Administration: Dealing with the Estate

Question 1

When does the administration period commence?

Answer 1

At the moment immediately following death.

Question 2

When does the administration period end?

Answer 2

When the PRs are in a position to vest the residue of the estate in the beneficiaries or trustees (if a trust arises under the will or intestacy rules).

Question 3

Does the PR hold office for life?

Answer 3

Yes.

This mean if further assets are discovered after the residue has been transferred, PRs are still required to deal with them.

Question 4

Explain the duties of the PRs.

Answer 4

They must collect and get in the real and personal estate of the deceased and administer it according to the law (s25 AEA 1925).

PRs are personally liable for loss suffered by the estate resulting from any breach of duty they commit as a PR. This breach is known as a devastavit.

Question 5

What is the test to determine whether a PR has breached their duty?

Answer 5

Whether there has been a loss caused by a breach of duty, not whether the PR is culpable.

Question 6

What are the main types of breach of duty caused by PRs?

Answer 6

1) Failure to protect value of the assets; and
2) Failing to pay the people entitled to the assets.

Question 7

Explain the provision of s61 Trustee Act 1925.

Answer 7

Court has the power at their discretion, to relieve a PR from liability for breach of duty if satisfied that the PR has acted honestly and reasonably, and ought to be fairly excused for the breach.

Question 8

Explain the three issues PRs may face during the administration of the estate.

Answer 8

1) There may be creditors they are unaware of, or unknown relatives (eg children born outside marriage that has been kept secret).

2) They may not know the whereabout of some beneficiaries who may have lost contact with deceased’s family.

3) There could be a successful claim against the estate under the Inheritance (Provision for Family and Dependants) Act 1975.

Question 8

Can a will include a clause protecting an executor from liability for breach of duty as a PR?

Answer 8

Yes, it may exclude liability for executors for mistakes they make in good faith.

Question 9

How do PRs protect themselves against claims from unknown creditors?

Answer 9

They must advertise fro claimants in accordance with s27 Trustee Act 1925.

They must then wait for t least two months before distributing the estate. If they do so they will be protected from liability against unknown creditors/claimants at a later date.

Question 10

If the PRs have complied with the requirements of s27 Trustee Act 1925, can the union creditors claiming at a later date reclaim property from the beneficiaries who have now been given the assets?

Answer 10

Yes.

Question 11

In accordance with s27 TA 1925, when can the following people advertise for unwon creditors:

1) executors;
2) administrators.

Answer 11

1) Executors can do so straight away;

2) Administrators must wait until they have obtained the grant of representation.

Question 12

Explain the process of advertising for unknown creditors under TA 1925.

Answer 12

PRs must give notice of intended distribution of the estate, requiring any persons interested to send particulars of their claim, either as creditor or beneficiary, by:

1) advertisement in the London gazete;
2) advertisement in a newspaper circulating in the district in which land owned by the deceased is situated; and
3) such other like notices including notices other than in England and Wales as would in any special case have bee indicted by a court of competent jurisdiction in an action for administration.

Question 13

What should the PRs do if they are unsure as to how to give notice of distribution of the estate to unknown creditors?

Answer 13

Apply to the court for directions.

Question 14

Where the estate includes land, what must the PRs do prior to distribution?

Answer 14

Search the LR (if registered) or conduct a land charges search (if land is unregistered) in order to determine whether there are any outstanding third party liabilities/ interests in relation to the property.

They should also conduct a local land charges registry search where appropriate.

Question 15

What happens when the time limit in the notice to distirtbue the estate has elapsed?

Answer 15

The PRs can distribute the estate taking into account those beneficiaries/ creditors they have actual knowledge of, and those which have been discovered as part of the advertisement.

They are NOT liable for creditors which are still unknown at the date of lapse of notice, although these claimants may pursue claims against the beneficiaries who have received the assets.

Question 16

Does the protection from liability under s27 TA 1925 give any protection where the PRs simply cannot locate one beneficiaries?

Answer 16

No.

Question 17

What should the PRs consider doing where they cannot locate a known beneficiary of the estate?

Answer 17

1) Keep back the assets in case they appear.

2) Take an indemnity from beneficiaries that they will meet any claims should the claimant reappear.

3) Take out insurance to provide funds. This is expensive as C may be entitled to interest on the amount of their entitlement for the period up to payment. Insurance does not absolve PR from personal liability, it means they Ould have insurance money available to pay the claim.

4) Apply to the court for an order authorising PRs to distribute on the basis that the claim is dead. This is called a Benjamin order.

Question 18

What evidence doe the court require before granting a Benjamin order?

