Saving Some of the Toothpaste in the Tube

When closing a decedent’s estate, the Trustee or Executor (commonly referred to as the “Fiduciary”) is often eager to distribute all of the assets of the estate to the beneficiaries.  However, typically there are expenses that trickle in after the bulk of the estate has been distributed.  This can leave the Fiduciary in a bind if he/she has already “squeezed all of the toothpaste out of the tube” and has nothing left to pay the last expenses.  

To avoid the necessity and awkwardness of the Fiduciary having to ask the beneficiaries to pay their shares of the last expenses, the Fiduciary should explore whether to hold back a “reserve” (a small amount of cash) prior to making the distributions of the estate to the beneficiaries.  The idea is to retain enough cash to be able to pay final expenses without having to ask all of the beneficiaries to “chip in.”

In calculating the amount of the reserve, the Fiduciary should consult his/her tax preparer to determine whether the estate will be required to file a tax return and whether the estate will be required to pay taxes.  If a tax return will be required, the Fiduciary should ask the tax preparer to estimate the cost of the tax preparation fee and the amount of the tax, if any.

The Fiduciary should also consult his/her attorney to determine what the final legal fees will likely be and whether there will be any additional fees such as recording fees or filing fees. 

If the estate is in a position to be closed within a year of the decedent’s death, there is the possibility that there could be unknown creditors of the decedent who later make claims against the estate.  Although the Probate Code specifies that in such a case the beneficiaries would be personally responsible for their pro rata share of the debt, it would be helpful and more efficient if the Fiduciary had the cash to be able to resolve these issues.  The likelihood of creditors making valid claims against the estate after the distribution of the bulk of the assets should therefore also be considered in calculating the amount of the reserve.

Once the amount of the reserve is determined, the Fiduciary should prepare an accounting to the beneficiaries showing an inventory and appraisal of the estate, the Fiduciary’s proposed fee, the planned distribution amounts to each beneficiary, and the amount of the reserve.  Because the concept of a reserve might not be familiar to most beneficiaries, it is often a good idea to include an explanation of its purpose.  Once the beneficiaries approve of the final accounting, the Fiduciary may distribute the assets minus the reserve to the beneficiaries.  

The Fiduciary should hold on to the reserve until he/she is absolutely certain that all final expenses have been paid.  Generally, this would be after the final tax returns have been filed, after final attorney fees have been paid, and after at least one year has passed since the decedent’s date of death.  The balance of the reserve can then be distributed to the pro rata to the beneficiaries of the estate. 

Although it is a rather simple concept and ultimately does not have a significant bearing on the amount of each beneficiary’s share at the time of distribution, keeping a small amount of “toothpaste in the tube” prevents potential headaches for the Fiduciary and allows efficient resolution of final expenses.