Deadline Approaches for Distribution Election for Estates and Trusts

| 1/30/2020
Deadline Approaches for Distribution Election for Estates and Trusts

Estates and complex trusts may elect to treat distributions made within the first 65 days of a calendar year as if they were made in the prior calendar year. Day 65 of 2020 is Thursday, March 5. Distributions for which the election is made are considered taxable income to the beneficiary in 2019 for purposes of both income tax and the 3.8% net investment income tax (NIIT).

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To be eligible for the election, a trust must be a complex trust rather than a simple trust. In other words, the trust must be able to make discretionary distributions to beneficiaries. Qualified Subchapter S trusts and electing small-business trusts are not eligible to make the election.

For 2019, trusts and estates reach the highest income tax bracket of 37% and are subject to the NIIT after just $12,750 of taxable income. For beneficiaries in a lower tax bracket in 2019 than they expect to be for 2020, making the 65-day rule election could reduce the overall income and NIIT tax liability. Estates or trusts that owe estimated tax also can use this election to reduce the estimated tax due for 2019.

Before making the election, taxpayers should consider the overall tax liability of the estate or trust and the beneficiary in 2019 and 2020. Taxpayers also should consider the state income tax ramifications, especially if the estate or trust is considered a resident of a low-rate state and if the beneficiary is a resident of a higher-rate state.

Both cash distributions and asset distributions are eligible for the election. However, taxpayers should consider any additional gain, loss, and holding period rules that might apply to asset distributions.

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Sally E. Day
Sally Day
Managing Director
Tracy Madden