INSIGHT
Trustees and Beneficiaries Can Save Taxes with the “65-Day Rule”
Sandy Murray, Rich McDonnell • January 27, 2020
Services: Private Client Services
Executors of estates and trustees of complex trusts may have an opportunity to reduce 2019 income taxes. Trusts and estates begin paying taxes at the top federal rate of 37.0% when 2019 taxable income exceeds $12,750. In addition, interest, dividend, net capital gains, and other investment income is subject to the 3.8% net investment income tax, resulting in a total federal marginal tax rate of up to 40.8%. Personal federal taxes for 2019 do not reach the top tax bracket of 37.0% until taxable income exceeds $510,300 for single filers or $612,350 for married, joint filers. Individuals are also subject to the 3.8% tax on net investment income at $200,000 – $250,000 of modified adjusted gross income.
The TCJA of 2017 suspension of federal investment expense and other miscellaneous deductions may increase the trust’s 2019 income. The TCJA has also created a federal Qualified Business Income deduction (Section 199A). When Section 199A is applicable and trust distributions are made, the deduction is allocable between the trust and its beneficiaries.
Income distributions made by the estate or trust to beneficiaries in a lower tax bracket during the tax year may result in overall tax savings. If the fiduciary of a calendar year estate or trust wishes to increase distributions to the beneficiaries in order to have more 2019 income taxed to them, there is still an opportunity to make distributions after December 31, 2019, 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 as paid in the prior tax year. This means that distributions made through March 5, 2020, can be used to shift 2019 taxable income to beneficiaries. The election allows the executor or trustee more flexibility and time to evaluate income and to make the decision regarding the potential tax savings of additional distributions.

Rich McDonnell
Partner, Tax
Community Outreach Liaison Leader
Rich is a Certified Public Accountant licensed in California and New York. He has nearly 40 years of experience, the …

Sandy Murray
Partner, Tax
BPM Board of Directors
Private Client Services Leader
Sandy has over 30 years of experience in tax return preparation, planning and research. His background includes maximizing net worth …
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