Estates and capital credits

March 2005

During the past North Dakota legislative session, a bill was introduced and voted down which would have forced electric cooperatives to pay 100% of all outstanding capital credits to an estate of a deceased member. The sponsors of the bill stated they had received numerous criticisms from electric cooperatives regarding this issue. Most electric cooperatives will pay out outstanding capital credits after the death of a member, but the payment is less than the full amount allocated to the member. Nodak is one of these cooperatives that discounts capital credit payments to estates.

To understand why we do what we do, it is important to remember a couple of facts. First, when a member dies, we are no longer dealing with fairness to the member, but rather fairness to someone who is the heir to the former member’s assets. Second, capital credits which are paid out in a lump sum have a greater value than if they are paid out over many years in the future.

With the above understanding, let’s look at a real situation. Suppose a long-time member dies, and he/she has capital credits that have been allocated over the last 18 years. (I used this term since that reflects our current situation.) Is it fair that the estate is treated better at this point in time than the active members of the cooperative? What would justify why the estate gets paid in full today while the live members have to wait until their capital credits are paid out over many years? Furthermore, there is never a guarantee that capital credits will ever be paid out. Why should the estate get to avoid any risk of further payments not being made? As a live member, you have that risk as slight as it might be.

There is, of course, a logistics-related reason that it is good to “clean up” additional capital credits at the time an estate is being handled. Still, it is not necessary to give the estate a financial benefit. By discounting the amount paid out, the lump sum payment can be made to be equitable with the stream of smaller payments that the membership is expected to receive over the next 18 or so years.

Some may say that paying out 100% of outstanding capital credits to an estate is the “right thing to do.” More than once, I have heard the comment that since we all will die sooner or later, every member will be treated equally if their capital credits are paid in full upon death. Actually, this statement is far from true. Thousands of our members leave the system and live long enough to receive all of their capital credits under a normal rotation. Paying out capital credits to estates in full value may be the right thing to do if the objective is to be perceived to be the nice guy to those receiving the payment. It is not the right thing to do if the objective is to be fair and equitable to all members of the cooperative. The right thing to do is to compute the present value of the accelerated payment of capital credits and pay that amount to the estate.

It was interesting that the issue got so far as to be introduced into the North Dakota Legislature and was narrowly defeated. The bill, if passed, essentially would have resulted in a state mandate that we give preferential treatment to estates. Clearly, the support for this bill was due to a combination of emotional response to criticism and a lack of understanding about equitable treatment of capital credits.