The duty to distribute, prudently

The problem. 

Many estate trustees are under the misapprehension that they cannot make any distribution to beneficiaries until a final clearance certificate has been received from Canada Revenue Agency (“CRA”).

This is false. 

A trustee has the discretion to make one or more distributions before the final distribution (“interim distributions”) if they wish.

The real question is whether an estate trustee should exercise this discretion and if so, how much they should distribute as interim distribution(s).

Duties. 

An estate trustee is a fiduciary who must reconcile different duties which include:

• A duty to pay all creditors, including a duty to ensure that all tax liabilities of the deceased and the estate are paid in full.

• A duty to administer the estate in a timely fashion. This is an affirmative duty.  Life is short and can change rapidly.  A distribution unnecessarily delayed is not without cost and not without risk of breaching the trustee’s duty: a delayed distribution can inflict real and unnecessary harm on a beneficiary, can create and inflame tensions between the trustee and beneficiaries, and can precipitate litigation.

The upshot is that an estate trustee should distribute as much as they prudently can as soon as they prudently can.

Prudence and foreseeable tax liabilities. 

An estate trustee is obliged to ensure that CRA is paid all income taxes due by the deceased (before death) or the estate (income after death).

The estate trustee can be personally liable to CRA if the trustee distributes the estate to beneficiaries and fails to pay all income taxes due.

The risks for the trustee if they fail to ensure all taxes are paid are significant.  However, nothing in these obligations precludes the potential for an interim distribution by a prudent estate trustee.

CRA is often extremely slow to produce final clearance certificates.  Delays of over 6-8 months from the date that the request is filed are not uncommon (with request filing often delayed pending the completion of full tax years).  Waiting for a final clearance certificate before making any distribution can impose very significant – and unnecessary – delays.

Unnecessary and unjustified delay causes increased friction and can increase legal expenses for the trustee and the beneficiaries.

Once the estate trustee has quantified the likely tax liabilities of the estate, the estate trustee can (and we believe should) distribute as much as the estate trustee prudently can while retaining a sufficient reserve (called a ‘holdback’) to satisfy any reasonably foreseeable future tax liability.

Under this fairly common scenario the likely tax liabilities of the estate are very modest.  The gains on the sale of the house (sale price greater than purchase price) likely is exempt from income tax under the ‘principle residence exemption’.

Once the trustee has sold the property and filed the tax return for the deceased for the last year of life (and ideally received a notice of assessment) the trustee should have a very good sense of any foreseeable further tax liabilities.  Using this information, the trustee should be able to determine a reasonable amount to holdback to ensure that the trustee retains sufficient funds to pay any liabilities that might arise before the final clearance certificate.

The trustee could then prudently distribute the rest of the estate.  A distribution of at least 50% of the estate would not be uncommon and can help beneficiaries immensely while also reducing tensions between the beneficiaries and the trustee and reducing the risk of litigation.

In short, a substantial interim distribution is often in the trustee’s best interest.