Are we there yet?
If you have ever served as an executor of an estate, then you will appreciate the risks that go into making a final distribution of assets. A lot must go on behind the scenes before assets start going out the door to beneficiaries.
What to Consider Before Distributing an Estate
You start by looking at the will itself. Many wills contain specific instructions about the timing of distributions and the way property should be divided. Most wills have at least one condition that must be satisfied before the beneficiary is entitled to receive anything – usually a requirement that the beneficiary must survive the decedent by a specified amount of time.
Next you consider whether any property should be set aside for the decedent’s surviving spouse and minor children. Some property may be exempt from distribution or must be used to satisfy a family allowance. Determining that has some procedural requirements.
Using Estate Assets to Pay Claims
After that, you look at whether there are enough estate assets to pay claims against it and any other obligations. This is especially crucial regarding federal taxes or other federal claims since you will be personally liable if you distribute assets without holding enough in reserve to pay taxes.
Mixed into this is timing to offset income earned by the estate. After all, a lot of estates earn income between the time of the decedent’s death and the time the assets are distributed. The estate is responsible for paying taxes on that income. You may need to consider timing the distributions to minimize taxes.
If your decedent died without leaving a will, then you cannot distribute assets until the court formally determines the heirs. Although this may seem like a mere technicality, it is the only way to ensure the right people receive distributions.
Court-Created Trust for Minors
If any of the beneficiaries are minors or are incapacitated, then you likely will not be able to distribute any assets outright to them. You may need to ask the court to establish a court-created trust or seek to have a guardian appointed.
Postponing a Distribution
You also need to keep an eye on the clock. There may be costs associated with postponing a distribution. For example, if the will leaves $10,000 to Sally, then by law Sally starts earning 6% annual interest on that money beginning on the first anniversary of the decedent’s death. The interest is paid out of the estate.
Then there is the recovery issue if federal estate taxes are owed. A decedent’s estate for federal estate taxes includes both probate (assets passing under the will) and non-probate (assets passing by beneficiary or survivorship designation, or that were held within a revocable trust). You, as the personal representative, must pay the entire estate tax out of the probate estate. However, you are entitled to recover a pro-rata share of the tax from the non-probate assets. This is usually difficult to do, so you will have to make a business decision early in the probate about whether you are going to do so.
Some assets, like real estate, are not easily divided. You may have to sell the asset before you can fully distribute the estate among the beneficiaries. You will need to reserve enough time to get that accomplished.
Distributing Community Property
Finally, there is that whole community property issue. If the decedent left a spouse, then you will have to determine what property was community property, and then how the estate’s share of that can be distributed.
You can distribute the estate at any time. That does not mean you should.
Hammerle Finley Can Help With Your Probate Needs
Virginia Hammerle is in her fourth decade of practicing law. She is Board Certified in Civil Trial by the Texas Board of Legal Specialization and an Accredited Estate Planner. Contact her at email@example.com or visit www.hammerle.com. This column does not constitute legal advice.