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.
Are PRs bound to comply with the wishes of a B re what assets they sell to raise cash?
No - but should take into account when reaching decision (i.e. avoid selling where possible)
What are the PR’s responsibility re the deceased’s income tax (IT) and CGT?
- Finalise deceased’s IT and CGT position for tax year of death
- Pay IT and CGT that becomes due during administration period (taxable gains made following disposal of estate assets and IT on income received during administration period)
How and when do PRs notify HMRC of IT/CGT owed by deceased or any refunds they are entitled to?
Record information and notify HMRC by submitting tax return on behalf of D for period 6 April to date of death
What kind of expense are IT and CGT liabilities and from where are they payable?
- Are an estate expense
- Payable from estate assets
Will be deductible when valuing taxable estate/included if refunds due
What must PRs differentiate between re IT and CGT liability?
The deceased’s income and gains and estate’s income and gains
Differen rates and reliefs apply
Which income of the deceased must the PRs account for?
- Untaxed income due and paid before death
- Some income paid after death which relates to period before death (e.g. rent on properties deceased let but which had not been paid)
What will bank interest be taxed as?
I.e. who
- Paid before death = taxed as deceased’s
- Paid after death = taxed as PR’s (even if it relates to a period prior to death)
To what assets will the deceased’s CGT liability relate?
Assets that the deceased no longer owned on day they died!
Obviously
Is death a disposal for CGT purposes?
No! On death, the base cost (what D paid for it) of asset is ‘up-lifted’ to date of death value = gains made in lifetime are wiped out!
The tax free uplift
What income is taxed as estate income in the hands of the PRs?
Arisen between date of death and distribution
Income that estate assets have generated between date of death and distribution
E.g. interest re bank accounts, dividends re shares, rent re let properties
At what rate will PRs pay the IT?
At the basic rate (% depends on type of income)
How will income generated by the assets after they have been distributed be taxed?
As B’s income
When will HMRC not require any reporting of estate income?
Where the only source of income is savings interest of less than £500 (so tax due would be less than £100)
When estate income is distirbuted to Bs, what happens if the B 1. does not pay IT or 2. are higher additional rate taxpayers?
I.e. PRs give Form R185 to Bs when estate income is distributed which records the IT paid by PRs in respect of income a B receives
- Can claim a tax refund
- Will need to make a top up payment to HMRC when completing tax return
When will PRs pay CGT on gains from the estate?
When they make a disposal of estate assets during administration which have increased in value since the date of death
Can PRs claim tax free allowance like an individual for both IT and CGT?
Not both - only CGT
If assets have fallen in value since the date of death, and they sell these assets, what can PRs do?
The amount of loss can be off-set against other gains made during administration
E.g. if the PRs make a gain of £26,000 on the sale of one asset and a loss of £2,000 on the sale of another the overall net gain chargeable to CGT is £24,000.
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
Why will PRs not have to worry about CGT when selling chattels?
If a gain made on disposal of a chattel is for consideration of £6,000 or less, it is exempt from CGT
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
How can PRs make a sale (as part of administration) or transfer of an asset (to B to sell it) more tax efficeint?
- B has no tax-free allowance/would otherwise pay at higher rate = PR should sell assets and use estate tax-free allowance and distribute cash to Bs
- PRs have used tax free allowance but B has not = PR should transfer asset to B and B can make gain
If the sale of an asset will generate a loss - PRs should consider whether the estate or the beneficiary has gains against which to set off the loss.
Can PRs claim main residence relief? Can a B?
- PRs cannot claim
- B can claim once they sell it later after satisfying criteria for it
What should PRs distribute first?
Once collected in assets, paid funeral, test, admin expenses…
Payment of legacies rather than residuary legacy (as not possible to identify value of residuary gift until administration complete; should be final step)
When can PRs make interim distributions of residuary B’s share?
And the balancing payment at end of administration
Where they are confident that sufficient assets will remain in control to meet outstanding payments later
What should the general considerations of PRs be to ensure they fulfil duty to accurately distribute estate?
- Identity of Bs (review will properly)
- Nature of interest (whether vested or contingent, what share entitletd to)
- Property to which they are entitled (which items fall in general gift/collection)
*
What is the method of transfer for chattels, pecuniary legacies, shares, and land at distribution?
- Chattels = deliver to B
- £ legacies = cheque/bank transfer
- Shares = stock transfer form
- Land = assent for a legal estate in land (AS1)
Who will bear cost of transfer of asset?
B save for specific provision in will
When should PRs distribute if 1. they anticipate an IPFDA claim to be brought or 2. they have put out a s27 notice?
- Delay by 10 months (6 months to issue claim and 4 months to serve notice)
- Do not distribute until after 2 month deadline for being notified by claims
In what order should legacies be paid generally?
- Pecuniary
- General
- Residuary
If not possible to pay all legacies, what happens to them?
They will rebate in reverse order, so…
- Funds insufficient to pay all other legacies = residuary B takes no benefit
- Funds insufficient to pay all specific gifts = general B takes no benefit
- Funds sufficient to meet specific gifts but not all general legacies = general Bs take reduced inheritance
- Specific gifts take priority
Within each category, if not all of the legacies can be paid, they abate (reduce) proportionately
What happens where there is no direction as to which particular assets in estate should be used to pay pecuniary/general legacy? e.g. 100 ordinary shares in ICI plc
Cf specific legacy (my gold ring) - exact item to transfer
Assets will be taken so that general legacies are paid from residue
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
What should PRs obtain from B when making a distribution?
Confirmation of receipt
What options does a PR have where a minor B has a vested interest but cannot give good receipt?
- Express clause in will giving PRs power to accept receipt from 16-17 (but no younger!)
- Parent/guardian provides receipt
- PRs hold gift property until child 18
- Appoint Ts to hold property for minor and make payment to T
- Pay legacy into court
What duty to PRs have regarding accounts? What will signing indicate
- Must keep account (record) of estate assets - signed and approved by both PRs and residuary Bs
- Signing indicates agreement with how estate administered and residue calculated
What 3 components usually make up the estate accounts and what is the purpose for each?
- Capital account = sets out estate assets and liabilities at death
- Income account = sets out income received re estate assets during administration and how it was spent
- Distribution account = sets out residuary B’s entitlement
What will a capital account record?
What has happened to each item during administration e.g. sold/transferred to B + liabilities like legacies and solicitor’s fees
What are income expenses shown as on the income account?
Will be deducted as income liabilities
How would rent from tenant of an estate property be shown in the income account?
- Income shown in income account
- Income tax payable would be shown as income liability
What distributions will be shown on the distribution account? What does the final balance show?
Distributions during the course of administration (interim distributions to residuary B)
Will also show final balance due to be distributed
Distributions to other Bs shown in the capital account!
Is there a specific form for the estate accounts? Who should sign them to indicate their agreement/approval?
- No specific form
- Residuary Bs (and executors)
