With 2024 well underway, certain calendar-year trusts and estates still have a small window of opportunity to reduce their 2023 income tax liabilities and those of the trusts’ beneficiaries provided they act before March 6, 2024.
Under a special IRS rule, trustees have 65 days after the start of a new year to distribute trust income and their related tax liabilities to beneficiaries and treat those payments as if they occurred in the prior year. This enables a trust to shift income subject to tax at the highest individual rates to beneficiaries who are often in lower tax brackets, thereby reducing the tax burdens of both the trust and its beneficiaries. For example, in 2024, the top 37 percent tax rate for non-grantor trusts applies to income of $15,200 or more. By contrast, this top tax rate applies to individual taxpayers when their taxable income reaches $609,350 for single persons or $731,200 for married couples filing joint tax returns.
When considering the 65-day election, trustees should consider several factors, including the terms of the trusts and whether distributions to beneficiaries of a certain age are allowed. For example, this election is not available to grantor trusts for which grantors report all trust activity nor does it apply to simple trusts that require fiduciary accounting of income to be distributed annually. Additionally, trustees must be mindful of the potential asset protection the trusts provide their beneficiaries while the assets are in the trust. Any such protection disappears with the distribution of those assets.
The rationale behind the 65-day rule is that it gives trustees the time they need after year-end to accurately calculate a trust’s distributable net income (DNI), or the maximum amount of taxable income a trust may allocate to beneficiaries and claim as a deduction.
To understand how this works, consider a complex trust that did not make any distributions to its beneficiaries in 2023 and estimates its DNI for the year to be $30,000. If the trust distributes $30,000 to its beneficiaries by March 6, it can carry out the DNI on its K-1 and elect to have the entire amount distributed during calendar year 2024. If the trust distributes $29,000 to beneficiaries by March 6, the trustee can elect to consider any or all of that amount as being distributed and be exposed to tax on the $1,000 not distributed. By contrast, if the trust distributes $31,000 by March 6, the trustee can elect to treat $30,000 as being distributed in 2023 and the additional $1,000 distributed in 2024.
About the Author: Robert Mark Weiss, CFA, is a regional director and financial planner with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with PWA Securities, LLC. For more information, call (941) 308-1126 or email info@provweath.com.
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Robert Mark Weiss is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
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Posted on February 7, 2024