The 65-Day Rule
A Second Chance to Distribute Income
Didn’t distribute all the trust’s income before December 31? There’s a 65-day window in the new year to make distributions that still count for the prior year’s tax return.
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Why this matters - trusts are taxed heavily
Here’s something that surprises most family trustees: trusts hit the highest federal tax rate (37%) at a much lower income level than individuals do. In 2026, a trust pays the top rate on income above roughly $16,000. An individual doesn’t hit that same rate until their income exceeds $640,000. That’s an enormous difference.
This means that money sitting inside the trust is taxed much more heavily than the same money would be if distributed to a beneficiary. When the trust distributes income to a beneficiary, the beneficiary pays tax on it at their own rate, which is almost always lower. The IRS calls this the “distribution deduction,” and it’s one of the most important tools in trust tax planning.
The problem: you don’t always know in time
The challenge is that the trustee often doesn’t know exactly how much income the trust earned until well after the year is over. K-1s from investments may not arrive until March. Capital gains aren’t final until all year-end statements are in. If the trustee has to make all distributions by December 31, they’re guessing, and might distribute too little (leaving income trapped in the trust at high rates) or too much (distributing more than intended).
The solution: the 65-day rule
The IRS gives trustees a grace period. Under the “65-day rule,” distributions made in the first 65 days of the new year can be treated as if they were made on December 31 of the prior year. For a calendar-year trust, that means any distribution made between January 1 and March 6 (March 5 in a leap year) can count toward the prior year’s tax return.
This lets the trustee wait until the picture is clearer: see how much income the trust actually earned, then distribute the right amount to minimize the overall tax bill.
The 65-day window
How it works in practice
- We review the trust’s income for the year (interest, dividends, capital gains, K-1 income, etc.)
- We calculate how much distributing to the beneficiaries would save in total taxes (trust-level savings minus the tax the beneficiaries will owe)
- If the numbers make sense, you as trustee make the distribution, write a check or transfer funds to the beneficiaries, by March 6
- We make the election on the trust’s tax return, and the distribution is treated as a prior-year distribution
- The beneficiaries receive a K-1 reporting the income for the prior year
It’s not always the right move
The 65-day rule is a powerful tool, but it’s not automatic. If the beneficiaries are already in high tax brackets, distributing income to them might not save anything. If the trust instrument limits distributions, the trustee may not have the authority to distribute just for tax purposes. And there’s a cap: you can’t distribute more than the trust’s income for the year.
We run the numbers before recommending a 65-day distribution. Sometimes the savings are substantial; sometimes it’s not worth the administrative effort.
Frequently Asked Questions
What is the 65-day rule?
The 65-day rule allows a trustee to make distributions in the first 65 days of the new year (January 1 through March 6 for calendar-year trusts) and treat them as if they were made on December 31 of the prior year. This means the distributed income is taxed to the beneficiary instead of the trust. Since trusts hit the highest tax rate at a much lower income level than individuals, this can result in significant tax savings. The election is made on the trust’s tax return and applies for that year only.
Why would I distribute income from the trust?
Trusts reach the top federal tax rate (37%) at roughly $16,000 of income in 2026. Individuals don’t hit that rate until over $640,000. When the trust distributes income to a beneficiary, the beneficiary pays tax on it at their own (usually lower) rate. The total tax bill, trust plus beneficiary combined, is often significantly less than if the trust had kept the income and paid tax on it.
Is there a limit on how much I can distribute under the 65-day rule?
Yes. The amount that counts as a prior-year distribution is capped at the trust’s income for the prior year, reduced by any distributions already made during that year. You can’t distribute more than the trust earned and have it all count. We calculate the exact cap as part of our year-end planning.
Do I have to do this every year?
No. It’s completely optional, and the decision is made fresh each year. Some years the tax savings are significant and the distribution makes sense. Other years, the beneficiaries are in high brackets themselves, or the trust didn’t earn much income, and there’s no benefit. We evaluate it annually and let you know whether it’s worth doing.