Interim distributions allow executors to get the bulk of the residuary estate to beneficiaries as quickly as possible.
There’s lots to do administering an estate (sometimes referred to a ‘probate’). And, the loose ends might well not be tied up for a year or more after the date of death. So, it is good practice for executors to make ‘interim distributions’ to the residuary beneficiaries as soon as they can, holding back an amount to cover those liabilities that may fall due as things draw to a close. Here, we look at how interim distributions work, and the rationale behind why executors can not just pay out everything before the estate is concluded.
What is an Interim Distribution?
An interim distribution is a partial payment of residuary estate to a residuary beneficiary where the administration of the estate is not yet complete. It is ‘on account’ of the beneficiary’s final entitlement to the estate (whatever that share might be – ie if there are more than one residuary beneficiary).
When are Interim Distributions made?
There is no timeframe for when interim distributions can or must be paid. It’s helpful to remember the basics of the probate journey to think when interim distributions might naturally become a sensible step for the executors. So, that journey is:
- Establish estate – gather date of death valuations for all assets and liabilities
- Pay IHT – if any falls due
- Probate – apply for the grant of probate
- Realise assets – with the grant of probate issued, the executors can release all cash assets
- Pay fixed cash legacies
- Conclude the administration of the estate (this might take months – see below)
The natural point at which executors should think about making interim distributions is once all assets have been realised, and liabilities paid. The final bullet point (above) shows the final bit of the administration of the estate to be ‘conclude the administration of the estate’. These ‘loose ends’ can often be very frustrating for all concerned, and are likely to be things like waiting for HMRC to sign off Inheritance Tax (IHT), income tax, or both.
If the executors wait until those loose ends are tied up, the residuary beneficiaries may well end up frustrated (or even annoyed!) that they aren’t allowed access to at least some of the inheritance due to them. Step forward interim distributions!
Who decides when or if Interim Distributions are made?
It is for the executors to decide when or if Interim distributions are made. It is also for the executors to decide what amount is released. The reason it is their decision is that they carry a personal responsibility to ensure that all liabilities are paid right up until the conclusion of the administration of the estate. If liabilities change for any reason, and the executors have paid out too much, they are then personally liable to meet the shortfall….!
How do Executors work out how much to pay on an Interim Distribution?
The key with interim distributions is that the executors must ensure that they have held back a cautious amount to cover all final liabilities. If they pay out too much, and liabilities exceed what they have left, they become (potentially) personally liable to meet that shortfall. So in simple terms, the calculation is the amount of cash available minus all liabilities that are or might fall due.
How much can be paid also relates to the timings of interim distributions. There are perhaps 2 natural points at which interim distributions are made, and that’s when the cash is released into the estate. That is firstly when the cash assets are released, and then secondly (if there is a house) when the deceased’s property is sold. It is usually in that order – ie cash assets released, and then house sells. Each of those two events will present as a moment for the executors to consider an interim distribution.
Why don’t the Executors just pay everything out the Residuary Beneficiaries?
It is simply impossible for executors to predict exact liabilities and to that end, they have to retain a ‘slush fund’. A well administered estate will see the executors release as much money as possible to the residuary beneficiaries (by way of interim distributions), with the final payments being (hopefully) relatively modest versus the value of the estate.
The most common ‘loose end’ to be tied up is the deceased’s tax affairs – Inheritance Tax (IHT), income tax, or both. This can take many months to receive final clearance from HMRC. And, until the executors have that clearance they can not (and should not) release all funds to the residuary beneficiaries.
Where will Beneficiaries see details of the Interim Distributions?
Executors should detail interim distributions in the ‘distribution account’ section of the estate accounts.
Do Interim Distributions apply to fixed cash Legacies?
It is very rare for the payment of fixed cash legacies to be staggered. Remember that legacies should only ever be token gestures versus the overall value of the estate. The bulk of the estate (the residuary estate) passes to the residuary beneficiaries and this is where interim distributions are used. At the time of drafting a will, the testator would never know the final value of their ‘net residuary estate’ as it depends on the value of assets realised, less liabilities falling due. That figure is only known when all loose ends are tied up. On the other hand, a fixed cash legacy is what it is. A fixed cash legacy might look like this:
“I GIVE £1,000 to The Royal National Lifeboat Institute”
A share of residue (against which interim distributions might be paid, may look like this:
“I GIVE the whole of my estate to The Royal National Lifeboat Institute”
What if the Executors refuse to make Interim Distributions?
This is a good reason (one of a number in fact) to think about appointing professional executors. Dealing with probate is often a very time-consuming process, and can be stressful too. If you appoint friends or family members as your executors, they take on that responsibility as a gesture of good faith, and something they will have to squeeze in around their ongoing own lives. If they struggle with that, you may place them in the ‘firing line’. And moreover, your residuary beneficiaries will have limited options to hold the ‘lay’ executors to account. If however you appoint professionals (solicitors) that comes with a number of benefits. Firstly, choose right and things should be dealt with quickly, efficiently, and without hitch (because it is what the solicitors do day in day out). Secondly, if things do go wrong, your residuary beneficiaries can rely on the fact that the solicitors are tightly regulated (The SRA), and even look to the Legal Ombudsman if they are unhappy with progress with the estate. There is no such ‘accountability’ if you appoint lay executors. Finally, you give the burden of the administration of your estate to someone who will be paid to do it – rather than asking a favour of friends or family.
Need advice about Interim Distributions?
If you are an executor or indeed a residuary beneficiary and you would like advice on the subject of interim distributions, do reach out – we’re here to help. You can leave a comment below, email us, or call. Our expert probate solicitors are here to help.