Interim Distributions From An Estate In Ontario

Administering an estate in Ontario can take a long time. Between collecting assets, paying debts, filing tax returns, and waiting on a clearance certificate from the Canada Revenue Agency, beneficiaries can wait years before they see a final payment. What many executors and beneficiaries do not realize is that the law does not require them to wait that long.

An interim distribution of an estate allows an estate trustee to pay out part of a beneficiary’s entitlement before the administration is complete, and in some cases a court can order one.

An interim distribution is a partial payment made to a beneficiary before the estate trustee has finished administering the estate and before a final distribution or passing of accounts. It differs from a final distribution in one important respect: the estate trustee retains enough funds to cover outstanding debts, taxes, and administration expenses that have not yet been finalized.

Ontario estate trustees have broad discretion to decide whether, when, and how much to distribute on an interim basis. That discretion is not unlimited. It must be exercised reasonably and in good faith, consistent with the trustee’s fiduciary duty to the estate and its beneficiaries. For a general overview of how these obligations arise, see our page on estate litigation in Ontario.

Executors carry personal liability for unpaid debts and taxes of the estate. If an estate trustee distributes all of the assets and it later turns out that the Canada Revenue Agency assesses additional tax, or a creditor comes forward, the trustee can be personally on the hook for the shortfall. This is why many executors wait for a tax clearance certificate before releasing any funds at all, a process that can take eight months or longer from the date it is requested.

That caution is understandable, but it is not an excuse to delay indefinitely. Once an estate trustee has identified the estate’s assets and has a reasonable estimate of its debts and tax exposure, holding back a sufficient reserve and distributing the remainder is both permitted and, in many circumstances, expected. An estate trustee who unreasonably delays distribution risks a claim for breach of fiduciary duty, and in some cases removal. We discussed the consequences of that kind of delay in our article on estate disputes in Ontario.

Yes, in certain circumstances. Ontario courts have confirmed that they can intervene in an estate trustee’s exercise of discretion where the trustee acts in bad faith, fails to exercise the discretion at all, or where co-trustees are deadlocked.

Beneficiaries who believe an estate trustee is unreasonably withholding funds are not limited to waiting or seeking the trustee’s removal. They can bring a motion asking the court to order an interim distribution.

The case law sets out a series of factors relevant to whether an interim distribution should be ordered, including:

• Whether the estate trustees have acted unreasonably or breached their fiduciary duty;

• Whether the trustees are deadlocked or have failed to exercise their discretion at all;

• The size of the proposed distribution relative to the value of the estate and any outstanding claims against it;

• Whether the beneficiary would suffer undue prejudice if the distribution is not made;

• Whether ongoing litigation or a contested passing of accounts makes an early distribution premature.

Each case is fact specific and these factors are non-exhaustive. 

Before agreeing to an interim distribution, it is standard and generally acceptable practice for an estate trustee to request a release from a beneficiary. Courts have been clear, however, that a release cannot be used to hold estate funds hostage. A trustee who refuses to pay a beneficiary anything unless the beneficiary signs an overly broad release, particularly one that benefits the trustee personally, may be found to have acted unreasonably.

On the other side, a beneficiary who refuses to sign a reasonable release without a legitimate basis for suspicion may be found to be the party responsible for the delay. Courts assess these disputes on an objective basis, looking at who acted reasonably in the circumstances.

For estate trustees considering an interim distribution, it is worth taking the following steps before releasing funds:

• Obtain a reasonably current inventory and valuation of estate assets;

• Identify known and reasonably anticipated debts, taxes, and administration expenses;

• Calculate a prudent holdback rather than distributing the full estate;

• Document the basis for the distribution and keep clear accounting records;

• Consider whether a release is appropriate, and ensure its scope is reasonable.

For beneficiaries who believe a distribution is being unreasonably withheld, the starting point is usually a written request to the estate trustee, followed by legal advice on whether the circumstances support a motion for an interim distribution.

Litigation should generally be a last resort given its cost, but it remains an important remedy where an estate trustee is not administering the estate diligently. 

At Pinto Shekib LLP, we advise beneficiaries, trustees, and estate trustees throughout Ontario on the full range of estates, wills and trusts litigation matters. Contact us at 416.901.9984 or info@pintoshekib.ca for a confidential consultation.