Answer 18

Court must be satisfied that fullest possible enquiries have been made to locate the missing beneficiary.

Question 19

What does the Benjamin order mean for the PRs?

Answer 19

They will have full protection against any claims from the missing beneficiaries.

However, it is expensive to apply to the court.

Question 20

Does a Benjamin order protect the beneficiary who receives the missing persons entitlement from a claim against that missing person?

Answer 20

No.

It only provides the PRs with protection.

Question 20

Explain PRs liability where an applicant under the Inheritance (Provision for Family and Dependants) Act 1975 successfully obtains an order for reasonable financial provision from the estate.

Answer 20

PRs will be liable unless they wait more than 6 months from the date of grant of representation before distributing the assets.

If an earlier distribution of assets is required, they use ensure they retain sufficient assets to satisfy an order if their applicant is successful within 6 months of the grant.

Question 21

Explain the administrative powers of the PRs.

Answer 21

in carrying out the administration of an estate. These are largely conferred by the AEA 1925 and TA 2000.

Question 22

When does the ownership of the assets under a will devolve into the ownership of executors?

Answer 22

Immediately on the death of the testator.

Question 23

When does ownership of the assets passing through intestacy pass the the PRs (ie where there is no will)?

Answer 23

Immediately once the grant of representation has been issued.

Question 24

When should Prs collect the assets?

Answer 24

As soon as practicable.

Question 25

What must the PRs do once the assets have been collected?

Answer 25

They must preserve them pending completion of the administration.

In preserving assets, PRs have same powers as trustees in terms of management and investment, and are subject to the same duty of reasonable care and skill.

Question 26

What is the first thing the PRs should do with available funds?

Answer 26

They should immediately start to pay off any outstanding debts and funeral expenses of the deceased.

Question 27

Following payment of debts and funeral expenses, what is the next payment the PRs should make (if applicable)?

Answer 27

Repayment of any loans taken out to pay any IHT which has arisen.

Question 28

What is a first proceedings undertaking?

Answer 28

This will be an undertaking given to a bank in return for a loan (usually taken out by the PRs to pay off IHT).

It requires the PRs to pay this first before anything to avoid being in breach of the undertaking.

Question 29

Can any assets in the will be sold and proceeds used for the payment of debts?

Answer 29

Yes but Mrs must take into account the following:

1) provisions of the will;

2) wishes of the beneficiaries;

3) Tax consequences.

Question 30

Explain why the provisions of the will might be important in determining which assets to sell to pay off the debts of the deceased.

Answer 30

Will may direct which assets are to be used for this purpose.

Usually they are paid from the residue if the will is silent on this.

Where the will is silent on which assets should be used to pay the debts, they must follow the basis principle that assets gifted in specific legacies under the will are not to be sold to pay debts unless all other assets in the estate have been exhausted.

Question 31

Explain why the beneficiaries’ wishes might be important in determining which assets to sell to pay off the debts of the deceased.

Answer 31

Wishes of beneficiaries should be respected by the PRs where possible.

Although the PRs have power to sell any assets in residuary estate, it is good practice to consult them prior to doing so. This is because they may have preferences as to which assets are to be sold/ kept.

Question 32

Explain why the tax consequences may be important in determining which assets to sell to pay off the debts of the deceased.

Answer 32

Cat, available exemptions etc should be considered before selling any assets, as if assets are to be sold at a loss (compared to value at date of death) loss reliefs for CGT and IHT may be available for the PRs to use.

Question 33

Are PRs personally able for debts of the deceased that they do not pay off?

Answer 33

Yes.

Question 34

Explain the PR duty to pay releasable funeral expenses.

Answer 34

PRs are required to pay reasonable funeral expenses in accordance with the deceased’s position and circumstances.

PRs are only liable in so far as they have assets available to pay such rewoanable funeral costs.

What is a reasonable funeral expense is a question of fact, determined in the individual circumstances of the case.

Question 35

Define testamentary expenses.

Answer 35

Generally considered to be expenses incidental to the property performance of duties of a PR.

This may include:

(a) the costs of obtaining the grant;

(b) the costs of collecting in and preserving the deceased’s assets;

(c) the costs of administering the deceased’s estate, for example solicitors’ fees for acting for the PRs, valuers’ fees incurred by PRs in valuing the deceased’s stocks and shares or other property; and

(d) any inheritance tax payable on death on the deceased’s property in the UK which vests in the PRs (s 211 Inheritance Tax Act 1984). (The inheritance tax payable on property falling outside this definition, such as property passing by survivorship, is borne by the beneficiary. The PRs can claim reimbursement of any tax they have paid from the person in whom the property is vested, although there may be practical difficulties in securing payment unless the beneficiary is also entitled to other assets from the estate.)

