Administration of Estates Flashcards
On which assets does the liability for secured debts fall?
Charged property bears primary liability for the payment of the debt secured against it
- if and to the extent an outstanding loan is greater than the value of the asset, the creditor ranks as an unsecured creditor
- e.g., mortgage on deceased’s home - PRs should first pay mortgage on the house using the property to which it is secured
On which assets does the liability for security of unsecured debts/expenses fall?
Statutory order of priority determines which assets are used:
1. Property not disposed of by a will but subject to retention of £ for pecuniary legacies (‘pecuniary legacy fund’)
2. Residue
3. Property will sets aside the repayment of debt
4. £ in pecuniary legacy fund
5. Property specifically given
Unless varied by the will
What are the post-grant steps in administration?
- Notify HMRC of any changes to IHT (Form C4)
- Finalise IT and CGT
- Place s27 Trustee Act notice
- Collect assets
- Pay debts
- Pay expenses
- Distribute legacies
- Prepare estate accounts
- Make final distributions to residuary beneficiaries
What document confirms executors/PRs have authority to administer the deceased’s assets?
The grant of representation
Where should estate money collected in be paid into?
- PR’s bank account opened specifically to hold estate money (not mixed with personal funds)
- Law firm client account
When should PRs begin to pay deceased’s outstanding debts and funeral expenses?
As soon as assets can be collected
What property of the deceased can be used to make the deceased’s debts/liabilities?
All the deceased’s property can be available for this purpose
- any clause to the contrary is void
What is a solvent estate?
The assets are sufficient to pay all funeral, testamentary and administration expenses, debts and liabilities
What is marshalling?
Doctrine which beneficiaries can use if PRs take assets out of order to pay creditors
- Allows beneficiary to compensate themselves
E.g., shares a beneficiary was entitled to (subject to a bequest to B) were sold by executors to pay off a debt
- the beneficiary is entitled to compensation for the shares from the residuary
How should PRs chose which assets to sell?
- General power of sale over whole estate
- Use available cash, then sell non-cash assets
- Statutory order
- Avoid CGT
- Consider wishes of beneficiaries
Duty of PRs regarding deceased’s income?
- PRs liable to pay any IT and CGT that the deceased owed at the date of their death
- Use deceased’s tax free allowances and pay tax at rate applicable for deceased
Account for:
- untaxed income paid before death
- some income paid after death which relates to a period before death (rent due, dividends declared)
- Bank interest paid after death is always taxed as estate income
What is tax liability of deceased paid from?
Estate expense and payable from estate assets
Duty of PRs regarding deceased’s gains?
- Calculate CGT liability for disposals made by deceased before they died
- Utilise deceased’s tax free allowance
What happens to CGT upon death?
Death is not a disposal for CGT purposes and does not give rise to a CGT liability
- tax free uplift: on death, base costs of assets is uplifted to date of death value
Duty of PRs/beneficiaries regarding estate income?
- Estate income (interest, dividends, rent) between date of death and date of distribution
- Paid at basic rate
- No tax-free allowance
- PRs give a Form R185 to beneficiaries when estate income distributed
- Beneficiaries can use this to claim refund or higher/additional rate tax payers must top it up when they make their own tax return
- Total income does not exceed £500 per year = no requirement to report to HMRC
What is the position for bank interest?
- Bank interest paid before death = tax as deceased’s
- Bank interest paid after death = Taxed as PR’s
How is income of assets after distribution to beneficiaries taxed?
Taxed as beneficiary’s income
Duty of PRs for estate gains
If assets have increased in value since the date of death - there is a gain when they are sold
- amount of gain greater than tax free allowance = pay CGT
- PRs are liable if they make a disposal of assets during administration period
- PRs can claim tax free allowance (unlike IT)
- any losses can be offset against other gains made during administration
- value of estate assets = date of death value
What gains are chargeable?
ONLY post-death gains
- gains made by deceased during their lifetime in relation to assets they still own at death, are not taxed
What is the chattel exemption?
Gain made on disposal of tangible asset is exempt from CGT if disposal is for £6,000 or less
At what value do PRs and beneficiaries acquire the assets?
- PRs acquire at date of death - tax-free uplift
- Subsequent transfer to beneficiary - no chargeable gain
- Beneficiary acquires asset at probate value (date of death) - not the date of transfer
Are tax liabilities a deductible expense for IHT purposes?
