior year. Any distributions will be required to be treated as occurring in the year they are made.

Remember that distributions made through March 5th, 2024, can be treated as having been made in 2023. The real benefit of the 65-Day Rule is that it provides options. When you are aware of options, you can make better decisions and achieve better tax results.

How Tax Planning Services Can Help

Before you choose to make any election, including the 65-Day Election, you should speak to a professional tax advisor. They can assist you with making the right decisions to reduce current tax liabilities without damaging the future of your estate or trust.

A tax planning advisor can also ensure you take the necessary steps to make the 65-Day Election. This requires you to check the appropriate box on Form 1041 (US Income Tax Return for Estates and Trusts). 

In some cases, the election must be made by preparing and sending a statement to the IRS.

For Strategic Tax Planning, Reach Out to the Experts at BGM

Tax planning in 2024 is a challenge that requires knowledgeable support. BGM draws upon decades of experience to advise you on the best next steps to take when tax planning for your estate or trust.

For questions about the 65-Day Rule or about how to reduce your estate or trust tax liability, reach out to BGM Group by calling 952-844-2500 or sending us a message.