Question 36

Explain the payment of funeral and testamentary expenses of a solvent estate.

Answer 36

Solvent estate is one where there is sufficient assets to pay all expenses, debts and liabilities (irrespective of whether there is anything left to pay legacies).

As such the beneficiaries may see their whole entitlement taken up buy the payment of debts and expenses.

However, debts will be paid out of assets in accordance with the order in s35 and s34(3) AEA 1925.

Question 37

Explain the provision of s35 AEA 1925.

Answer 37

A beneficiary is liable for any secure charge over an asset they take (unless there is any contrary intention expressed in a will or other relevant document).

The most common here is a property being inherited which is subject to a mortgage.

Question 38

What constitutes a contrary intention for the purposes of s35 AEA 1925?

Answer 38

There must be an express reference to a mortgage.

Eg a will stating. the gift of my cottage to my daughter free from mortgage, would be sufficient.

Question 39

What does s34(3) AEA 1925 provide?

Answer 39

The statutory order which the PRs must follow when deciding which part of the deceased’s estate should be used for the purposes of payment of funeral and testamentary expenses.

Question 40

List the statutory order in schedule 1, Part 2 of the AEA 1925 (which s34(3) refers to).

Answer 40

1) Property undisposed of by will subject to centurion of a fund to meet pecuniary legacies;

2) Property included in a residuary gift subject to retention of a fund to pay pecuniary legacies not already provided for.

3) Property specifically given for the payment of debts.

4) Property charged with the payment of debts.

5) The fund, if any, retained to meet pecuniary legacies.

6) Property specifically devised or bequeathed, rateably according to value.

7) Property appointed by will under a general power rateably according to value.

Question 41

Can the statutory order be amended (ie can this be changed by the testator)?

Answer 41

Yes.

This is called contrary intention and the testator can make such an intention clear in their will, identifying which assets are to be used to pay and debts and expenses.

Question 42

Explain the position with regard to insolvent estates (ie those which dod not have the assets to cover debts and expenses).

Answer 42

Estate is insolvent if assets are insufficient to pay off all debts and expenses which arise.

In such cases assets should be sold and used to pay debts until all exhausted.

Question 43

Where there are insufficient assets to repay all debts, what is the order of priority? q

Answer 43

1) Secured debts are to be paid first (eg mortgages);

2) Then funeral costs are prioritised over remaining unsecured creditors.

3) Finally unsecured creditors will abate equally until the funds have been exhausted.

Question 44

Once debts have been paid, what must the PRs do?

Answer 44

Deal with specific legacies.

The specific property should be vested in the beneficiaries (or trustees if a trust is arising).

This is different for all types of property (eg shares will need an STF to transfer ownership, whilst property needs an assent).

Question 45

Are bencizires entitled to income received on an asset during the period between death and the time they receive the asset?

Answer 45

Yes.

However they must wait until the PRs vest the property in them before claiming such income.

The beneficiary is also liable for the income tax which has arisen on any income from the property (eg dividends).

Question 46

Who is liable for the costs of insuring/ protecting specific assets under specific legacies?

Answer 46

The beneficiary of those assets should reimburse the PRs accordingly (subject to any contrary intention in the will that thee payments are to be paid from the residue).

Question 47

Who is responsible for any litigation costs arising from disputed title over an asset which belonged to the deceased?

Answer 47

The beneficiary of that asset.

Question 48

Explain the process for administering the pecuniary legacies (gifts of specific sums of money).

Answer 48

The will would usually make it clear that the residuary is subject to the payments of pecuniary legacies, or after payment of the pecuniary legacies.

This means the residue will only be divided between residuary beneficiaries once pecuniary legacies have been paid.

Question 48

Explain the process for payment of pecuniary legacies where the will does not contain annex press provision as to whether they are before or after the payment of the residuary estate.

Answer 48

The personalty in the residue should be used to pay the pecuniary legacies, and only once all gone should the realty be used.

This means that the pecuniary legacies are still to be paid out of the residue.

Question 49

How are the pecuniary legacies paid where part of the residue fails and therefore falls under intestacy (eg the residuary beneficiary predeceased the testator)?

Answer 49

They must be paid from any property which is undisposed of, with ready money being used first.

Question 50

What is the general rule on the time limit in which pecuniary legacies should be paid?

Answer 50

They should be paid within 1 year, at the end of the executor’s year (ie once year after the testator’s death).

if this is not complied with, the beneficiary will be entitled to compensation by way of interest.

Question 51

What is the effect of T stipulating a pecuniary legacy is payable ‘immediately following their death’?