Yes, tax liabilities are a deductible expense when valuing the estate for IHT purposes
Order PRs distribute assets to beneficiaries
- Specific gifts
- General legacies
- Residuary legacies
Who bears the cost of transfer?
Beneficiaries bear the costs of transfer of asset
How is land transferred?
Assent for a legal estate in land (land registry form AS1)
How long should PRs wait before making distributions?
- Wait until 2 month deadline for being notified of claims by unknown beneficiaries and creditors
- If claim under IUPDFA may be brought - ten months
What must PRs obtain after making distribution?
Must obtain confirmation of receipt from beneficiary
What must PRs do if making distribution to minor?
Minor beneficiaries cannot give good receipt:
- An express clause in will which gives PRs power to accept receipt from minor aged 16 or 17 is enforceable
- Parent or guardian provides receipt
- PRs hold gifted property themselves until child is 18
- Appoint trustees to hold property
- Pay legacy into court
What are PRs duties regarding estate accounts?
- Keep record of estate assets and how they have been administered
- Should be signed and approved by both PRs and residuary beneficiaries
- Usually includes: capital account, income account, distribution account
When does statutory power under s29 Trustee Act 2000 for trustees to charge for their services apply?
- Statutory power to charge only applies where firm is not acting alone, the charges are reasonable and consent from co-trustees is obtained
- A lay PR or professional PR who is acting alone must be given express power in the will (charging clause) to charge for their services
Acting as an executor - charging
In the absence of a charging clause in the will, consent in writing of a co-executor or an agreement by beneficiaries, a solicitor/law firm cannot be paid for the work they do as executor as executor
What is the power to appropriate?
- Power to appropriate an asset in satisfaction of a beneficiary’s entitlement
- PRs can decide which assets are used to meet this
- A specific beneficiary must not be prejudiced
- Consent of recipient beneficiary required
What is the power to insure?
- Power to take out insurance to insure estate assets
- Can pay insurance premiums out of estate income or capital
Limits/duties attached to powers to invest?
- If PRs retain assets for a period of time, they have a duty to preserve the estate and actively invest
- s8: Power to acquire freehold/leasehold land in UK only (not abroad)
- PRs must carry out regular reviews of investment
- PRs must have regard to standard investment criteria
- Duty to obtain appropriate advice, unless PRs reasonably conclude that it is unnecessary/inappropriate
What is the power to delegate?
PRs can employ agents and delegate their powers, except for:
- how and whether assets should be distributed
- whether fees or costs are payable from income or capital
- appointment of trustees/nominees/custodians
If delegation is required, they must do so in writing to the agent and provide them with written policy statement
What method of protecting PRs is appropriate where there are unknown beneficiaries/creditors?
s27 Notice - Trustee Act
Publish notice of intention to distribute to known beneficiaries two months after date of advertisement
- does not protect other beneficiaries who receive more than their entitlement to the estate
What methods of protecting PRs are available if there are known but missing beneficiaries/creditors?
- Benjamin Order
- Pay legacy into court
- Presumption of Death Act
- Insurance (expensive)
- seek indemnity
What step should PR take first?
Death of individual must be registered within 5 days of being confirmed by medical practitioner
When should PRs distribute?
- If the PRs anticipate IPFDA claims: delay by 10 months (6 months to issue claim and 4 months to serve notice)
- If they have put out a s27 notice: do not distribute until after 2-month deadline for being notified of claims
What are the trustees’ of an estate powers of ownership?
The trustees have full powers of ownership of the assets and may sell them provided they comply with their fiduciary duties
- no requirement to consult beneficiaries before selling the assets
Payment in relation to debts
- Secured debts pass with the property to the beneficiary, unless the will provides otherwise
- other debts should be paid before residue is distributed
How to get in the assets using the grant?
The executor must send a copy of the grant of probate issued by Probate Registry to each relevant organisation together with a covering letter requesting the transfer of the asset
What happens if a beneficiary is bankrupt at the time of the deceased’s death, or becomes bankrupt following death?
Any legacy is paid to their trustee in bankruptcy, rather than to the beneficiary as they can give valid receipt
What are the formalities required for an assent (transfer of land to beneficiary)
The assent must be made by deed, in writing, signed by the parties and naming the recipient
An assent is used where the holder of legal title is deceased and the legal title is being transferred
Is an assent always required to be by deed?
Not always, but if the personal representatives are including obligations on the recipient (such as indemnity covenants), then it must be
If the will is silent regarding interest on pecuniary legacies
interest would not generally become payable until after the executor’s year has elapsed
