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Maximize Your Estate or Trust’s Tax Efficiency with the 65-Day Rule

Steven Elliott, MST, CPA

Lead, Sr. Tax Manager

Summary

Learn how the 65-Day Rule can help you reduce your estate or trust tax liability. Talk with a Mercer Advisors specialist.

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The benefits of trusts and estates are well documented and significant. However, their highly compressed tax brackets result in income being subjected at the highest tax backets, at much lower income levels, than for individuals. There are opportunities to save through good tax planning and timing. One significant tax election is the 663(b) elections – known as the 65-day rule.

The Internal Revenue Code section 663(b)(1) provides that a distribution from a trust or an estate within the first 65 days of the tax year can be made effective as of the last day of the preceding tax year. That means that a distribution of all or a part of trust or estate income by the trustee to a beneficiary made as late as March 5, 2024, can be treated for income tax purposes as if it had been made on December 31, 2023. (Note: the deadline for the distribution typically is March 6. But because 2024 is a leap year, the deadline is March 5.)

Trusts, estates, and individuals are taxed up to a maximum rate of 37%. And for a trust or estate, this top marginal tax rate is triggered with any income above $14,450. It’s important also to note that an additional 3.8% Medicare surtax may also apply to a trust or estate, resulting in an effective marginal tax rate of 40.8%.

Although there are a variety of ways to avoid the high trust tax rate, they can be tough to execute before the end of the year because trustees may not know the amount of the income until after December 31. The 65-day rule gives trustees more time to plan and allocate income.

 

Why is the 65-Day Rule Important?

As shown in our examples below, an estate or trust with a December 31, 2023 year-end has earned $50,000 of taxable income. This puts the estate or trust into the highest 37% tax bracket, with $16,644.50 owed in federal income tax. If the 65-day election is made, the estate or trust can distribute some or the entire $50,000 to the beneficiary up to March 5, 2024, which may result in significant savings.

Federal Estate and Trust Income Tax Rates
Amount of taxable income Tax rate
Not over $2,900 10% of taxable income
Over $2,900 but not over $10,550 24% of taxable income
Over $10,550 but not over $14,450 35% of taxable income
Over $14,450 37% of taxable income

 

Taxes Owed for a Trust Earning $50,000 in 2023
10% of $2,900 = $290
24% of $7,650 = $1,836
35% of $3,900 = $1,365
37% of $35,550 = $13,153.50
TOTAL taxes due: $16,644.50

But if the 65-day rule is elected and distributed to an individual in a marginal tax bracket, the tax savings may be significant.

65-Day Rule Elected
Individual Tax Bracket Tax Savings
15% of $50,000 = $7,500 $9,144.50
22% of $50,000 = $11,000 $5,644.50
24% of $50,000 = $12,000 $4,644.50
32% of $50,000 = $16,000 $644.50

Note: savings may be different depending on filing status, other income, deductions, and/or credits.

*The above is a hypothetical example for illustrative purposes.

 

How to Make the Election

The 663(b) election is made by checking the box on line 6 under “Other Information” at the bottom of page 3 of Form 1041. The question on line 6 reads, “If this is an estate or complex trust making the section 663(b) election, check here.”

 

Estate or Estate Tax Planning Requires Careful Consideration

When choosing a trustee, consider other factors beyond the person’s age and their relationship to your heirs. How much do you know about their money management skills? Will the trustee be willing to handle the responsibility for many years to come in the case of minor children or a business? If large amounts of money are involved, does the trustee have the experience necessary to evaluate financial professionals that might need to be hired?

Trust or estate planning can be complicated and naming a trustee can be one of the trickiest parts. If you need additional information about the 65-day rule or would like to discuss your trust or estate planning needs, contact your wealth advisor. And if you’re not a client, let’s talk.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.