If you are the executor of an estate or the trustee of a trust, you should know that egregiously high income tax rates apply to estates and trusts at very low levels of income. Despite the new tax act, in 2019, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $12,750 of income. That’s not very high. For example, let’s say an estate has income of $212,750. The tax on the $200,000 (income in excess of the $12,750 threshold), at 40% equals a tax of $80,000. Ouch!
Help! Is there any hope?
Yes, the estate and trust only pays tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%. Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.
Is there anything I can do?
It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return. This year’s deadline is March 5, 2020 (one day earlier than usual this year because of the leap year). Executors and trustees should act soon to take advantage of this opportunity for substantial tax savings.
Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.