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. In 2023, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $14,451 of income. That’s not very high. For example, let’s say an estate has income of $214,451. The tax on the $200,000 (income in excess of the $14,451 threshold), at 40% equals a tax of $80,000. Ouch!
Suggestions?
There is hope! Estates and trusts 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.
What Can I Do Now?
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, 2024.
Estates don’t need to have a calendar year end. For example, if a decedent died in June, the year end for the Estate can be May 31, in which case the 65-day rule would allow distributions until August 4th. Executors should keep this in mind when planning distributions.
Are there Other Factors to Consider?
Yes. In addition to financial considerations, there are other factors to keep in mind. If a beneficiary is not financially knowledgeable and cannot manage money, or has a drug habit or is mentally unstable, you may not want to distribute the funds. These factors may outweigh the potential tax savings of larger distributions from a Trust or Estate.
Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.