IRC Section 663(b) allows a trustee of a trust who is not required to distribute income (referred to as a complex trust) extra time to determine the trust’s taxable income for the prior tax year and if there may be any income tax savings by distributing that income to the trust’s beneficiaries. If a trustee determines that there are income tax savings to be realized by having the trust beneficiaries pay income tax on the income instead of the trust, the trustee may make distributions to the trust beneficiaries during the first 65 days of the current tax year and treat those distributions as distributions of income to the beneficiaries for the previous tax year.
The trustee must make the election on a timely filed (including extensions) Form 1041. Thus, a trustee currently has until at least April 18, 20231 to determine the (calendar year) trust’s 2022 taxable income and if the election should be made but must make any distributions to be eligible for the election by March 6,2024. If it is ultimately determined that distributions made during the first 65 days of the current tax year exceed the amount needed to carry-out the trust’s taxable income for the prior tax year, the election may be made for only a portion of those distributions. The trustee should keep records as to what year a distribution applies. Also, the trustee must make sure that the distributions comply with the terms of the trust and are in the best interests of the beneficiary as income taxes are only one of many considerations in making that determination. Finally, it is recommended that you discuss these issues with a competent tax advisor before trying to implement the rules discussed herein.
Note that the 65-day rule under IRC Section 663(b) also applies to estates.
