Administration of the Estate Flashcards
What are the methods for collecting in assets?
- Banks and building societies require withdrawal forms;
- Personal possessions stored and safeguarded;
- Sale / transfers of investments arranged by financial advisor
Money collected should be paid into a separate PR bank account or law firm client account.
How are debts and expenses of the estate paid?
All of the assets of the estate are available to pay the deceased’s debts and liabilities and any clause in the will to the contrary is void.
What is a solvent estate?
Where the assets in the estate are sufficient to pay:
1. Debts and liabilities ;
2. Funeral expenses
3. Testamentary and administrative expenses.
If solvent, the order of payment does not matter. If not, then must be paid in compliance with the statutory order.
How are secured debts of the estate treated?
These are where the property (i.e land) is charged (i.e with a mortgage). Unless the will clearly states otherwise, the beneficiary inherits the property with the security. If the security value is less than the outstanding loan, then no other assets can be used to pay it. If the outstanding loan is more than value of asset, creditor ranks as unsecured for that amount.
In what order are assets in the will used to pay unsecured debts / expenses?
Statutory Order:
1. Property not disposed of by the will (i.e passing by full or partial intestacy) subject to retention of money for pecuniary legacies;
2. Residue (subject to pecuniary legacies);
3. Property that the will sets aside / charges with repayment of debts;
4. Money in pecuniary legacy fund (if money insufficient, legacies abate proportionately);
5. Properts specifically given.
However, beneficiaries have marshalling claim for when their assets are wrongly used to pay creditors.
What are the PRs obligations in relation to taxes?
- Finalise and settle any tax that the deceased was due to pay before death (i.e income tax on rental properties if they were a landlord, or from their salary, CGT if they made disposals);
- Pay any tax accruing on the estate during the period of administration.
It is therefore important to separate tax owed by the deceased and tax which is owed by the PRs (as a result of being legal owners of the estate).
What is the effect of CGT on death?
Disposals made before death, relating to assets no longer owned on the date of death (because deceased disposed of them) receive tax free uplift, wiping out the gains occuring during D’s lifetime.
How is income tax calculated on the estate?
- PRs treated as receiving income
- PRs do not receive personal allowance
- Basic rate is used, higher and additional rates do not apply
- Income tax after a distribution is paid by the beneficiary
- If the only source of income is savings interest of less than £500, HMRC do not require reporting
- Beneficiary deemed to acquire asset at probate value
How are gains on the estate treated?
- PRs liable, can claim tax-free allowance and offset gains against losses
- Gain made on disposal of chattel is exempt from CGT if disposal was for £6000 or less.
- PRs cannot claim main residence relief.
What should the PRs do in relation to the estate accounts?
They are under a duty to have these signed by the residuary beneficiaries and all PRs, produce them on request of the court.
The date of the accounts symbolises the end of administration and there is no prescribed format.
Usually releases PRs from further liability to account.
Which accounts comprise the estate accounts?
Capital Account
* Details assets and liabilities of the estate, how each asset was disposed of and to whom
* Liabilities = solicitors fees, IHT, legacies etc.
Income Account
* Interest from bank accounts
* Rent received
* Expenses (i.e overheads)
Distribution Account
* Shows residuary beneficiary’s entitlement and interim distributions.
What is an interim distribution?
The PRs may make an interim distribution to a beneficiary where the protracted administration of the estate is causing them financial difficulties, provided that the asset is not provided for the payment of debts.
What happens if there are insufficient funds to pay the legacies?
The classes abate backwards, if there is enough to pay part of the class then it abates proportionally.
What is the order in which legacies should be paid?
- Specific
- General
- Residuary
How does appropriation work?
When paying general and residuary legacies, the PRs are free to choose the assets which they use to pay these (unless the will indicates otherwise, s41 AEA 1925).
Appropriation is, however, only allowed where the value of the asset is equal to or lower than the beneficiary’s entitlement + trustees can pay the balance as a cash payment.
