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Estates & Trusts

Planning for Year-End Distributions to Your Trust Beneficiaries?

By November 21, 2014No Comments

Do you need to make year-end distributions to your trust beneficiaries? Capital gains from assets sold in December are not taken into account in calculating this year’s estimated tax payments for trusts, so waiting until after the Thanksgiving holiday to generate cash for distributions may provide an extra boost in the trust’s cash flow flexibility.

The IRS rules regarding the calculation of estimated tax payments provide that trusts are to base their Q4 declarations of estimated tax on actual income and expenses through the end of November. Thus, if the trust needs to raise cash to make required or discretionary distributions to beneficiaries, any December transactions will generally not require any remittance of tax to a taxing authority until the trust’s tax returns are filed in 2015. Postponing sales a few days can amplify the trustee’s ability to make the best economic decisions possible on behalf of the beneficiaries.

The tax code also allows trustees to make Q4 distributions to trust beneficiaries after the end of the calendar year and still have them counted as distributions for the prior calendar year. This facility under IRC §663(b) can be a powerful tool in addressing unexpected yearend income such as capital gains distributions from mutual funds and corporate actions resulting in taxable income in your portfolio. Due to the fact that trusts reach their maximum rates at $12,150 of taxable income (versus $406,750 of taxable income for a single individual), distributing income to beneficiaries can result in a significant permanent tax savings.   If you’d like to walk through how this applies to your trust and discuss how you may be able to leverage some of these provisions, please call us anytime.

Don’t forget the power of gifting! Now is an excellent time to re-examine your gifting program and decide whether it continues to meet your goals. Remember, the IRS allows you to gift $14,000 per year (adjusted for inflation) to each individual without incurring a gift tax liability. In addition, payments for medical expenses, medical insurance, and educational expenses paid directly to the service providers are exempted from the definition of a gift under §IRC 2503(e). A special election under §529(c)(2)(B) allows you to “super-fund” a college savings plan account for the benefit of younger generations by contributing to the §529 account now and spreading the gift tax impact of the gift evenly over five years. This technique can potentially reduce a current gift of $70,000 (which would otherwise result in a taxable gift of $70,000 – $14,000= $56,000) to five annual-exclusion-only gifts of $14,000. This will shift appreciation on the funds into the tax-favored §529 plan which furthers the goal of funding education for younger generations as well as removing the appreciation from your estate. If you’re interested in gifting strategies, please contact us to discuss your wealth transfer goals and how we might be able to help you further them in 2014.

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