Mastering NIIT for Trusts and Estates: Net Investment Income Tax Planning Strategies to Minimize Surtax

Description

The impact of the Section 1411 NIIT on estate and trust taxation cannot be overstated. Since its passage for tax years beginning after Dec. 31, 2012, tax advisers have wrestled with strategies to minimize the impact of the NIIT on fiduciary taxpayers.

Section 1411 imposes a 3.8% surtax on “net investment income”. For trusts and estates, the taxable base consists of the lesser of “undistributed net investment income” over the threshold of the highest regular income tax bracket in effect for the taxable year. The tax applies to most trusts, with very few enumerated exceptions.

Given the low threshold for the top tax bracket for trusts, and because virtually all trust and estate income—save limited exceptions where the trust can argue material participation in a business holding qualifies as net investment income—the NIIT applies to virtually all trust income.

Determining whether capital gains income can be treated as distributable net income and thus subject to the DNI deduction, advisers must fully grasp the impact of the NIIT. Trust advisers must understand the various moving pieces of NIIT calculations to minimize the impact of the additional surtax.

Listen as our experienced panel provides a practical roadmap to the calculations, reporting and planning considerations involved in the Section 1411 NIIT, including discussions on the latest IRS guidance on the application of the NIIT to trusts and estates, primarily focusing on material participation, but also on calculation of what constitutes net undistributed investment income.