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Monday, December 3, 2012

Why is there a second distribution on a small estate?

Did you ever wonder why you receive your inheritance, only to get a second, smaller cheque from the estate months later? This reader had the same question:

My mother died in 2011, leaving a modest estate. I'm told there is a second distribution coming. I want to know if this is standard, seeing as how my mother's estate is small.

Yes, it's very common for estates to be distributed in two (or occasionally more) portions. This really has little to do with the size of the estate.

The second distribution is generally much smaller than the first one, and this has to do with the reason for the division in the first place. Usually an executor wants to get the estate handled quickly and the money out to the beneficiaries in a timely manner. At least, that's supposed to be how they think. I'm ignoring all of the rogue executors out there for the moment.

The executor must pay bills and taxes before he or she can pay beneficiaries. Bills aren't much of a problem in terms of delays. Taxes, on the other hand, can be another matter. It can take several months to get a Clearance Certificate from Canada Revenue Agency to show that all taxes have been paid. And normally beneficiaries don't want to wait that lon. To get the bulk of the estate into the hands of the beneficiaries, an executor may do an interim distribution. (Note that I said "may" do this, as he or she is not required to give the beneficiaries their shares early).

This involves holding back enough estate money to cover anticipated taxes and any last expenses (usually accounting and legal fees). The executor then distributes everything except this holdback. Months later when the Clearance Certificate arrives, the executor distributes any money that is left over. In this reader's case, this is almost certainly the second distribution that has been mentioned. As I said, I would expect this distribution to be smaller than the first one.

Another possibility, though one that is admittedly less likely, is that the executor found that your mother owned more assets than were known about earlier.

In multi-million dollar estates, there can be several distributions over time. This is usually because it takes time to sell businesses or homes in Mexico, and new sums of money flow into the estate as time goes on. However, in most cases, especially in smaller estates, there wouldn't be more than two distributions.

It sounds to me as if the executor in this case has a good grasp on things and is following all the right steps.

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