I'm going to approach this topic today from the perspective of an executor. Often, my clients are executors who want to talk about whether or not they should make an interim distribution of the estate they are handling. First I advise them of their legal position, and then we discuss the decision itself.
Legally, an executor must ensure that estate assets are used to pay debts, expenses, and taxes of the deceased and of the estate before any beneficiaries get any estate assets. That simple statement is the underlying legal principle that leads to the executor's dilemma about whether or not to make an interim distribution. No executor wants to end up using his or her own assets to pay the deceased's taxes, and that could happen if the executor has prematurely given away all the estate's assets.
The only way to know for sure that the deceased and the estate owe no further taxes is to get a Tax Clearance Certificate from CRA. So why doesn't every executor just get the Clearance Certificate? Why even consider going ahead without it? Well, because it takes so long to get one. It takes months. Many months. I have recently heard anecdotal evidence that executors are receiving Clearance Certificates in surprisingly good time, but I haven't heard enough yet to believe the shorter waiting time is the new normal.
During the wait for the Clearance Certificate, the beneficiaries are usually pressuring the executor to hurry up. Few of them are familiar enough with CRA to know that six or eight months is not unusual. Understandably, they want their inheritance sooner rather than later, and they believe that constantly asking the executor for it will achieve that. In my experience, some - okay many - beneficiaries tend to wonder why things are taking so long and they speculate about whether something has gone wrong or the executor is hiding something. At this point, things tend to go sour.
The lengthy wait and its consequences are brought up in every conversation about whether or not to make an interim distribution. As with every decision involving potential legal steps, the client has to weigh possible benefits against possible downsides. In this case, the executor is weighing the possibility of personal liability against the pressure of impatient beneficiaries. Most executors that I've met are sympathetic to the beneficiaries and want to pay them as soon as possible. Every now and then I meet one who is holding back the estate out of spite, but those people, fortunately, are rare.
This is where the interim distribution comes in. The executor can achieve both goals. He can pay the beneficiaries the majority of what they are entitled to receive, while ensuring he does not incur personal liability by holding back enough to cover taxes and any last-minute expenses.
The amount to hold back should be carefully considered. A mistake that executors sometimes make at this point is to assume that the taxes owed by the deceased will be the same for the last year of life as they were for previous years. This is not always the case. On the death of the individual, there may be capital gains that crystallize. There may be income tax on RRSPs or RRIFs that are paid to an estate. An executor should ensure he knows the full financial picture and in many cases should consult an accountant before being confident that he knows what the tax impact will be, and therefore how much money should be held back from the beneficiaries.
When executors ask me whether they should carry out an interim distribution, I start from a position of assuming that an interim distribution is a positive step. My client and I then look at the possible downsides as set out above, but I try to steer the client to a practical conclusion. If the bulk of the estate can be paid out without risk to the executor, then in my opinion, it should be paid out.
As a general rule, an executor cannot be forced by the beneficiaries to make an interim distribution. It is within the executor's discretion as to whether that is good for the estate as a whole. However, an executor must always keep in mind that beneficiaries have rights too, and near the top of the list is the right to have the estate wound up in a timely manner. In extreme cases of delay, the courts have been known to order an executor to make an interim distribution.
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