IRC Sec 663(b) Election (65 Day Rule)
IRC Sec 663(b) allows fiduciaries of estates and complex trusts to make what is commonly referred to as the “65-day election.” The 65-day election gives fiduciaries an additional 65 days after the end of the entity’s tax year to make beneficiary distributions and still be able to report them on their prior-year tax return. This election is an annual irrevocable election made by checking a box on Page 3 of Form 1041 at the time of filing, including any extensions.
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Distributions made within 65 days of the estates or trust's subsequent tax year end may be deemed to have been made as of the last day of the tax year.
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The estate or trust will still be afforded a distribution deduction.
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For example, for a fiduciary who chose to make the 65-day election for the trust’s 2022 tax year ending December 31, 2022, the 65-day deadline was March 6, 2023.
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Late elections may be approved by the IRS if the fiduciary can prove that they acted reasonably and in good faith.
Benefits
Utilizing the 65-day rule allows income to be optimized to help lower the estate’s or trust’s tax rates. Trust and estate tax brackets are quite condensed, thus even small distributions reduce the tax bracket percentage significantly. Also, if the trust and estate tax brackets are higher than the beneficiary’s, moving income from the trust to the individual by way of a distribution will also save tax.
Medicare Surtax
The 3.8% Medicare surtax is assessed on a trust’s or estate’s undistributed “net investment income.” Net investment income is passively earned income such as interest, dividends, capital gains, and rental income, reduced by certain investment expenses. Distributing income may also reduce this tax for the entity.