65-Day Rule
§663(b) Election

What the §663(b) election does

Under §663(b), the fiduciary of a trust or estate can elect to treat distributions made within the first 65 days of the taxable year as having been paid or credited on the last day of the preceding taxable year. For calendar-year trusts, that means distributions made between January 1 and March 6 (or March 5 in a leap year) can be treated as December 31 distributions for purposes of computing the distribution deduction under §§661–662 and the beneficiary’s inclusion under §662.

This is an annual election: it is made separately for each taxable year and applies to all distributions within the 65-day window. It is not selective: you cannot elect to pull back some distributions but not others.

Why it matters - the trust tax rate problem

Trusts and estates reach the top federal income tax rate (37%) at approximately $16,000 of taxable income (2026 threshold). By contrast, an individual taxpayer doesn’t hit the 37% bracket until over $640,600 (single) or $770,000 (married filing jointly).

This compression means that retaining income in the trust is almost always more expensive than distributing it to beneficiaries who are in lower brackets. The distribution deduction under §661 is the mechanism for shifting the tax burden, and the 65-day rule gives the trustee a window to make that decision with full information.

Without the election, the trustee must make all distributions by December 31 of the taxable year, often before receiving final K-1s from partnerships, before knowing final capital gains, and before being able to calculate actual DNI. The 65-day rule solves this timing problem.

The cap on the election

The amount that can be treated as distributed in the preceding taxable year is not unlimited. Under §663(b), the election applies only to the extent that the amount does not exceed the greater of:

• The trust’s fiduciary accounting income (FAI) for the preceding taxable year, or
• The trust’s distributable net income (DNI) for the preceding taxable year (reduced by distributions actually made during the preceding year)

In most cases, the effective cap is DNI minus prior-year distributions already made. If the trust already distributed its full DNI during the year, there is no remaining DNI to absorb the 65-day distribution; the election has no additional tax benefit in that case.

Note: The election does not create additional DNI. It only allows the timing of when a distribution is deemed to have been made to shift. The distribution must still be an actual distribution of money or property to a beneficiary.

Making the election

• The election is made on the trust’s Form 1041 for the taxable year to which the distribution is being allocated (i.e., the prior year’s return)
• Specifically, it is made by checking the box on Form 1041, Section A, line 6 (or by attaching a statement if the form instructions direct)
• Must be made by the due date (including extensions) of the return
• The election is irrevocable for that taxable year once the return is filed
• It is made annually: there is no permanent election. The trustee decides each year whether to make the election
• The election applies to both simple and complex trusts, but it is only relevant for complex trusts. Simple trusts are already required to distribute all income currently, so the election has no practical effect.

Estates and fiscal years

Estates, and trusts that have made a §645 election, can use a fiscal year. For fiscal-year filers, the 65-day window runs from the first day of the new fiscal year. For example, an estate with a June 30 fiscal year end can treat distributions made between July 1 and September 3 as June 30 distributions.

This interacts with the §645 election: during the election period, the combined estate/QRT can use a fiscal year AND the 65-day rule, which gives maximum flexibility for timing distributions around the actual receipt of income information.

Practical considerations

• The 65-day rule is most valuable when the trust receives K-1 income from partnerships or other pass-through entities that arrive after year-end
• It is also valuable for trusts with significant capital gains, where the trustee wants to see the full picture before deciding how much to distribute
• The election must be paired with an actual distribution: the trustee cannot simply elect to treat income as distributed without actually writing a check or transferring assets
• Document the distribution and the election in your fiduciary records
• Coordinate with the beneficiary’s tax preparer so the K-1 income is reported in the correct year
• If the trust has multiple beneficiaries, the 65-day distribution is allocated among them based on the trust instrument and distribution formula

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