Answer 51

Interest is payable not from the elapse of the statutory time limit, but from the date of death.

Same principle applies if the testator specified a particular event which triggers payment (eg payable one month after my death).

Question 52

How is interest calculated for the purposes of compensation to the pecuniary beneficiary for receiving the legacy after the statuary time limit has elapsed?

Answer 52

At the rate specified in T’s will.

In the absence of this provision in the will, interest rate will be the rate of interest payable on money paid into court.

Question 53

What are the four exeptions to the rule that interest is payable on a pecuniary legacy for the date of death?

Answer 53

Where the legacies are:

1) Payable in satisfaction of a debt owed by T to a creditor.

2) Charged on the land owned by T.

3) Payable to T’s minor children; or

4) Payable to any minor (not a direct child of T) where the intention is to provide for the maintenance of that minor.

Question 54

What are estate accounts?

Answer 54

The accounts drawn up before final payment of residuary estate.

Question 55

Why is an adjusted IHT assessment necessary prior to paying out the residuary estate?

Answer 55

Adjustment to about of IHT potable on instalment and non-instalment property in the estate may be necessary where:

1) additional assets or liabilities are discovered since the IHT account was submitted;

2) additional lifetime transfers (made within 7 years prior to death) have been discovered;

3) provisionally estimated values need to be agreed in final form. This usually applies to shares in private companies and the value of any land forming part of residuary estate;

4) agreement between PRs and HMRV of tac liability or repayment in relation to the deceased’s income and CGT before death is yet to be made; or

5) sales have been made by PRs after deceased’s death which have given rise to a claim for IHT loss relief.

Question 56

What is IHT loss relief?

Answer 56

Value of some assets being sold to meet debts and tax liabilities may be sold at less than their value on the date of T’s death.

Loss on sale relief can therefore reduce IHT lability of the estate in such cases.

Question 57

What is qualifying investments relief?

Answer 57

Where ‘qualifying investments’ are sold within 12 months of death for less than their market value at the date of death, sale price can be substituted for the market value at death and the IHT liability adjusted accordingly.

The relief must be claimed as it is not automatic and must be applied for.

Question 58

What is a qualifying investment for the purposes of qualifying investment loss relief?

Answer 58

Shares or securities in quoted companies on a recognised stock exchange at the date of death, and also holdings in authorised unit trusts.

Question 59

Who is liable to pay the IHT on lifetime transfers ?

Answer 59

General rule is the donee (ie the beneficiary) is liable for the IHT, the PRs of the donors estate may become liable if it remains unpaid after 12 months after the end of the month the donor died.

However PR liability is limited to the extent of the deceased’s assets which they have received or would have received in administration of the state but for their own neglect or default.

Question 59

What is a corrective account/

Answer 59

Where all variations t the extent of the value of T’s assets and liabilities are known, and all reliefs to which the estate is entitled have been quantified, PRs must report all outstanding matters to HMRC.

This report is known as a corrective account.

Question 59

Who is liable to pay IHT on property gifted during the testators lifetime (within 7 years of their death)?

Answer 59

The PRs will be liable where the deceased retained a benefit in that property.

The property in such situations is treated as pat of the testator’s estate on death.

Donee of the gift is primarily liable for the IHT attributable to it, but if tax remains unpaid for 12 months after the end of the month T died, Mrs become liable.

PRs should consider how to protect themselves incase this liability materialises.

Question 60

What is IHT clearance?

Answer 60

PRs can apply for q clearance certificate fro HMRC to confirm there is no IIHT outstanding.

HMRC will provide this if satisfied that IHT attributable to chargeable transfers has or will be paid. If the transfer is one made on death, HMRC MUST confirm this.

The effect of this is it discharges all persons, most notably the PRs, from further liability to IHT.

Question 61

Explain income tax and CGT the deceased was liable to pay.

Answer 61

PRs must make a return to HMRC of the income and CG of the deceased for the period starting on 6th April before the death, and ending on the date of death. this must be applied for immediately following death.

The reliefs the deceased was eligible for can be applied as if they had lived for the whole of the year.

Any liability to tax is a debt of the deceased and must be paid by the PRs during the administration.

Question 62

What is the effect of a tax refund to the deceased?

Answer 62

This increases the size of the estate and may therefore change the amount of IHT payable.

Question 63

What are the income tax rates applicable to assets the deceased owned which form part of the estate?

Answer 63

dividends - 8.75%;

other income (eg rental payments from properties let out) - 20%.

Alliances available to individuals are not available to PRs for the purposes of paying these tax bills.

Question 65

Where calculating income tax liability on income of assets during the administration period, can the PRs claim relief for interest paid on a bank loan used to repay IHT?

