What Is the Trust 65 Day Rule Election?

The 65-day rule is a tax provision that allows a trustee or executor to make a distribution to a beneficiary within the first 65 days of the new tax year and elect to treat that payment as if it were made on the last day of the preceding tax year. This is an annual election, meaning the fiduciary must decide whether to use it each year based on the trust’s specific financial situation.

This election is not a default setting; it must be actively chosen by the fiduciary when preparing annual tax filings. The decision hinges on a careful review of the trust’s income and the tax situations of both the trust and its beneficiaries. The rule gives fiduciaries a window after the year has closed to make strategic decisions about income distribution.

The Purpose of the 65 Day Rule Election

The purpose of the 65-day rule is rooted in the structure of trust income tax brackets. Trusts have highly compressed tax brackets, meaning their income is taxed at the highest federal rate at a much lower threshold than for individuals. For instance, a trust could hit the top 37% federal income tax bracket with just $15,200 of taxable income in 2024, leading to a significant tax burden on retained income.

This relates to the concept of Distributable Net Income (DNI), which is the pool of taxable income a trust generates that can be passed to beneficiaries. When a trust distributes its DNI, it takes a deduction for that amount, and the beneficiary reports the income on their personal tax return.

A trustee might realize in January or February that the trust retained a large amount of DNI from the previous year, pushing it into a high tax bracket. By making a distribution before the 65-day deadline, the trustee can elect to treat it as occurring in the prior year. This shifts the taxable income from the trust to the beneficiary, who is often in a lower tax bracket, thereby reducing the overall tax paid.

Requirements for Making the Election

The 65-day rule election is available only to complex trusts and decedents’ estates. A complex trust is one that is not required to distribute all its income annually, can make charitable contributions, or distributes principal. In contrast, a simple trust must distribute all its income each year, making this rule unnecessary.

The payment must be made to the beneficiary within the first 65 days of the trust’s tax year. For trusts operating on a calendar year, this deadline is March 6th, or March 5th in a leap year. Distributions made after this strict cutoff cannot be applied to the prior tax year under this rule.

The election is also limited by the trust’s financial results from the prior year. The amount of the distribution that can be treated as paid in the preceding year cannot exceed the greater of the trust’s accounting income or its Distributable Net Income (DNI) for that year.

How to Make the 65 Day Rule Election

The fiduciary makes the 65-day rule election on Form 1041, U.S. Income Tax Return for Estates and Trusts. This is not a separate form but a specific question that must be answered on the trust’s annual tax return when reporting its income, deductions, and distributions.

To make the election, the trustee or preparer must check the designated box on Form 1041. Checking this box formally notifies the IRS that distributions made in the first 65 days of the current year are being applied to the prior tax year’s DNI.

The election must be made on a timely filed Form 1041, including any approved extensions. The election is irrevocable for the year it is made, and the decision cannot be changed after the tax return’s due date has passed.