Administration: Dealing with the Estate

Question 1

What is the length of the administration period?

Answer 1

It commences at the moment immediately following the death and ends when the PRs are in a position to vest the residue of the estate in the beneficiaries, or
the trustees.

Question 2

How long does a PR hold office?

Answer 2

For life, so if further assets or liabilities are discovered after the residue has been transferred, the PRs are still required to deal with them.

Question 3

What is the primary duty imposed on PRs?

Answer 3

PRs must ‘collect and get in the real and personal estate of the deceased and administer it according to the law’

Question 4

What is a breach of duty by a PR known as?

Answer 4

devastavit

Question 5

What is the test for devastavit claims?

Answer 5

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

Question 6

How are PRs liable for loss to the estate resulting from breach of duty?

Answer 6

They are liable personally.

Question 7

What is the court’s discretion to relieve a PR from liability for breach of duty?

Answer 7

The court must be satisfied that he PR ‘has acted honestly and reasonably and ought fairly
to be excused for the breach’.

Question 8

How can a PR protect themselves from liability against unknown beneficiaries and creditors?

Answer 8

The PRs must give notice of the intended distribution of the estate, requiring any person
interested to send in particulars of their claim, whether as a creditor or as a beneficiary, by advertisement in the London Gazette, advertisement in a newspaper circulating in the district in which land owned by the deceased is situated and
such other like notices, including notices elsewhere than in England and Wales, as would,
in any special case, have been directed by a court of competent jurisdiction in an action
for administration, and then waiting two months from the date of the notice before distribution.

The PRs should also make searches which the prudent purchaser of land would make in
the Land Registry, the Land Charges Register and the Local Land Charges Registry to reveal the existence of any liability in relation to the deceased’s ownership of an interest in land.

Question 9

When can PRs begin advertising?

Answer 9

If they are executors, they may advertise at any time after the death; if they are administrators, they have power to advertise at any time after obtaining the grant of representation.

Question 10

How can a PR protect themselves from liability against missing beneficiaries and creditors?

Answer 10

Keeping back assets in case the claimant appears (unpopular with beneficiaries).

Taking an indemnity from the beneficiaries that they will meet any claims if the claimant
reappears. This represents a risk for the PRs as the beneficiaries may lack the means to
satisfy the claim when the claimant appears.

Taking out insurance to provide funds. This can be expensive.

Applying to the court for an order authorising the PRs to distribute the estate on the basis that the claimant is dead (Benjamin Order)

Question 11

What evidence is required for the court to grant a Benjamin Order?

Answer 11

The court will require evidence that the fullest possible enquiries have been made to trace the missing person.

Question 12

How can a PR protect themselves from liability against an applicant under the Inheritance (Provision for Family and Dependants) Act 1975?

Answer 12

The PRs can protect
themselves against such liability by waiting more than six months following the date of the
grant of representation before distributing the assets.

If earlier distribution is required, PRs should ensure they retain sufficient assets to satisfy an order should an applicant be successful within six months of the grant.

Question 13

Which assets devolve on the PRs and which assets do not?

Answer 13

Assets which pass under the will or intestacy rules automatically devolve on the PRs.

Assets which pass independently of the will and the intestacy rules do not devolve on the PRs. The PRs have no obligation, or indeed power, to deal with these assets.

Question 14

When does the devolution of assets occur for PRs?

Answer 14

For executors devolution happens immediately on the death, for administrators
when the grant of representation is issued.

Question 15

What is the effect of the devolution assets?

Answer 15

It gives PRs the ownership of the assets in the estate.

Question 16

How can PRs collect the assets of the estate?

Answer 16

Unless the PRs can take immediate possession, in most cases the PRs will need to produce their grant of representation to whoever is holding the asset.

Question 17

When should PRs begin to pay the deceased’s outstanding debts and the funeral account?

Answer 17

As soon as monies can be collected from the deceased’s bank or building society, or realised through insurance policies.

Question 18

What are the points a PR must consider when deciding which particular assets they will sell in order to raise money?

Answer 18

The will may direct from which part of the deceased’s estate the debts, funeral account, testamentary and administration expenses should be paid.

It will be generally incorrect for PRs to sell property given specifically by will unless all other assets in the estate have been exhausted in payment of the debts,

Where possible, the wishes of the beneficiaries of the residuary estate should be respected
by the PRs.

the PRs should consider the amount of any capital gains (or losses) likely to arise as a result of the sale, and the availability of any exemptions,

Question 19

What payments must be made by the PRs?

