Planning With Estates and Complex Trusts Using the 65-Day Rule
Feb. 18, 2016
Certain estates and trusts may make an election to treat the income associated with distributions made within the first 65 days of a tax year as taxable income in the previous year. Distributions for which the election is made are considered taxable income for purposes of both income tax and the 3.8 percent net investment income tax (NIIT). To be eligible for the election, an estate or trust must be a complex trust that is eligible for a $100 standard exemption. Qualified subchapter S trusts and electing small business trusts are not eligible to make the election. Day 65 of 2016 is Saturday, March 5, and the deadline is not extended to the next business day.
For 2015, trusts and estates reach the individual highest income tax bracket of 39.6 percent and are subject to the NIIT after $12,300 of taxable income. Because individuals do not reach the 39.6 percent bracket until income is significantly higher, income distributed from trusts frequently is taxed at a lower rate.
This planning technique typically is implemented using cash distributions. Although it could be accomplished by distributing assets in-kind, additional gain, loss, and holding period rules may apply depending on the taxpayer’s specific facts.
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