Estates are usually comprised of different types of assets such as real estate, cash, and marketable securities including, stocks, mutual funds, municipal bonds, and corporate bonds.

During the estate administration, an estate attorney may recommend to the Personal Representative to make partial distributions to the beneficiaries. A partial distribution is an interim distribution to the estate’s beneficiaries while the estate is still being administered.  In contrast, a final distribution is a distribution at the conclusion of the estate administration process.

Usually, Personal Representatives make partial distributions to the beneficiaries with cash or by distribution of securities.  Distribution of non-cash assets such as stocks or bonds are called in-kind distributions.  In today’s economy characterized by low yields on fixed income investments and real estate that remains for sale on the market for considerable time, Personal Representatives are likely to hold on to cash to pay taxes, the carrying costs of real estate and to pay administrative fees such as fiduciary fees, attorney fees, accountant fees and similar items.

In many instances, it will be administratively prudent for the Personal Representative to make in-kind partial distributions to beneficiaries.  What type of securities should the Personal Representative use to satisfy the in-kind partial distribution to beneficiaries?

A well seasoned probate attorney should advise the Personal Representative to use tax free investments, such as municipal bonds or municipal bond mutual funds to make partial distributions to beneficiaries. The reason is because the transfer of tax free investments reduces the estate’s tax free income. The reduction of tax free income, results in an increase of tax deductible expenses for the estate. Section 643 of the Internal Revenue Code allows the Personal Representative to take deductions for most administrative expenses to the extent of taxable income, but after reduction for tax free income and capital gains.  For instance, if an estate has income of $30,000 comprised of  tax free interest of $10,000 and taxable interest of $20,000, then only 2/3 ($20,000 taxable income/$30,000 total income or 66.67%) of that year’s administrative expenses are deductible against the income.  If a partial distribution of tax free investments shifted $5,000 of the tax free income to beneficiaries, then the ratio of taxable income to total income is increased to 4/5 ($20,000 taxable income/$25,000 total income or 80%).   In sum, the estate would deduct $8,000 for administrative expenses with the partial distribution of tax free investments that yielded $5,000 in tax free income but only $6,667 without the partial distribution.

Note: This blog is designed for general information only. The information presented at this site should not be construed to be neither formal legal advice nor the formation of a lawyer/client relationship. If you would like to contact Stuart A. Rader regarding an area of probate and trust administration, estate planning, taxation, and succession planning for closely held businesses, please email counselor@floridaprobatelawblog.com.