Answer 19

The PRs must settle any outstanding debts owed by the deceased at the time of death.

The PRs are required to pay reasonable expenses of a funeral conducted in a manner
suitable to the deceased’s position and circumstances, but are only liable in so far as they
have available assets of the deceased to make the payment.

Testamentary expenses including the costs of obtaining the grant, the costs of collecting in and preserving the deceased’s assets, the costs of administering the deceased’s assets and any IHT payable.

Question 20

What is a solvent estate?

Answer 20

One in which there are sufficient assets to pay all the expenses, debts and liabilities in full.

Question 21

How are secured debts dealt with in solvent estates?

Answer 21

A beneficiary taking a secured asset takes it subject to the debt and will be responsible for paying the debt unless the will states a contrary intention.

Question 22

What is the order in which assets are used to pay unsecured debts and expenses for solvent estates?

Answer 22

Property undisposed of by will subject to retention of a fund to meet pecuniary legacies.

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

Property specifically given for the payment of debts. (Property is given for the payment
of debts where the testator directs in the will that a particular asset is to be used for this
purpose, but leaves no direction as to what is to happen to any money left over).

Property charged with the payment of debts. (Property is charged with the payment of
debts where the testator directs in the will that the asset is to be used for this purpose but
provides that any money left over is to go to a beneficiary).

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

Property specifically devised or bequeathed, rateably according to value.

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

Question 23

What is an insolvent estate?

Answer 23

The assets are insufficient to discharge in full the funeral, testamentary and administration expenses, debts and liabilities.

Question 24

What is the order for distribution in insolvent estates?

Question 25

How should the PRs administer an estate if they are doubtful as to its solvency?

Answer 25

The PRs should administer the estate as if it is insolvent.

Question 26

How should the legal estate in a house or a flat be vested in a beneficiary?

Answer 26

By a document known as an assent.

Question 27

When do specific gifts vest in the beneficiary?

Answer 27

The vesting of the asset is retrospective to the date of death, so that any income produced by the property, for example dividends on a specific gift of company shares, belongs to the beneficiary.

Question 28

Who is responsible for the costs of transferring the property to a specific legatee and the costs of insurance coverage?

Answer 28

It is the responsibility of the legatee who should reimburse the PRs for the expenses incurred.

Question 29

What is the typical provision in wills for the payment of pecuniary legacies?

Answer 29

That the gift of the residuary estate will be ‘subject to’ or ‘after payment of’ the pecuniary
legacies.

Question 30

What if the will does not contain a provision for the payment of pecuniary legacies?

Answer 30

the PRs will have to decide which assets are to be used to pay the pecuniary legacies.

According to the law, pecuniary legacies are paid from the residuary estate, with personalty being used in preference to realty.

Question 31

When do pecuniary legacies become payable?

Answer 31

At the end of ‘the executor’s year’,
i.e. one year after the testator’s death. Until then, PRs are not bound to distribute the estate to the beneficiaries.

Question 32

What happens if the payment of a pecuniary legacy is delayed beyond the executor’s year?

Answer 32

The legatee will be entitled to interest by way of compensation

The rate of interest will either
be the rate prescribed by the testator’s will, or, in default of such provision, the rate payable
on money paid into court.

Question 33

What are the four occasions when interest is payable on a pecuniary legacy from the date of the death?

Answer 33

For legacies payable in satisfaction of a debt owed by the testator to a creditor.

For legacies charged on land owned by the testator.

For legacies payable to the testator’s minor child.

For legacies payable to any minor.

Question 34

What are the IHT reliefs that may reduce the IHT liability of the estate?

Answer 34

Loss on sale relief

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

Question 35

What are qualifying investments for IHT adjustment of IHT purposes?

Answer 35

shares or securities which are quoted on a recognised stock exchange at the date of death and also holdings in authorised unit trusts.

Question 36

How should PRs deal with remaining IHT instalments when they are ready to draw up estate accounts?

Answer 36

Since the PRs continue to be liable for the remaining instalments, The PRs should
consider retaining sufficient assets in the estate to cover the remaining tax.

Question 37

When will the PRs of a donor’s estate become liable for the IHT payable on LCTs?

