The 65-Day Deadline for Fiduciaries Is Looming!

Calling all fiduciaries: Don’t overlook the 65-day deadline! Trusts that are not required to distribute all of their income currently and estates on a calendar year may make an election to treat distributions made through Saturday, March 6, 2021, as having been made during calendar year 2020. Although the election may be made on a timely filed income tax return (including extensions), the distribution must actually be made by March 6, 2021. The election may be useful where a distribution is desirable to reduce the estate’s or trust’s income below the level where the top federal rate of 37% applies ($12,950 for 2020). For 2021, the top rate of 37% applies when taxable income exceeds $13,050.

The election may also be useful where a distribution is desirable to reduce the estate’s or trust’s undistributed net investment income and adjusted gross income below the level where the Medicare surtax on net investment income applies. For 2020, the surtax applies to trusts and estates with undistributed net investment income and adjusted gross income in excess of $12,950. As per current law, for 2021 the surtax continues to apply when undistributed net investment income and adjusted gross income are in excess of $13,050. Compared to estates and trusts, the individual adjusted gross income (“AGI”) thresholds are much greater (AGI over $200,000 for single filers and AGI over $250,000 for joint filers), so there may be a planning opportunity that eliminates the surtax on the net investment income of the estate or trust by making a distribution to a beneficiary who would not be subject to the surtax based on his/her AGI.

Trusts and final-year estates may also make an irrevocable election to allocate federal estimated income tax payments to the beneficiaries (but not income tax withheld). This election may only be made by filing Form 1041-T with Form 1041, or only Form 1041-T if the income tax return is not yet completed by 65 days after the year-end. The due date for filing the form is March 8, 2021 (because the due date is a Saturday) for calendar-year taxpayers. Further, an election may be made to allocate New York estimated income tax payments to beneficiaries, but only by filing Form IT-205-T with Form IT-205; or if the income tax return is not completed by 65 days after year-end, only Form IT-205-T, by March 8, 2021 for calendar-year taxpayers.