Chapter 6: Administration (Post-Grant) Flashcards
Administration: PR Duties
To understand the administrative process is it important to understand the obligations that PRs are subject to and the powers available to them.
- The duties of a PR include key statutory and common law obligations to carry out the administration of the estate.
- PRs must carry out their duties in accordance with the powers conferred on them - it is therefore important to understand the scope of their powers to know whether a breach of duty has occurred. The extent of these powers is considered in detail in another element.
- The role of PR is fiduciary in nature and PRs are also subject to fiduciary duties.
A PR is personally liable for loss caused by a breach of duty.
Duties of a PR
The duties of a PR before the issue of a grant:
- Common law duty to dispose of the deceased’s body (Williams v Williams). This is usually arranged by surviving family members and will have already taken place before a solicitor becomes involved.
- Statutory duty to provide information about the estate to HMRC and pay inheritance tax (IHT) due (Ss 216 and 226 Inheritance Tax Act 1984 (‘IHTA’)). A grant will not be issued unless information required to be reported to HMRC has been delivered and any IHT due has been paid.
The practical issue of how funds can be raised to pay IHT before the grant is issued is considered later in the module.
Duty to Inform HMRC & pay IHT
- The PRs must notify HMRC about the assets and liabilities of the estate (s 216 IHTA).
- They do so by completing form IHT 400. An IHT 400 will be completed for any estate that is not excepted. You will consider the difference between excepted and non-excepted estate in another part of this module.
- The PRs must also pay any inheritance tax due in relation to the estate assets within their control i.e. the succession estate (s226 IHTA). The PRs may use estate funds and are not required to use personal assets to meet this liability.
- These duties must be complied with before the grant of representation is obtained.
Duty to administer
The duties of a PR under the grant (S 25 Administration of Estate Act 1925):
- Collect and get in the real and personal estate of the deceased and administer it according to law
- Provide an inventory and account of the estate assets
These duties are owed to the estate beneficiaries and creditors (Tankard v Midland Bank 1942)
Duty to collect-in
To comply with this duty PRs must:
- Identify and locate the deceased’s assets (including sums owed to the deceased)
- Identify the deceased’s liabilities and creditors
- Obtain control, possession, or legal ownership of the assets
The PRs will already have identified and valued the assets and liabilities as part of reporting to HMRC prior to obtaining the grant. The method of obtaining control over the assets will depend on the nature of the asset. Both matters are considered in later elements.
Duty to ….”administer estate”
Once assets have been collected in, the PRs must ‘administer’ the estate in full by:
- keeping the assets secure
- paying the deceased’s debts and liabilities
- meeting administration expenses
- paying legacies
- and distributing the residue to those legally entitled.
The duty relates only to assets which devolve on the PRs i.e. the succession estate. Assets which pass outside of the succession estate do not vest in the PRs e.g. joint tenant property
Duty to provide “inventory and account”
The PRs must keep a list of assets and values (inventory) and a record of the steps they have taken in the administration (account). This information is usually recorded in the ‘Estate Accounts’.
A beneficiary or creditor may ask to see the estate accounts. If the PRs refuse, or have not maintained adequate records, an application to court (in accordance with the NCPR) for an order to produce an inventory and account may be made.
While it is usually the beneficiaries who have an interest in seeing the estate accounts, a creditor with a claim against the estate may want to find out more information.
Duty of Due Diligence
PRs are free to make their own decisions about how best to carry out their duties but must always act within the scope of their powers conferred by the will and/or statute.
However, PRs do have a general duty to carry out the administration with due diligence and within a reasonable time. What amounts to due diligence will depend on the facts of the case but if the court decides a breach of duty has occurred it can make a declaration as to the breach and direct an inquiry as to damages.
PRs should complete the administration within 12 months of the date of death (s 44 AEA) known as the ‘executor’s year’ (but applies also to administrators). If the administration takes longer than 12 months this does not necessarily mean a breach has occurred, but from this time PRs are required to justify any delay.
Duty of Due Diligence
Although a PR has an obligation to complete the administration within a reasonable time and their role ends once the administration is finalised, the appointment is for life. This means:
- If additional assets are discovered after the administration is complete the PRs have a duty to administer these assets.
- If creditors or beneficiaries, who were not known at the time, come to light after the estate is fully administered and demand their entitlement, the PRs may be personally liable. This matter is not considered in detail in this element.
PR Powers
To carry out their administrative duties PRs require the power to deal with the estate assets e.g. the power to sell.
When PRs begin the administration, they must determine what powers they have available to them. PR powers derive from two sources: Statute – Will/Codicil
Whatever the scope of the PRs powers, PRs must always act within them and an ultra vires act will be a breach of duty
PR powers are not considered in detail in this element.