Answer 37

If the tax remains unpaid by the donees 12 months after the end of the month in which the donor died.

The PRs’ liability is limited to the extent of the deceased’s assets
which they have received or would have received in the administration of the estate, but for their neglect or default.

Question 38

What is a corrective account?

Answer 38

A report sent by the PRs to HMRC when all variations in the extent or value of the deceased’s assets and liabilities are known, and all reliefs to which the estate is entitled have been quantified

Question 39

How can PRs obtain confirmation from HMRC that there is no further claim to IHT?

Answer 39

PRs can apply (using form IHT30) for such confirmation to be provided in the form of
a clearance certificate.

The effect is to discharge all persons, in particular the PRs, from further liability to IHT.

Question 40

With respect to the deceased’s income tax and CGT, what must PRs send to the HMRC immediately following the death?

Answer 40

The PRs must make a return to HMRC of the income and capital
gains of the deceased for the period starting on 6 April before the death and ending with the
date of death.

Question 41

How does the payment of tax debts and/or the receipt of tax refunds impact IHT?

Answer 41

The debt will be deductible
when calculating the amount of inheritance tax whilst the refund will be treated as an asset increasing the size of the estate for IHT purposes.

Question 42

At what rates do PRs pay income tax on any income paid to the estate during the administration?

Answer 42

8.75% for dividends

20% for other income.

Question 43

When will PRs pay no income tax?

Answer 43

There is an informal concession where the only income of the estate is interest which does not
exceed £500.

Question 44

What reliefs can PRs claim against their income tax liability

Answer 44

The PRs may be able to claim relief for interest paid on a bank loan to pay inheritance tax.

Question 45

What is the gain that is chargeable on PRs selling estate assets?

Answer 45

The difference between the sale value and the probate value of the asset on the date of death.

Question 46

What are the CGT rates for PRs?

Answer 46

20%, except for gains on residential property which are taxed at 28%.

Question 47

In which years can PRs claim the annual exemptions for CGT?

Answer 47

The PRs may claim the annual exemption (£6,000) for disposals made in the tax year in which the
deceased died and the following two tax years only (if the administration lasts this long).

Question 48

What if PRs sell assets for less than their value at death?

Answer 48

An allowable loss for CGT will arise.

This loss may be relieved by setting it against gains arising on other sales by the PRs in the
same, or any future, tax year in the administration period.

Question 49

Is the transfer of assets to beneficiaries a disposal for CGT purposes?

Answer 49

No.

Question 50

When is an estate classified as a complex estate?

Answer 50

If either the value of the estate exceeds £2.5 million or tax due for the whole of the administration period exceeds £10,000 or the value of assets sold in a tax year exceeds
£500,000.

Question 51

What happens if the estate is not classified as a complex estate?

Answer 51

The PRs can make an informal payment to HMRC without having to provide a tax return.

Question 52

What happens if the estate is classified as a complex estate?

Answer 52

The PRs must make a return to
HMRC of the income they receive on the deceased’s assets, and any gains they make on disposals of chargeable assets for administration purposes.

Question 53

What must be taken account when PRs distribute the remaining assets to the residuary beneficiaries?

Answer 53

The interim distributions have already been made on account of their entitlement.

Question 54

What are the formalities for an assent of real property?

Answer 54

The assent must be in writing, it must be signed by the PRs, and it must name the person in
whose favour it is made.

A deed may be used if the PRs require that the beneficiary give them the benefit of an indemnity covenant.

Question 55

What is the purpose of estate accounts?

Answer 55

To show all the assets of the estate, the payment of the
debts, administration expenses legacies and interim distributions, and the balance remaining for the residuary beneficiaries.

Question 56

What must the residuary beneficiaries do with the estate accounts?

Answer 56

The residuary beneficiaries sign the accounts to indicate that they approve them.

In the absence of fraud or failure to disclose
assets, their signatures will also release the PRs from further liability to account to the
beneficiaries.

Question 57

What is the effect of the residuary beneficiaries’ signatures on the estate accounts?

Answer 57

In the absence of fraud or failure to disclose assets, their signatures will release the PRs from further liability to account to the beneficiaries.

Question 58

What must accompany the estate accounts?

Answer 58

Unless the estate is a small estate, a separate capital and income account to show capital assets, and income produced by those assets during the administration period.