Answer 65

Yes.

This value of the interest paid on repayment of the bank loan can be deducted from the gross income on assets in the estate, provided that bank loan was taken out for the purposes of paying the IHT.

Question 66

Does income received as a beneficiary form part of the beneficiary’s taxable income for the period?

Answer 66

Yes.

Question 67

What happens where a CGT loss arises from the PRs sale of an asset?

Answer 67

Allowable loss for Cat arises which can be relieved by setting it against gains arising on sales of other items of property.

Any unrelieved loss at the end of the administration period cannot be transferred to the beneficiaries, so careful planning is key to avoid (where possible) unrelieved losses.

Question 67

Explain PRs liability for CGT.

Answer 67

Death wipes out all acquisition prior to the death.

therefore the base value of the asset is the probate value at death.

From there, whenever the PRs sell the asset (eg to raise money to pay IHT or other debts) CGT liability will arise and the PRs are liable for paying this.

Eg probate value at death of car is 100k, and PRs sells it for 150k to raise funds for debts, 50k is the chargeable gain made and is taxable at 20% (unless it is property which is taxed at 28%).

Incidental costs of disposal (eg stock brokers’ commission on sale of shares) may also be deducted. The relevant proportion of the valuation costs for the whole estate is also deductible.

The CGT annual exemption is also available to the PRs, which is currently 6k.

Question 68

What is the CGT rate for PRs?

Answer 68

28% for properties and 20% for all other assets.

Question 69

If there would be unrelieved CGT losses on the sale of assets in the estate, what is the best option available to the PRs?

Answer 69

Mrs can vest them in beneficiaries (or trustees if a trust arises). This way no chargeable gain or allowable loss arises.

Beneficiary or trustee is deemed to acquire the asset at its probate value.

This base cost of the asset will be relevant to future CGT calculation on any subsequent disposal by the beneficiary.

Question 70

For each income tax year during the administration period, what must the PRs calculate?

Answer 70

Income tax and CGT liability on assets disposed of for administration purposes.

If estate is not classified as a complex estate, payment can be made without completing a tax return.

If the estate is complex, a return to HMRC use be filed detailing income received and gains made on chargeable assets.

Question 71

Define a complex estate for tax return purposes.

Answer 71

1) value of the estate exceeds 2.5 million; or
2) tax due for whole of administration period exceeds 10k; or
3) value of the assets sold in a tax year exceeds 500k.

Question 72

When is tax arsing during the administration period (either income tax or CGt) payable?

Answer 72

In a lump sum at the end of the administration period.

However, CGT made on UK residential land must be paid within 60 days of completion of the sale.

Question 72

How is freehold or leasehold land vested in a beneficiary?

Answer 72

By means of an assent in the name of the beneficiary or trustee holding it for a beneficiary.

If PRs are to be the trustees holding the land for the beneficiary, they must still do this by way of an assent.

An assent must be signed by the PRs, must be in writing and must name the person in whose favour it is made. It then vests the legal estate in the named person. Deed is not necessary to pass the legal estate, but a deed is usually used (for example) if the require the beneficiary to give them an indemnity covenant.

Question 73

What are estate accounts and how must they be formatted?

Answer 73

Purpose of the accounts is to show ll the assets of the estate and the payment of debts, admin expense, legacies, and the balance remaining for the residuary beneficiaries.

The residuary beneficiaries must sign the accounts to indicate their approval. this then releases PRs from further liability to account to the beneficiaries.

Question 74

What happens if the PRs have collected the assets and then have the assets stolen from them?

Answer 74

Any beneficiaries entitled to those lost assets can bring devastavit claim against the PRs.

Question 75

The income tax rate payable by PRs on income from the estate is 20%. what happens where they then transfer the estates income to a beneficiary in the following situations:

1) the beneficiary is a higher rate tax payer;

2) the beneficiary is a standard rate tax payer.

Answer 75

1) the beneficiary must pay 20% income tax on receipt of the income (ie they must make up the remaining tax payable because they are a higher rate tax payer). They can use any relevant exemptions they have for that tax year exemptions (eg savings allowance or dividend allowance);

2) the beneficiary does not have to pay ay remaining tax on the income being transferred to them as they themselves are a standard rate taxpayer (which is the rate the PRs have already paid the income tax at).

Question 76

If a professional trustee is the one trustee, can hey still charge for their services?

Answer 76

No.

They can only do so if there is more than 1 trustee, and the other co-trustees consent in writing (and there is no provision in the will or trust expressly limiting this).

The only other way a sole professional trustee could do this is if they obtained a court order.