Trust Planning Opportunity and the 65 Day Rule

It’s not too late to take advantage of planning opportunities for certain trusts for 2017 tax filings. Irrevocable Trusts that do not require the trustee make distributions of income and principal to the beneficiaries can take advantage of the “65 Day Rule”. This Rule allows trustees to make distributions within 65 days of the new tax year and elect to treat the distribution as though it was made on the last day of the previous tax year. Taking advantage of this rule could provide significant tax savings to the trust, but the 65 days are up on March 6, 2018.

Similar to individuals, trusts are taxed via a graduated tax rate. For the 2017 tax year, trusts reach the highest tax rate of 39.6% at $12,400 of taxable income compared to single individuals who reach the 39.6% tax rate at $415,050. The additional 3.8% Medicare surtax applies to investment income for trusts and individuals at these taxable income levels as well. Distributing income from the trust to a beneficiary who is not in the highest tax bracket can pull income from a high tax rate environment to a lower tax rate environment.

Reasons to Make a 65 Day Rule Distribution

• Gives the tax and estate planner the ability to look back at the prior year’s income and make an exact calculation to decide how much to distribute versus using estimated data at year end.
• Can pull items of income taxed at higher rates (interest, ordinary income, royalties) from the trust and distribute it to beneficiaries who may be taxed at lower rates.
• Can pull items of dividend income out of the trust where it may be taxed at a 20% rate and distribute it to beneficiaries where it may be taxed at a preferential 15% rate.
• May save on the 3.8% Medicare surtax by pulling investment income from the trust and distributing it to the beneficiaries.
• Capital gains typically cannot be distributed. Check with you tax advisor to see if this applies to your trust. If it does, further tax savings can be achieved.

How DHJJ Financial Advisors Can Help

Trustees should consult their tax and estate planners to determine if this is the right strategy to use for their particular trust. Trustees should also work with the trust beneficiaries to understand how the trust distributions will affect their tax posture. This opportunity comes around at the beginning of each new year. If you are ready to see if this works for you, please contact DHJJ Financial Advisors.

Posted in