Administration: Post-grant practice Flashcards
When do PRs have evidence of authority to collect in and administer estate?
After obtaining grant of representation
What is the method of collection for each type of asset? Bank account balance, actual property, investments, land?
For collecting in assets stage
- Balance of bank accounts = banks/building societies will require withdrawal forms to be completed
- Actual property (e.g. jewellery) = collected, stored and safeguardeed
- Investments = sale/transfer can be arranged by financial advisor
- Land = can be transferred into name of PRs if not being directly transferred to B
Where should money collected in be paid into?
Either:
- PR’s bank account (opened specifically to hold estate money and to prevent mixture with personal funds); or
- Law firm client account (Solicitors’ Accounts)
When should PRs begin to pay deceased’s outstanding debts and when should they be paid?
- Can begin to pay as soon as assets can be collected in
- Duty to pay debts with ‘due diligence’ (normally before end of executor’s year)
What will PRs be liable for if they fail to pay debts even though there are assets available?
Liable to creditor and any B for consequential loss (e.g. cost of proceedings incurred by creditor to recover debt)
Can an express clause limit PR liability to Bs and creditors?
Can limit liability to Bs but not creditors
How can PRs obtain protection against unknown creditors?
By complying with s27 notice procedure
What must be repaid ASAP to minimise expense of interest payments?
Any pre-grant loan PRs took out to pay IHT
What is a ‘first proceeds’ undertaking?
Given to a bank in connection with a loan; PRs promise to use first moneys raised during administration to repay loan
Failure to comply = breach
What general administration expenses should be paid as and when they arise during administration?
- Cost of valuing estate assets
- Probate fees
- S27 notice costs
- Professional legal fees for services provided to estate
Which of the deceased’s property is available for the payment of debts and liabilities? What about clauses to the contrary?
All of deceased’s property
Any clause to the contrary is void
How will the rules determining the order in which estate assets are used to pay debts and liabilities differ?
Rules differ depending on:
- Whether estate is solvent or insolvent
- Debts are secured or unsecured
What is a solvent and insolvent estate? How do the rules re what assets are used differ for each?
Solvent = assets sufficient to pay all funeral, testamentary and administration expenses, debts (secured and unsecured) and liabilities
- Chronological order in which debts are met is not a primary concern as credit will be available anyway (but is a statutory order re application of assets towards payment of unsecured debts and administrative expenses)
Insolvent = assets insufficient
- Debts must be paid in statutory order
Does it matter whether legacies can be paid or not when considering which assets to pay debts/liabilities with?
No!
For secured debts, which assets are used?
E.g. a mortgage on deceased’s house
The charged property will bear primary liability for payment of the debt secured against it unless contrary intention shown in will (s35 AEA)
Contary intention = other assets used
What are the consequences if outstanding loan is less than or greater than the value of asset secured?
- Less than value of asset secured = no other estate assets can be used to repay secured debt (i.e. house will be received with the mortgage!)
- Greater than value of asset secured = creditor usually ranks as unsecured creditor
Less = bad = have to receive house with. mortgage and maybe sell it :(
E.g. A owns a house, Chez Nous (£250,000) which was charged with a mortgage during A’s lifetime (£30,000 is outstanding). By his will, A gives Chez Nous to B. The will is silent on the liability to repay debts.
The effect of s35 AEA is that B inherits Chez Nous subject to the mortgage and is not entitled to have the mortgage debt discharged from other assets in the estate. B therefore may need to sell Chez Nous to repay this debt.
NB this is in the case without a contrary intention (will usually be one)
Why can a solvent estate still affect what Bs will receive if credit will be paid in any event?
The choice of assets used to pay these amounts will affect Bs if their part of estate is used
What is the statutory order re application of assets towards payment of unsecured debts and administrative expenses?
I.e. which assets are used
Will apply unless varied by the will
- Property not disposed of by will (passing by full/partial intestacy) subject to retention for any pecuniary legacies (‘pecuniary legacy fund’)
- Residue (subject to retention of pecuniary legacy fund if not alr done)
- Property the will sets aside for repayment of debts
- £ in the pecuniary legacy fund
- Property specifically given (chattels)
Never (Not disposed)
Realised (Residue)
Statutory order (Set aside)
Pays in (Pecuniary legacy fund)
Sections (Specific gifts)
By will a testator (T) leaves their estate as follows:
- House to A valued at £210,000
- £10,000 to each of B and C
- Residue to D
T’s assets, excluding the house, are worth £55,000. The debts of the estate are £6,000 and there is a mortgage of £60,000 which remains outstanding following their death. The will is silent as to what part of the estate should bear the debts.
Applying the statutory provisions:
- A receives the house subject to the mortgage (s 35 AEA)
Unsecured debts (£6,000) will be paid in accordance with the statutory order.
