Although 2023 is well underway, certain calendar-year trusts and estates still have a small window of opportunity to reduce their 2022 income tax liabilities and those of the trusts’ beneficiaries provided they act before March 6, 2023.
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 2022, the top 37 percent tax rate for non-grantor trusts applies to income of $13,450 or more. By contrast, this top tax rate applies to individual taxpayers when their taxable income reaches $539,900 for single persons or $647,850 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 2022 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 2023. 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 2022 and the additional $1,000 distributed in 2023.
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 Raymond James Financial Services. For more information, call (941) 308-1126 or email info@provweath.com.
Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory and Financial Planning Services are offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors, a Registered Investment Advisor.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investments mentioned may not be suitable for all investors.
You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Please note that changes in tax laws may occur at any time and may have a substantial impact on each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters.