A distribution is the delivery of cash or an asset to a given heir. After resolving debts and paying any taxes due, the executor should distribute the remaining estate to the heirs in accordance with the instructions in the will (or as dictated by the court).
Before making any distributions, it's best to come up with an overall estate settlement plan: how you plan to resolve debts, which assets you plan to sell, which assets you plan to distribute directly, which heirs will get what, etc.
Your goal is to resolve all debts and to allocate 100% of the remaining value of the estate, with each heir scheduled to receive the proper items and the correct overall share of the estate. It's usually easiest to try to do things in this order:
- Handle Named Beneficiaries — Define distributions for assets over which you have no control (i.e., 401Ks, life insurance policies, etc.)
- Account for Family Entitlements — Define distributions for any Family Entitlements that will be utilized
- Allocate Bequests — Define distributions for any specific bequests made in the will
- Prepare for Debt Resolution — Ensure you will have enough cash to resolve the debts, planning to sell assets if necessary
- Mark Assets for Sale or Distribution — Plan remainder of asset disposition
- Allocate Distributions — Define distributions so that each heir will get the proper share of the final estate
If the estate will not have enough free cash to resolve all debts, even after liquidating all available assets in step 5, you may need to revisit some of the earlier steps in an attempt to satisfy estate creditors, since debts generally have precedence over other estate claims.
The steps outlined above work well for an estate that can ultimately pay its bills, but if not, you will need to keep in mind that an estate must give preference to its obligations in a defined priority order (see diagram). Certain transfers (such as to IRA beneficiaries) happen automatically outside the control of the estate, and the estate itself must then ensure it has enough funds to pay all taxes, then estate administration costs, then any family entitlements, then any general debts, and with anything left over, fulfill any bequests, and finally distribute the residuary estate. If the estate runs out of money handling one priority, then subsequent priorities are left with nothing.
Note that state law determines which debts have priority over other debts, and some debts (such as funeral expenses) often have priority over family entitlements, but these specifics really only matter if the estate cannot pay all its bills (see Insolvent Estates for more details).
EstateExec makes the overall planning process easier by allowing you to mark whether you plan to sell or distribute each asset (see Reference: Asset Planning), and to define desired distributions to each heir (see Reference: Manage Distributions). You can then see at a glance which assets and heirs need more attention, and the Overview tab will show you overall estate progress.
Certain items are not passed through a will, such as life insurance, property held in joint tenancy or community property with the right of survivorship, funds in an IRA or 401K for which a beneficiary was named, stocks held in a transfer-on-death account, and so forth. You can choose to list these items as assets to help you keep things organized, but remember to create a Distribution for each with the "Reason" identified as "Beneficiary".
Puerto Rico law dictates key aspects of estate distribution, in the following priority order:
A surviving spouse can claim the family home as part of his or her share of the estate, to the extent that he or she is entitled to that much value from the estate. If his or her share of the estate is not as valuable as the family home, a surviving spouse has the right to continue to occupy it until death.
See Puerto Rico Civil Code § 1625.
In Puerto Rico, one-half of the inheritance must go to the so-called forced heirs (surviving descendants and spouse, or if none, then any surviving ascendants), while the remaining half can be given to whomever the will specifies. Until 2020, there was a slightly more complex approach to this called the rule of thirds, but this has been deprecated.
See Puerto Rico Civil Code § 1621 et seq.
If decedent did not officially reside in Puerto Rico, then Puerto Rico allows the rules of inheritance of that outside jurisdiction to dictate the allocation of personal property.
However, real property (i.e., real estate), is always assigned considering La Legítima (see above).
Eliminated in 2020.
Wills sometimes specify that certain assets or dollar amounts are to be distributed to certain heirs. Such bequests should be generally be handled before dealing with the residuary estate, in which percentages of the remaining estate are allocated to the appropriate heirs. You can mark these bequests via the Distribution dialog (see Manage Distributions).
However, not all bequests can be honored: sometimes the asset is no longer part of the estate; sometimes the bequest conflicts with local law (e.g., community property); sometimes the asset must be sold (as a last resort) in order to pay estate debts.
The process of reducing bequests is called abatement, and any required reductions are typically made proportionately to the recipients. For example, if the estate is worth $50K and there are several bequests that total $100K, all bequests would be reduced by 50%. Similarly, if the will bequeaths three pianos to a particular heir, and there are only two pianos in the estate, then the heir would receive just two pianos. And if there were no pianos in the estate, then that bequest would remain unfulfilled (known as ademption). Even if the estate has plenty of money left over, the executor cannot "make up" for an abatement or ademption; in this example, the executor cannot buy the heir a piano using other estate funds, or just provide extra cash in lieu of the piano.
The will usually specifies a percentage that each heir should receive of the residuary estate (the residuary estate is the amount remaining after all debts and obligations have been satisfied, and any specific bequests handled). For example, if the will says that Sally should get 40% of the residuary estate, and the estate is worth $200K, then Sally is entitled to $80K worth of assets and cash, and all of the defined distributions for Sally should add up to $80K.
Tip: You can enter these target percentages on the EstateExec Heirs tab, and as you define distributions, see how you are doing in reaching these targets in the Heir Target Allocation chart on the Overview tab (for additional tips, see EstateExec Reference: Manage Distributions).
In some cases, a decedent dies with an heir (or multiple heirs) owing the decedent money. As an executor, you do not have legal authority to simply forgive (i.e., cancel) such debts: it would be unfair to the other heirs. The heir to whom the money was lent can either repay the estate the amount owed, or you can distribute the loan as an "asset" to some other heir, or you can deem that such repayment has been made as a portion of the inheritance otherwise owed that heir. For example, if an heir owes the estate $10K, and is entitled to $50K in distributions from the estate, you can distribute that $10K loan "asset" to the heir, and plus $40K in other distributions.
A charitable donation is really just an estate distribution to a particular type of heir (a charity). The executor does not have the right to give away items of value to charities unless specifically authorized by the will or the court.
Distribution Completion and Receipts
Actually making distributions to heirs is usually one of the last things the executor does in settling the estate. Although it is best practice to make all the distributions at the end of the process, it is usually permissible to make some distributions earlier if desired (be especially careful of restrictions if the estate is going through probate).
It is good practice to require all heirs to sign a receipt for any distributions (the receipt can cover multiple items). When making final distributions to an heir, it is also good practice to have that person sign a document (perhaps prepared by an attorney), stating that he or she approves of your actions as executor and confirms that he or she has received everything due.
Discount $$: EstateExec users can access significant discounts on third-party shipping services (see Task: Make all distributions).
See also EstateExec Reference: Manage Distributions for specifics about using EstateExec to organize, plan, and document distributions that satisfy the directives of the will (and/or the court).