May 09, 2016
Key Trust Elections that Need to Be Considered by Early March
By Donald Zidik, Director, Tax & Business
Many of our clients serve as trustees or executors and should be aware of certain elections that may be available to them. This is especially true now, as there are distributions and elections that need to be made within the first week of March.
The first election to consider is the 65-day rule election (IRC Section 663(b)) which states that a trustee or executor may elect to treat any distributions made during the first 65 days of the year as being made on the last day of the preceding calendar year (or fiscal year if the entity is an estate). This election gives the trustee or executor an opportunity to allocate distributions to a beneficiary who may be in a lower tax bracket than that for a trust. This is useful, as complex trusts and estates are taxed at the highest marginal rate beginning +at a lower threshold than for individuals (starting at $12,300). This also allows proper planning for the 3.8% net investment income tax which is also taxed at a higher threshold for individuals as compared to trusts and estates.
The 65-day election also gives the trustee or executor additional time to plan and make the appropriate distributions after the year-end. The election is simply made by checking the appropriate box on the second page of Form 1041. In addition, the election can be made on a tax return that is filed after the 65th day of the year (March 6 in most years and March 5 in 2016).
Please keep in mind that if you do make the election, you need to make sure that you properly identify distributions made in the current year so as to avoid duplication for the following tax year. Another factor to consider is that the resident state in which the trust or estate is domiciled may not recognize the 65-day election. Massachusetts is one of those states that does not recognize the 65-day rule election. Please also note that the election is irrevocable.
There is also the Section 643(g) election that needs to be made within the first 65 days of the following year. This election allows the trustee to have any portion of estimated tax paid by the trust to be allocated to one or more beneficiaries. Therefore, the beneficiary can claim the estimated tax payments on his or her individual tax return. The election is made by filing Form 1041-T (Allocation of Estimated Tax to Beneficiaries) by the 65th day after the close of the of the trust's or estate's tax year. Please note that executors of estates may only make this election in the final year of the estate. The trustee or executor also needs to include this amount on the beneficiary's Schedule K-1. It is important to make sure that the Form 1041-T is filed by the 65th day of the year.
Another important item to consider is where the 65th day falls in a given year. The 65th day normally falls on March 6, except in leap years, as is the case for 2016. This would cause the 65th day to fall on March 5, 2016. This date falls on a Saturday this year, which means that the actual due date for filing Form 1041-T falls on the next business day, which is Monday, March 7, 2016. Distributions under the 663(b) election need to be made by March 5, 2016.