In-Kind Distribution

A common way to pay people is by the use of cash, but that isn’t the only way. Another alternative payment is in-kind distribution, which is when payment is made through mediums like physical goods or securities. These types of distributions can be used in a myriad of settings such as between corporations and investors or in venture capital and private equity fields.

How Distributions In-Kind Work

In-kind distributions can happen between companies, between a business and shareholders, or between loved ones. A company may decide to do an in-kind transfer because they want to retain cash for other purposes. It may also be more tax-efficient to transfer non-cash assets as opposed to paying in cash. For instance, a company choosing to use an in-kind distribution instead of cash can curb capital gains taxe son assets that have appreciated in value.

Types of Distribution In-Kind

There are various types of in-kind distributions and each has a different financial implication. Three common types include securities, real estate and inheritance.

Stock dividends

A common type of distribution in kind is stock dividends. Stock dividends are essentially payments made to stockholders in the form of additional shares versus cash. When investors buy shares in a business, they’re often paid by means of stock dividends. Another way stock dividends can be used as a form of payment is for retirees. Instead of receiving cash as part of their retirement plan, they can opt for cash instead. Aside from stock, other securities like bonds, ETFs, and mutual funds can be exchanged too.

Real estate

Real estate can be used to make a payment instead of cash. The recipient could also decide to liquidate the real estate if they were in need of cash or tap into any rental income the real estate generates. It’s important to note that inheriting property could trigger capital gains taxes if that property has appreciated in value.

Inheritance

An inheritance can be given in many forms including as securities, real estate, and other types of valuable assets. Receiving the assets in kind can provide flexibility regarding how those assets are used. Some people may choose to keep the assets and let them appreciate, sell them for cash, or do a mix of both.

Benefits of In-Kind Distribution

Cashing out stock can trigger tax bills, which some people would rather avoid. For this reason, in-kind distributions can be an effective tax strategy. For instance, receiving real estate that has appreciated in value would attract less taxes than selling a property and cashing out. Likewise, inheriting stocks could lead to a lower tax bill than selling the same appreciated stock.

In-kind distributions can also be beneficial to people with retirement accounts and used as a strategy for retirement planning. For instance, instead of people subject to required minimum distributions withdrawing cash, they may decide to take in-kind distributions instead. This could have two benefits; potentially minimizing their tax bill and enabling them to keep more assets invested by rolling those distributions into a taxable brokerage account. A third benefit is that those in-kind distributions can be passed on to heirs and thus, used as a wealth building tool.

That said, in-kind distributions may still trigger a tax bill as you still pay taxes on the value of assets transferred. However, if you do the transfer during a time when the assets have decreased in value, like during a market downturn, you could end up paying less.

A final thought on the benefits of in-kind distributions as it can help retain more of an asset’s value. Whereas when you sell an asset and pay taxes, you may end up with less.

Considerations

There are risks associated with in-kind distributions, especially if you’re reliant on that distribution to help you achieve a financial goal. The type of in-kind distribution you give or receive will determine the risk.

Before receiving or giving an in-kind distribution, consider your long-term financial goals and how receiving in-kind distributions like stock, real estate, or annuities could impact that.

Speak with someone on our team today if you need help deciding whether in-kind distributions are the right choice for you.