65-day Rule for Trusts – 3/6 Distribution Deadline

Trusts pay income taxes at very, very high rates, as the highest trust income tax bracket starts at a very, very low-income level. An individual taxpayer will usually pay significantly lower tax than a trust would, given the same amount of income.

Trusts pay tax at the maximum 37% federal tax rate when their taxable income reaches about $16,000 for 2025.  An individual taxpayer filing as single does not get to the 37% bracket until their taxable income is about $626,000, and a married couple filing jointly does not get to 37% until about $751,000 taxable income.

Also, the 3.8% net investment income tax starts at about $16,000 income for a trust.  For individual taxpayers, the thresholds are much higher: $200,000 filing single and $250,000 married filing jointly.

Distributions of income from complex trusts (and decedent’s estates) are discretionary, not mandatory. Distributions of trust income result in a deduction for the trust, with the income reportable by the beneficiary. This has the effect of shifting income from the high-tax-bracket trust to the lower-tax-bracket beneficiary in most cases.

Key Deadlines for Calendar-Year Trusts

If not enough trust income was distributed during the 2025 tax year, additional distributions can still be made within 65 days after year-end, and will be treated as if they were made during the 2025 tax year. For a calendar-year trust, the 65-day period is from January 1, 2026, through March 6, 2026.

If the trust makes distributions during the 65-day period, we can simply check a box when preparing the trust income tax return to make the IRC Section 663(b) election. This election allows the trust to treat such distributions as having been made in the prior calendar year, and take an income distribution deduction when the trust income tax return is filed.  The election can be made as late as the September 30, 2026 extended filing deadline for calendar year trusts; however, the distribution payments to beneficiaries cannot be later than March 6, 2026.

Important Limitations and Considerations

1. Only complex trusts and decedent’s estates can make the election. Simple trusts and grantor trusts cannot.
2. Capital gains are generally not included in the computation.
3. Accurate records of cash distributions should be kept.
4. Trust agreements might have restrictions on cash distributions.

Keep that March 6^th distribution payment deadline in mind, and contact David Cooper, PP&Co Tax Director, at dcooper@ppandco.com for more information or to determine what makes sense for your particular situation.