The 663(b) election, also known as the “65 Day Rule” enables a trust to make a distribution within the first 65 days of year, and have it count as a distribution for the previous tax year. While this has always been a planning tool used to maximize tax savings for trusts and beneficiaries, it takes on even more importance due to the Medicare surtax on net investment income. The 3.8% Medicare surtax is assessed on net investment income for taxpayers whose modified adjusted gross income is above the following thresholds:
The above listed table shows that the 3.8% tax kicks in rather quickly for trusts and estates. Every trustee of a complex trust needs to examine their trust’s income as well as the income tax brackets of the beneficiaries in order perform the most efficient tax planning.
Things to Keep in Mind:
- If you have a Simple or Grantor trust, this election does not apply.
- Since capital gains are subject to the Medicare surtax, and capital gains are retained at the trust level, you need to factor that into your distribution calculations.
- Trustees still need to keep other considerations in mind before making distributions to save taxes. A tax-driven decision to make distributions might conflict with the desires of the grantor of the trust.
- If a trust makes a 663(b) election, it must keep careful records to track what years the distributions apply to.
If you have any questions, please see any member of the Estate and Trust Team.