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65 Days of Planning Opportunities for Trusts and Estates

Feb 8, 2024
Chris Ryan
Lauren Smith

Shifting Income from Trust to Beneficiary

Trusts and estates have 65 days after year-end under IRC Sec. 663(b) (March 5, 2024 for trusts and calendar-year estates) to make distributions to beneficiaries and elect to have part or all of those distributions up to the greater of its distributable net income and accounting income treated as made during the 2023 tax year. Using this election, trustees can shift income from a trust/estate to its beneficiaries, who may be in a lower income tax bracket.

Considerations Before Making Distributions

Before making distributions during the 65-day period so that this election can be made, the trustee/executor should consider the following:

  • The tax implications for both the trust/estate and the beneficiary
  • The impact of any additional income on the beneficiary’s eligibility for certain government assistance programs and financial aid, if applicable, and
  • The beneficiary’s ability to handle additional funds

This election is made on the trust/estate’s timely filed income tax return, including extensions, by reporting the distribution amount on the return and checking the box on line six in the Other Information Section on page three of the return.

Allocating Estimated Payments to Beneficiaries (IRC Sec. 643(g))

A lesser-known opportunity for trusts and estates during the 65-day period after year-end is the ability to elect to allocate its estimated tax payments to beneficiaries under IRC Sec. 643(g). This is available for non-grantor trusts and estates in the final year.

It’s not uncommon for practitioners to advise that estimated taxes be paid for the current year or that an overpayment is applied from a prior year to the current year. Then, a decision is made later in the year to terminate the trust or estate, resulting in no income tax for the year. Rather than waiting for the refund, another option is to allocate the trust/estate’s estimated taxes to the beneficiaries. This can be advantageous for the beneficiary, who may have taxable income because of the trust/estate’s termination, which they did not consider when making their own estimated tax payments. Nevertheless, the estimated taxes from the estate/trust are allocated to the beneficiary’s fourth-quarter estimated tax payment.

This allocation of estimated tax to beneficiaries is made by filing Form 1041-T within 65 days after year-end (March 5, 2024 for trusts and calendar year filing estates). It may only be made for estimated tax payments. Income tax withholding cannot be allocated to beneficiaries.

Practitioners should be aware that this is primarily a federal income tax opportunity.

Currently, the only states that permit the allocation of estimated tax payments to beneficiaries are California, Hawaii, and New York.

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Chris Ryan

Chris Ryan is a is a Senior Manager in the firm’s Tax Department with nearly 9 years of public accounting experience. He is focused on gift, trust, estate planning, and comprehensive income tax planning for high-net-worth individuals as well as closely held business owners. He also handles fiduciary accountings for trusts and estates.

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