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 are Not Always in Cash
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 can also take distributions in kind. This includes required minimum distributions. 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 profit from share price appreciation as a capital gain rather than ordinary income, which is generally taxed at a higher rate.