Potential Fiduciary Income Tax Savings Upon Distributions to Beneficiaries

           Fiduciary income tax preparation season is upon us.  Please remember that Rynkar, Vail & Barrett specializes in the preparation of these returns, as well as related fiduciary income tax planning.  Our firm’s expertise and reasonable billing rates make it an ideal source for such services for your trust and estate clients.  Please keep us in mind and do not hesitate to contact us for further information.

      Substantial changes in Federal tax law effective in 2013 have expanded the importance of considering special distributions to trust and estate beneficiaries.  The new higher 39.6% Marginal Tax Rate on ordinary income and the new 20% rate on qualified dividends/capital gains on income over $11,950 for trusts and estates increase the likelihood that beneficiaries’ tax rates will be significantly lower than those entities.  Additionally, the new 3.8% Net Investment Income Tax (NIIT) is effective when taxable income exceeds only $11,950 for trusts and estates whereas a beneficiary may not be subject to the 3.8% tax at all, depending on adjusted gross income level.

         Naturally, making distributions may not be advisable or permitted.  However, if you have any trusts or estates for which you believe that such planning might be advisable, perhaps we can be of assistance in preparing alternative tax projections.  (Please see the enclosed illustration of potential savings.)  As you are aware, distributions during the first 65 days of a year can be treated as distributions made during the previous year, so there is still time to do this planning for the calendar year 2013.

      If you have any questions or comments, please do not hesitate to contact Bob Rynkar, Frank Riviezzo or Melissa Gonzalez.


      Assume a trust or estate with taxable income of $100,000 consisting of $50,000 interest income and $50,000 qualified dividends/capital gains.  Also, assume a low tax bracket beneficiary or multiple beneficiaries such that ordinary income distributed from the trust or estate would be taxable at the indicated Federal tax rates.  (Note this illustration does not reflect the potential additional effect of state and local taxes and assumes that beneficiary AGI is below the threshold for imposition of the Net Investment Income Tax.)

 Income Retained by Trust or Estate

       Federal Income Tax              $28,100    $28,100    $28,100 

              Net Investment Income Tax           3,300       3,300       3,300

                                                                            $31,400     $31,400     $31,400   

Income Distributed to Beneficiaries

        Tax Rate on Ordinary Income         15%       25%       28%

           Federal Income Tax               $15,000*    $20,000    $21,500

 Federal Tax Savings if Distributed            $16,400    $11,400    $ 9,900 

* Note: It is possible that a beneficiary could be taxed on ordinary income at a rate of 15% and pay little or no tax on qualified dividends/capital gains, which would reduce the $15,000 tax shown in this scenario.