It is common for the probate of an estate or termination of a trust to require more than a year to complete as taxes are paid, creditors satisfied and the various assets either liquidated to divided as required in the Will or Trust. If litigation erupts, an estate or Trust may remain open for over a decade. There are some estates which remain open after several decades, though the bulk of estates close within a year to two years.
During that period of time, the estate assets remain under the control of the Trustee or Executor, and the various beneficiaries do not see the proceeds until the Trust or Estate closes. See our article on Probateof Estates in California.
This can be a definite disadvantage to those beneficiaries in need of funds sooner. For those beneficiaries who are elderly, it can be particularly unfair. A beneficiary who is in his or her mid-eighties may have to wait a third of his or her remaining lifetime to gain access to funds that the decedent wanted them to enjoy as soon as possible!
Recognizing this, the Courts have allowed a special process whereby even before an Estate or Trust is ready to be closed, preliminary distribution may be achieved for the beneficiaries. The basics of this process and the criteria utilized by the Court are the subject of this article.
THE BASIC PROCESS:
The common reason for making a preliminary distribution of a portion of the decedent’s assets before the estate can be finally closed and distributed is to allow one or more beneficiaries to enjoy all or a portion of their inheritance before final distribution. Court policy favors such efforts.
This is particularly true when the gifts are monetary (“pecuniary”) since the Court may easily determine the sums to be distributed. When hard assets (interests in a business or real estate) are involved, the Courts may hesitate before dividing the distributions up.
In forming an overall plan for distribution, it should be recognized that preliminary distribution implements the policy of favoring earliest distribution consistent with proper administration. Estate of Buchanan (1955) 132 CA2d 81.
The basic policy provides that although an estate may be large, its administration complex, or ownership of certain of its assets subject to litigation, the unaffected portion of the estate may be distributed if such distribution will not jeopardize the rights of persons interested in the estate. The Courts support such efforts normally since they allow the representative to minimize delays often inherent in the probate proceeding by preliminary distribution of specific gifts or payment of pecuniary gifts.
Procedure for Preliminary Distribution: The Petition for Preliminary Distribution
The representative generally must obtain court approval before making a preliminary distribution. Authorization to make a preliminary distribution may be obtained by filing a noticed petition with the court under Probate Code Section 11600-11602 and 11620-11622. Notice must be given as provided in Probate Code Section 1220 to the beneficiaries and other interested parties listed in Probate Code 11601. Such notice will quickly determine if any parties object to the proposed distribution and they may file their opposition with the Court or make an appearance to object.
Time for Filing Petition for Preliminary Distribution
Most counsel find it advantageous to file the petition after the expiration of the period for filing creditors’ claims and a determination that all uncontested claims have been paid or are adequately secured. If only two months have elapsed, courts may be very cautious in granting preliminary distribution under Probate Code Section 11620 because there is little protection for persons interested in the estate from additional creditors’ claims that may still be presented. See In re Painter (1897) 115 C 635.
At least 15 days before the hearing on a petition for preliminary distribution under Probate Code Section 11620, notice must be served as provided in Probate Code Section 11601 on certain designated persons who constitute heirs, interested parties, and known creditors.
Required Findings of Fact by the Court
Petitions for preliminary distribution require the court to make the following specific finding of fact: For all petitions, a finding that the “distribution may be made without loss to creditors or injury to the estate or any interested person.” Probate Code Section 11621
Amount of Distribution
There are no express limitations on the amount of property that can be distributed under a petition for preliminary distribution filed under Probate Code Section 11620 as long as the court determines that adequate protection exists for the creditors and those interested in the estate. Realistically, the Court will require ample funds remain for any likely obligation of the estate to creditors, tax authorities, litigation, etc.
Who May Petition
A petition for preliminary distribution under Probate Code Section 16200, 11602, and 11620 may be filed by any interested person - they must be able to show a direct pecuniary interest in the distribution. See Estate of Baldwin (1943) 21 C2d 586.
Who May Object
Any person interested in the estate may oppose a petition for preliminary distribution under Probate Code Section 11602. Case law has defined the phrase “person interested in the estate,” for purposes of opposing a petition for preliminary distribution under former Probate Code Section 1000 as one who has direct pecuniary interest that would be defeated if the distribution as requested were granted. See, e.g. Estate of Molera (1972) 23 CA3d 993; Estate of Goyette (1971) 14 CA 3d 224.
Costs for Petition for Preliminary Distribution
The costs of a proceeding in connection with a petition for preliminary distribution are paid by the distributee or the estate, in proportions determined by the court. Probate Code Section 11624. Note that this means that persons who will not necessarily benefit from the preliminary distribution may have to pay their pro rata share of the additional costs which, while not major, will be several thousand dollars in most cases.
The essence of the law is simple: if other heirs or creditors (including taxing authorities) are not injured and if the distribution can be easily calculated by the Court, then the preliminary distribution will normally be granted. Indeed, in any complex estate which may take years to close, it is the choice a wise fiduciary should make to benefit the heirs.
It does cost money to draft and file the petition and extreme care must be made to assure that no creditors are harmed. The most common objection, however, is often from other family members not receiving the distribution who may feel it is unfair or somehow may impact their interests. Quite often those people will not file a formal objection but will appear at the hearing to voice their concerns.
Certainly unless there is an overriding reason, the preliminary distribution should seek to treat all beneficiaries equally and it is common to have all beneficiaries receive, pro rata, their share of the distribution. It is even more common for the wise fiduciary to take an informal poll of the beneficiaries to determine their wishes and if there is real resistance to the preliminary distribution, determine if there is good cause for the objection…and seek to remedy the concerns.
But regardless of such objections, if the proposed distributees need the funds, or if he or she is elderly and if the others are not clearly harmed, the Court will normally uphold the petition and there is law that seeking such a preliminary distribution is actually a duty imposed upon the fiduciary in such circumstances.