estateplanning

BY JOHN WOODFORD , CPA

Section 645 Election This election allows the trustee to join a decedent ’ s estate in filing an income tax return . Making the election allows the trust to take advantage of the tax advantages available to an estate but not a trust . Some of these are : 1 . Adopt fiscal year-end . 2 . Charitable set aside . 3 . No estimated tax payments . Adopting a fiscal year can be an important tool in determining the timing of the realized income between tax years . This election needs to be made by the latter of the due date , including extensions of the initial trust or estate income tax return . In most cases the election is good for two years but there are exceptions .

Section 663 ( b ) Election ( 65-day Rule ) This election allows the trustee to have distributions made in the first 65 days of the subsequent considered as made in the preceding tax year . This allows the trustee to match distributions with the trust ’ s income for the tax year and benefit from the beneficiary ’ s distribution deduction under Section 661 .

This election applies to complex trusts only as the income beneficiary of a simple trust is considered to have received the current accounting income and taxed on it whether distributed during the year or not .

Election to Realize Gain on Distribution of Appreciated Property Normally when non-cash property is distributed to trust beneficiaries there is no gain recognized by the trust . An exception to this would be if the appreciated property was used to fulfill a pecuniary or certain specific bequest . Absent a specific bequest the beneficiaries receiving a distribution of non-cash property would be considered to have received a distribution equal to the lesser of trust ’ s basis in the property or its fair market value . This disposition will receive an allocation of distributable net income ( DNI ). IRC Section 643 ( e ) allows for the trust to make an election to have the gain realized at the trust level .

By making the election the unrealized gain will be recognized by the trust in the year of the election and subject to tax in the fiduciary income tax return .

The effect of this election would spread the expense of the tax on gain to all beneficiaries as they are receiving benefit from the distribution . It may also absorb a carryover loss of the trust .

Allocation of Capital Gains to DNI DNI is the maximum amount of income that the trust can claim a distribution deduction for . Generally capital gains are excluded from DNI . This is embedded in Treasury Regulations under IRC Section 643 . There are exceptions to this rule that will allow a trust to distribute capital gains out to the beneficiaries : 1 . The trustee is given the power to allocate in trust document or a power provided under state law . Many states allow for the trustee an allocation of capital gains to beneficiaries under a Power to Adjust . 2 . The trustee has consistently included capital gains as part of the distributions .

3 . The capital gains are allocated to corpus but actually distributed or used by the trustee in determining the distribution .

4 . Trust termination . On the final return of the trust all capital gains and losses are passed through to the beneficiaries . The trustee may think it ’ s desirable to allocate capital gains to the beneficiary because of favorable tax rates , but Section 643 may stand in the way .

Allocation of Administrative Expenses Administration expenses are those incurred in administering the trust or estate . The trustee distributes net

22 CALIFORNIA CPA MARCH / APRIL 2024 www . calcpa . org