What are Interim Distributions?

An interim distribution is a partial distribution of the estate to beneficiaries before administration is finalized.

The Essence of Interim Distributions

The key to successful interim distributions of estates is balancing competing considerations reasonably.

Deciding whether to make an interim distribution and if so how much is an excellent example of the challenges of administering an estate – the trustee must make judgement calls that can have significant consequences.  To do this, the trustee should be get professional advice and guidance, inform themselves of the real considerations, not over-exaggerate immaterial risks, make a decision in a timely manner and implement it.

The Competing Considerations

The key factors to consider are –

• Protecting the estate trustee from unnecessary risk or liability which can have two forms
  • Distributing too much too soon can expose the trustee to liability, but
  • Taking too long to distribute some or all of the estate can expose the trustee to challenge from beneficiaries and even sanction from the Court (especially in the form of reduced trustee compensation).
• The entitlement of beneficiaries to timely distribution of the estate
• The value to beneficiaries of prompt distributions.  Inheritance delayed is, in many respects, inheritance denied

The Role of Holdbacks

The gold standard for protection of the estate trustee is to ensure that they have received a Clearance Certificate from Canada Revenue Agency up to the time of final distribution of the estate.

However, it is neither necessary nor appropriate for an estate trustee to make no distribution before receiving a clearance certificate.  That over-prioritizes trustee risk, to the detriment of beneficiary interests.

The soludion is for the estate trustee to retain a holdback that is sufficient to cover all reasonably foreseeable liabilities, which include unpaid income taxes and any other debts or expenses, and to distribute the balance as an interim distribution.

Taxes and the 50% guideline

The biggest risk to the estate trustee from too large an interim distribution is that they may not have enough funds on hand to pay all income taxes due.

In particular, if the estate trustee distributes the entire estate to the beneficiaries and then determines that there are unpaid income taxes for the deceased or the estate, the estate trustee can be personally liable for the unpaid tax.

Thus, the question for an interim distribution is, “what distribution is prudent to make before receiving a clearance certificate?”

The answer lies in ensuring that the estate trustee has a good understanding of the approximate unpaid tax liabilities .  The most important liaiblities fall into two categories (usually)

• taxes arising well prior to death (particularly relevant if the deceased did not file tax returns for many years before their death).  The amount due can range from nothing to exceed the entire estate – all depends on whether the deceased managed their taxes prudently before death, and
• taxes arising on death, usually from the deemed disposition of RRSPs, RRIFs, and other investments (including real estate other than a principal residence).  As a rough rule, for most estates it is very unlikely that these taxes will exceed 50% of the estate.

Challenging excess caution

In our experience, many estate trustees (and their legal counsel) are overly cautious and refuse to make any interim distribution without a clearance certificate.  This reflects poor understanding of the competing considerations, exaggeration of the tax liabilites, and underappreciation of the benefit to beneficiaries of interim distributions.

The caselaw is clear that a beneficiary is NOT entitled to an interim distribution.  However, that does not mean that a trustee can or should refuse to make any interim distribution.  First, the refusal to distribute should not be from malice or spite as a way to assert dominance over the beneficiaries (which is unfortunately common trustee behaviour).  Second, a beneficiary is entitled to demand that the trustee administer the estate properly in the best interest of the beneficiaries in a timely manner.  Thus, the burden of proving that it is not prudent to make any interim distribution should lie on the trustee.

Where the estate trustee is unduly delaying any distribution, beneficiaries should get legal advice.

Miltons Estate Lawyers – Probate, Wills, Trusts and Estate