Why is ethanol distilled off before adding water in the first step of a malonic synthesis?
I assume this is a real procedure for actual synthesis. 

Distilling ethanol off does have an effect on the workup of this reaction. Usually one needs to separate the reaction product and educts or side products afterwards by separation between an aqueous and an organic phase. Having ethanol in the mixture prevents the two phases from separating. In order to isolate your product you will need to distill ethanol off before adding water, because water would also be distilled off, if you added it first.