- The first relevant category is the residue (subject to the retention of a legacy fund of £20,000 for B and C). Gross estate £55,000 - £20,000 = £35,000 residue.
- Debts are repaid in full from this residue.
- B and C are paid in full from the legacy fund.
- D receives the remaining residue £29,000 (£35,000 - £6,000 for debts)
Can categories be used at the same time?
Each category’s assets must be exhausted before moving on to next as required
How does the pecuniary legacy fund work?
- Money will be retained for pecuniary legacies (in will) before working down statutory order
- If all parts above are exhausted (property not disposed of, residue, property will sets aside) the fund can be dipped into
What happens to the money of the pecuniary legacies that was meant for Bs if it was used?
Their legacies abate (reduce) proportionately according to value
By will a testator (T) leaves her estate as follows:
- £15,000 to B
- £5,000 to C
- Residue to D
T assets are worth £55,000. The debts of the estate are £40,000. The will is silent as to what part of the estate should bear the debts.
Applying the statutory provisions:
Unsecured debts (£40,000) will be paid in accordance with the statutory order
- The first relevant category is the residue (subject to the retention of a legacy fund of £20,000 for B and C).
- Gross estate £55,000 - £20,000 = £35,000 residue. The whole of the residue is used to repay the debts – D inherits nothing
- £5,000 of debts remain outstanding. This amount is paid from the next category (the legacy fund). £20,000 - £5,000 debts, which leaves only £15,000 for B and C.
- The original gifts are of unequal amounts. The burden of the debt is shared between them in proportion to the value of their gift. B’s legacy is reduced by ¾ of the debt and C’s by ¼ of the debt. B gets £15k - £3,750= £11,250. C gets £5k - £1,250 = £3,750
What is the difference in the contrary intention required in the case of secured and unsecured debts?
I.e. for will to override statutory order where contrary intention shown
Secured = More than a general direction, a clear/specific intention for the B of secured asset to receive item free of debt
Unsecured = Express wording of a general direction e.g. for residue to bear the burden of debts
“I give my residuary estate to my executors on trust for sale and out of the proceeds of sale to pay my debts …..”
I.e. to amend order property not disposed of > residue > money set aside for payment of debts = need a general direction
To make sure someone receives house free of a mortgage = need a specific intention
If PRs take assets ‘out of order’ to pay creditors, what can B - whose assets have been ‘wrongly taken’ - use? Are creditors under an obligation to return money given to them?
- Bs can use the doctrine of marshalling
- Creditors not bound by rules (do not have to return money)
What does marshalling allow a B, whose inheritance has been reduced, to do?
If the assets to which he was entitled have been wrongly used to pay a creditor, B can compensate himself by going against property which ought to have been used to pay debts
So disappointed B could claim against assets inherited by another B if those assets should have been used to repay debts
If there is insufficient cash in the category being used, what can the PRs do?
Use general power of sale over whole of estate to sell the non-cash assets (to produce cash!)
What should be considered when the PRs have a choice about which assets to sell?
- CGT implications
- How easily or quickly a sale can be carried out (e.g. quoted shares can be sold faster than unquoted shares)
- Wishes of Bs
For CGT purposes, what value do Bs take assets at when they are transferred?
Probate value
What should be borne in mind re CGT when deciding what assets to sell?
I.e. how to avoid CGT
If PRs sell assets that have risen in value since death, the profit they make is subject to CGT, so…
- Should sell assets which have not risen in value or are rapidly falling in value (to preserve estate value)
- Should reserve assets that have risen in value to transfer to Bs (will not be treated as disposal!)
E.g. PRs need to raise cash by selling an item from residue and may choose:
- Car (probate value £4,000, current value £4,0000)
- Painting (probate value £10,000, current value £25,000)
The PRs should sell the car to raise cash and retain the painting to be transferred to a residuary beneficiary.
Will gains made by D during lifetime be taxed if they still own at date of death?
I.e. has increased from first bought to date of death
No! Recall tax free uplift; only post-death gains are chargeable
Are PRs free to decide whether to sell an asset to raise cash or transfer an asset directly to B?
Yes subject to any specific obligations - CGT implications should also always be considered
When can PRs ascertain value of residue and what is needed to calculate it?
- Can ascertain when all debts, testamentary expenses and other legacies paid
- To calculate: must have final accurate figures for tax liabilities (inc IHT) and other expenses (interest payable on loans, legal fees)
If law firm has been involved = money in client account can be used to pay final invoice for fees and balancing figure distributed in accordance with residuary entitlement
Re appropriation to B in settlement of their entitlement, what happens when the value of asset at date of appropriation exceeds or is less than their entitlement?
Screenshot included because this has been covered already and i am tired
Example of appropriating a house
