What is 'Distribution In Kind'

A distribution in kind, also referred to as a distribution in specie, is a payment made in the form of securities or other property rather than in cash. A distribution in kind may be made in several different situations, including the payment of a stock dividend or inheritance, or taking securities out of a tax-deferred account. It can also refer to the transferal of an asset to a beneficiary over the option of liquidating the position and transferring the cash.

BREAKING DOWN 'Distribution In Kind'

Investors can invest in a company by buying bonds or stocks. Bonds pay investors a return in the form of interest payments. Stocks pay investors a return in the form of dividends and share price appreciation. A dividend or share buyback is a distribution of cash to investors. In general, companies that are doing well pay out healthy and growing dividends. These companies also buy back stock. Companies with declining earnings may be forced to buy back stock or pay dividends with borrowed funds. Another alternative is to distribute dividends in kind.

Distribution in Kind

Not all distributions are made in cash; some are made in kind. The most common form of a distribution in kind occurs when a company pays a dividend in stock rather than in cash. A distribution in kind may also be employed for tax reasons. In certain situations, receiving appreciated property directly can result in a lower tax bill versus selling the property and receiving the value of the property in cash.

Some funds deliver distributions in kind to investors after a certain threshold. If an investor redeems shares in the fund over the threshold, the remainder of the redemption value is paid in kind with shares of the fund. The reason for doing this is to prevent large tax hits in the event of high redemption activity.

Advantages of Distributions in Kind

In-kind distributions are not just advantageous for the company. Investors in tax-deferred accounts like to receive distributions in kind because they help to reduce taxes. People who inherit shares generally receive them in kind for this reason. Investors with individual retirement plans (IRAs) can also take distributions in kind. This includes requirement minimum distributions (RMDs). In fact, distributions in kind can be used for an entire RMD. This means people can take the actual stocks and bonds out of the account as a distribution without liquidating. Investors who wish to keep fully invested accounts may find this to be a valuable option. Distributions in kind are also good for stocks that are undervalued or may go up significantly. This allows the investor to record the gain from share price appreciation as a capital gain rather than ordinary income, which is generally taxed at a higher rate.

RELATED TERMS
  1. Distribution Yield

    The amount of cash flow received or paid out by an annuity, REIT ...
  2. Capital Gains Distribution

    The payment of proceeds prompted by a fund manager's liquidation ...
  3. Probability Distribution

    A statistical function that describes all the possible values ...
  4. Lump-Sum Distribution

    A one-time payment for the entire amount due, rather than breaking ...
  5. In Specie

    A phrase describing the distribution of an asset in its present ...
  6. Liquidating Dividend

    A type of payment made by a corporation to its shareholders during ...
Related Articles
  1. Financial Advisor

    How to Save Clients from RMD Aggregation Mistakes

    Advisors can help clients avoid required minimum distribution mistakes in their retirement plans.
  2. Financial Advisor

    How to Navigate Taxable Mutual Fund Distributions

    It's almost time for year-end capital gains distributions for mutual funds. Here's how to monitor them and minimize their tax impact.
  3. Investing

    Find The Right Fit With Probability Distributions

    Discover a few of the most popular probability distributions and how to calculate them.
  4. Investing

    What a Normal Distribution Means

    Normal distribution describes a symmetrical data distribution, where most of the results lie near the mean.
  5. Financial Advisor

    The Basics of Income Tax on Mutual Funds

    Learn about the basics of income tax on mutual funds, including what types of income may be subject to the capital gains tax rate.
  6. Retirement

    Not All Retirement Accounts Should Be Tax-Deferred

    It may be better to leave your assets exposed to the tax man when you're saving to retire.
  7. Investing

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  8. Investing

    Understanding Taxes on Mutual Funds Dividends

    Learn about the basics of mutual fund dividend taxation, including how and why mutual funds pay dividends and when different tax rates apply to dividend income.
  9. Financial Advisor

    Multiple Accounts? Here's How to Calculate RMDs

    Ever wondered about how to calculate required minimum distributions on multiple accounts? Here's a quick primer.
Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  3. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  4. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  5. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  6. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
Trading Center