Has the ship sailed on making distributions from estates and complex trusts?

The 2012 tax year for complex trusts and estates has closed, so how can a trustee or personal representative still take advantage of making additional distributions to beneficiaries? There is an opportunity called the "65 day election" that allows a trustee or personal representative to roll back distributions made in the first 65 days of the year to the prior year. Here is how it works. Let's say a trustee makes a distribution to a beneficiary of $15,000 on February 8, 2013. The trustee can elect to treat that $15,000 distribution to a beneficiary as if it was made in the tax year ending December 31, 2012. If the $15,000 was all of the income earned in the trust, the trust would now have no taxable income and thus pay no tax. The beneficiary would have to include an additional $15,000 in their 2012 income but at a more than likely lower tax rate. For the 2012 tax year, the 65 days end on March 6, 2013, therefore the distribution would have to be made by that date to qualify as a 2012 distribution.

Considerations and limitations? What do you need to know about the "65 day election"? The "65 day election" only applies to estates and complex trusts. A complex trust is a trust where the income is not required to be distributed currently. These are the only two types of fiduciary entities where the "65 day election" applies. Also, income tax rates for estates and trusts reach the top rate of 35% for 2012 at $11,650. That means it does not take a great deal of taxable income in a trust or estate to pay a significant amount of tax. As outlined above we can minimize the tax paid by shifting the tax to the beneficiary. There are several things to keep in mind, however. First, the governing document for the complex trust or estate must allow this type of distribution. Second, the beneficiary will have to include additional income in their personal income tax return. You will need to determine the beneficiary's tax situation and make sure the beneficiary is comfortable with including the additional income for 2012.

In summary, the ship does not sail until March 6, 2013. There is still an opportunity to reduce the overall income tax payable between a complex trust or estate and the beneficiaries of those entities.

For questions, assistance, or requests for additional information please contact our estate tax professional, Gary Holcomb at 425-289-7636 or gholcomb@bpcpa.com.