The 65-Day Rule for Trust Distributions: The Section 663(b) Election.

A trustee gets the trust's brokerage 1099 in February and realizes the trust earned $60,000 of interest and dividends last year that nobody distributed. Taxed inside the trust, that income lands almost entirely in the 37% bracket, plus a 3.8% surtax, and the bill is over $21,000. Taxed on the beneficiary's return, where she sits in the 22% bracket, the same income costs far less. The 65-day rule is the tool that lets the trustee still make that choice, months after the year has closed.

A trust does not get the wide brackets an individual does. For 2026, under Rev. Proc. 2025-32, a trust's income is taxed at 10% up to $3,300, 24% up to $11,700, 35% up to $16,000, and 37% on everything above $16,000. An individual does not reach that 37% rate until taxable income is well into the hundreds of thousands. So a trust hits the top rate at $16,000 while its beneficiary might still be in the 12% or 22% bracket. On top of that, the 3.8% net investment income tax (a surtax on investment income) hits a trust once its income clears that same $16,000, a threshold most individuals never approach.

The way out of the compression is to distribute income to the beneficiaries. A complex trust (one that can accumulate income rather than pay it all out) gets a deduction under IRC §661 for what it distributes, and the beneficiary picks up that income on their own return under §662, reported on a Schedule K-1. The catch is timing. A trustee usually cannot know the trust's income for the year until well after December 31, once the 1099s arrive, and by then the year is closed. That is the exact gap the 65-day rule fills.

Section 663(b) lets a fiduciary elect to treat any distribution made within the first 65 days after year-end as though it were made on the last day of the prior tax year. For a calendar-year trust, 65 days after December 31, 2026 is March 6, 2027. So the trustee can wait for the tax picture to clear, cut a check to the beneficiary by March 6, and have it count against the prior year's income. The distribution carries out that year's income to the beneficiary and out of the trust's high brackets.

The amount you can elect is capped. Under Treas. Reg. §1.663(b)-1, the election cannot exceed the greater of the trust's accounting income or its distributable net income (DNI, the ceiling on how much taxable income a distribution can carry out) for the year, reduced by amounts already distributed during that year. DNI is the governor on this whole machine: you can only push out to beneficiaries what DNI allows, and distributions above DNI carry no income and get no deduction. In plain terms, you cannot shift more income than the trust actually earned.

The election is made by checking a box on the trust's Form 1041, in the Other Information section on the back of the return (line 6, "If this is an estate or a complex trust making the section 663(b) election, check here"). It has to be on a timely filed return, including extensions, and once made for a year it is irrevocable. There is no separate form and no letter to the IRS. Miss the box and the distribution simply counts in the current year instead, which defeats the purpose.

Two kinds of trusts do not need this and cannot use it. A simple trust is already required to distribute all of its income every year, so there is nothing to elect. A grantor trust is taxed to the person who set it up regardless of distributions, so the brackets never bite. The 65-day rule is for complex, non-grantor trusts and for estates, which is where accumulated income runs into the compressed brackets. If you are weighing whether to hold or distribute across several years, it pairs naturally with the planning behind a grantor retained annuity trust or the broader estate tax exemption picture.