Section 663(b) of the Internal Revenue Code provides fiduciaries of complex trusts and estates with a valuable post–year-end planning opportunity. Commonly referred to as the “65-day rule,” this election can be especially useful when year-end income information is not fully available by December 31, or when fiduciaries wish to evaluate tax outcomes before finalizing distributions.
Here’s how the 663(b)-election works, when it applies, the potential tax advantages and limitations, and the key compliance requirements fiduciaries must consider before making the election.
Understanding the 65-Day Election for Trusts and Estates
Normally, complex trusts and estates record income as well as distributions to beneficiaries on a cash basis. That, is, these transactions are booked at the time they are made.
But very often, trust fiduciaries do not have all their required tax information in hand by December 31st (assuming a calendar tax year). Section 663(b) exists to give fiduciaries some flexibility in the first 65 days of the year to make decisions and book distributions to beneficiaries.
Specifically, Section 663(b) lets complex trusts and estates distribute assets to beneficiaries early in the year, and elect to have the transaction taxed in all respects as if it were recorded on the last day of the prior tax year.
This is often desirable because individuals usually have much more favorable tax brackets compared to trusts and estates. Taking the Section 663(b) election is effectively an opportunity for tax arbitrage. In most cases, the more assets the trust can distribute to beneficiaries in the form of distributable net income (DNI), the lower the total income tax bill.
Note: This option exists only for complex trusts, as well as estates.
Simple trusts are generally required to distribute all income currently (and generally cannot distribute corpus or make charitable contributions). So they are not eligible for the 663(b) election.
Crediting
Per IRS regulations, the distributed amount must be “properly paid or credited” within the 65-day window. For the transaction to count as “properly paid or credited,” fiduciaries must be able to substantiate the actual transfer of funds or control of assets to beneficiaries. That is, fiduciaries should keep careful records of transaction amounts, dates, and method of distribution, as well as the distribution allocation among beneficiaries.
Applicability
If the fiduciary makes the election under Section 663(b), the election will only apply to amounts actually paid or credited during the first 65 days of the new tax year that are specifically designated by the fiduciary. That means that estate or trust fiduciaries can treat some early-year distributions as having occurred in the prior year, while treating others as having been booked and completed in the current year.
The election must be made on a timely filed Form 1041 (including extensions). Once the filing deadline passes, the election is irrevocable.
Potential Tax Benefits of Taking the 663(b) Election
Under current tax laws, trusts and estates are subject to highly compressed federal income tax brackets.
For example, while a single individual would not reach the top marginal income tax bracket of 37% until he or she reaches taxable income of approximately $626,350, a trust must pay the top 37% tax rate on income over $15,450, as of tax year 2025.
Because trusts and estates reach the highest marginal rate at such low-income levels, income retained at the fiduciary level is often taxed far more heavily than the same income would be on a beneficiary’s individual return.
Unless the trust has very low net income, the beneficiary has very high taxable income, or both, shifting the reporting of income to beneficiaries—through distributions and tools like the 663(b) election—may result in a much lower federal income tax bill.
When NOT to Take the Election
Taking the Section 663(b) election may not be advisable if the beneficiary’s marginal income tax bracket is higher than that of the trust.
This is unusual, because trusts and estates, by design, have much more compressed income tax brackets compared to individuals. But it could potentially arise if the beneficiary has very high income and is in a very high tax bracket, and the trust has very little income.
Fiduciaries may also choose not to take the election if the income would cause other negative consequences, such as the loss of Medicaid benefits, need-based financial aid for college costs, higher Medicare Part B and Part D premiums under IRMAA, the loss of health insurance premium tax credits under the Affordable Care Act.
Section 663(b) Election Example
A complex trust has made no distributions to beneficiaries during the calendar year.
But after going over year-end transactions in January, the trustees decided to distribute $100,000 in assets.
When the trustees come to fill out the IRS Form 1041, they have a decision to make:
- Option 1: They can decline to make the 663(b), election, booking the transaction in 2026.
- Option 2: They can take the election, and book the transaction in 2025.
Taking the election means the distribution is treated as though it were paid on the last day of 2025, and puts it onto the individual beneficiaries’ respective tax returns for that year, which are generally much more favorable than those of the trust.
The election does not change the total amount of the distribution. But it does change the timing, and whose tax returns report the income.
Fiduciaries may also make the election decision based on a change in beneficiaries’ circumstances.
How to Make the Election
AbitOs assists fiduciaries of a complex trust or the executor of a decedent’s estate, to make the election via checkbox on IRS corresponding Form. The election must be made by the Form 1041 deadline including extensions. However it is important to note that even if the election can be made by the deadline, the actual distribution has to be recorded in the first 65 days of the year.
State Tax Considerations
State income tax rules do not always conform to the federal 65-day election, so a distribution treated as prior-year income for federal purposes may still be taxed differently—or in a different year—at the state level. Have your AbitOs advisor review your State requirements before the 65 day distribution.
Conclusion
The 663(b) 65-day election is a useful and potentially powerful tax timing tool for fiduciaries of complex trusts and estates.
Used correctly, 663(b) allows trustees and executors to make informed distribution decisions after the end of the tax year when income is known and tax consequences can be thoroughly evaluated. Fiduciaries should be alert to opportunities to push net distributable income to beneficiaries’ income tax returns at more favorable tax rates, rather than retaining it on the trust or estate’s books, where the money will be taxed at much higher rates, in most instances.
But taking the election is not appropriate in every case. Effective use requires careful attention to beneficiaries’ tax profiles and their overall situation.
How AbitOs Can Help
Trust distribution decisions rarely turn on tax rules alone. AbitOs works with trustees, executors, and their advisors to evaluate §663(b) elections and other distribution strategies in the context of the full financial picture. This includes trust terms, distributable net income, beneficiary tax brackets, state tax exposure, and downstream effects such as Medicare premiums, credits, and benefits.
Our team helps fiduciaries model alternatives, document decisions, and implement compliant, tax-efficient strategies designed to maximize after-tax value for beneficiaries while remaining fully aligned with fiduciary duties and governing instruments.
To arrange a personalized consultation, contact us.
