Non-Pro Rata Distributions — Pros and Cons

John W. Randolph, Jr. of the law firm of Pressly & Pressly in West Palm Beach, Flordia along with New York University graduate tax law student, Jennifer Gurevitz, have authored an insightful article discussing the Opportunities and Pitalls with Non-Pro Rata Distributions to Residuary Beneficiaries, Prob. & Prop., July/Aug. 2005, at 60.

Here is an excerpt from the authors’ conclusion:

An attorney should point our to the fiduciary the benefits of making non-pro rata distributions, such as reducing beneficiary income taxes, fostering charitable planning, alleviating the necessity to cause distributions of fractional interests in assets such as real estate, enhancing beneficiary asset value, avoiding the difficulties surrounding distribution of odd lot securities * * * and allowing for the distribution of a particular asset desired by a beneficiary.  At the same time, however, fiduciaries must understand the numerous pitfalls that can arise with making non-pro rata distributions.  These pitfalls include recharacterization as a taxable exchange among beneficiaries, the potential for an individual beneficiary to be subject to income tax on assets received by a charitable beneficiary, and the possibility that distributions will not be economically proportionate, whether because of improper valuation or varying tax bases of the distributed property.