January 3, 2014

Pro Rata and Non-Pro Rata Distributions

People enjoy having flexibility. When faced with the choice of either handcuffs or freedom, a prudent person would opt for the latter instead of the former. Consequently, when a trustee or personal representative is tasked with distributing a person's estate, flexibility is unsurprisingly useful there as well. This raises the issue of whether a person's estate grants the personal representative or trustee the ability to make pro rata or non-pro rata distributions.

In a pro rata situation, the beneficiary is given an equal portion of each item of the estate. In a non-pro rata situation, the beneficiary is entitled to a certain portion of the total estate but not to a particular item. The following example illustrates the difference between a pro rata and a non-pro rate distribution.

In 2008, Abel, a resident of San Jose, CA, writes a will and devises his entire estate equally to his close friends Baker and Carr, and names Elbert is neighbor as personal representative. During probate, Elbert inventories Abel's estate and discovers that Abel owns (1) a $200k condo located in Almaden Valley, (2) a $200k bank account at Star One Credit Union, (3) $10k in Southern Company common stock and (4) a 2000 Honda Accord worth $10k according to Kelley Blue Book. 

In a pro rata situation, Elbert would grant a 50% interest in each items, namely items (1)-(4), to both Baker and Carr.  Thus Baker and Carr would co-own the house, bank account, stock and car. In a non-pro rata situation, Elbert could distribute items (1)-(4) to Baker and Carr whereby they would receive the same total value but not the same items. Therfore Elbert could give the house and car to Baker, items (1) and (4), and the stock and bank account, items (2) and (3), to Carr. This would be permitted in a non-pro rata situation because even though the items received are different, the total amount is not, i.e. the house is worth is $200k and the car is worth $10k whereas the bank account is worth $200k and the stock is worth $10k.

By providing for a non-pro rata distribution, this gives the personal representative or trustee the flexibility to distribute the estate in a manner pleasing to the beneficiaries. No two people are alike. It is highly likely that one beneficiary may prefer a home instead of cash, or a car instead of stock. For example, one beneficiary may have a sentimental attachment to a house or a car, whereas another beneficiary may just be interested in the receiving their share of the total estate regardless of the assets receive. A non pro-rata distribution allows the personal representative or trustee to satisfy these dual desires because they are not handcuffed when making a distribution. Instead they are free to mix and match items to equalize the distributions.