Statutory duty of Care
In addition to the general duty of due diligence, by virtue of s 35 TA 2000 PRs are subject to the same statutory duty of care as trustees when they exercise powers under the TA 2000 to which the duty applies.
The s1 duty of care imposes a higher standard for professional PRs such as solicitors than lay trustees.
A higher standard is also imposed upon those possessing special knowledge or experience, as well as those who hold themselves out as having such special knowledge or experience.
The statutory duty of care will apply when PRs exercise their power to invest, delegate, insure and purchase land.
Fiduciary Duties
As noted at the start of this element a PR must comply with their duties relating to the administration process and fulfil these using the powers conferred on them by statute and/or will.
In addition, the role of a PR is fiduciary in nature so PRs are also subject to the wider fiduciary duties. PRs must not, unless authorised by the court or fully informed beneficiaries:
- Place themselves in a position of conflict e.g. a PR may not purchase an asset from the estate even if this is for a fair value
- Profit from their position
Payment for services will not constitute a breach of the ‘no profit’ rule provided a PR acts in a professional capacity or the payments are authorised under the will.
Summary
- PRs are subject to various statutory and common law duties, including a duty to report to HMRC and pay IHT, collect in and administer the deceased’s estate, and provide an inventory and account of the administration.
- PRs have a duty to administer the estate according to law and act with due diligence.
- PRs should complete the administration of an estate within the “executor’s year” (12 months from the date of death)
- PRs derive their powers to carry out their duties from statute and from a testator’s will / codicil and must act within those powers.
- The role of a PR is fiduciary in nature and a PR must comply with the ‘no conflict’ and ‘no profit’ duties.
PR Powers
To carry out their administrative duties, PRs require the power to deal with the estate assets e.g. to sell assets.
The PRs must always act within the scope of their powers and an ultra vires act will give rise to a breach of duty. Therefore, at the start of the administration the PRs must consider the powers available to them.
PR powers primarily derive from two sources: Statute and/or Will/Codicil.
Statute & Wills
Statute
· If the deceased died intestate only statutory powers will apply.
· If the deceased left a will, statutory powers apply to the extent these do not conflict with express provisions i.e. statutory powers apply in default of any alternative contained in the will.
Will/Codicil
· If the deceased left a will, it may (but does not have to) contain express administrative provisions dealing with PR powers.
· Express clauses may confer additional powers that go beyond statutory provisions or may exclude / modify statutory powers.
· Express provisions in a will take priority over statutory powers.
Statutory Powers
The Administration of Estates Act 1925 (‘AEA’) confers powers specifically on PRs.
The Trustee Acts 1925 and 2000 (‘TA 1925’ & ‘TA 2000’) and Trusts of Land Appointment of Trustees Act 1996 (‘TOLATA’) include powers for ‘trustees’ and these powers also apply to PRs.
This element will explore the statutory powers of PRs to:
· Sell, charge or lease
· Appropriate
· Insure
· Invest
· Charge for PR services
· Delegate powers
· Appoint trustees
PRs are also often appointed as trustees of will trusts. Powers exercised by PRs in this capacity are not considered in this element.
Power to sell, charge or lease (ss 33 & 39 AEA)
The PRs have wide powers to sell estate assets.
The PRs may need to do this soon after the grant is issued so they can repay the deceased’s debts and any loan taken out to meet the inheritance tax liability.
The choice of asset to sell is considered later in the module.
Power to appropriate (s 41 AEA)
PRs have the power to appropriate an asset in satisfaction of a beneficiary’s entitlement and PRs can decide which assets are used to meet this.
The power is subject to the following rules:
· A specific beneficiary must not be prejudiced.
· Consent of recipient beneficiary is required.
· The value of the asset must be considered at the date of transfer/appropriation rather than the date of death.
Power to appropriate
If the value of an asset exceeds the beneficiary’s entitlement the PRs may not appropriate.
If the value of the asset is less than the entitlement the PRs may appropriate and then make a balancing cash transfer.
It is common for a will to include an express clause removing the need to obtain the consents required by the section.
Example:
· A testator (T) left a will which gave £25,000 to his friend (F) and the rest of his estate to his sister (S).
· F wants the PRs to give her T’s antique desk instead of giving her £25,000 in cash. The desk was worth £20,000 at T’s death but is now worth £18,000.
The PRs can do this:
· because the desk was not specifically given to someone else by the will,
· provided F consents (not an issue as F requested the appropriation); and
· provided F receives a further £7,000 so the total value received is equal to the amount of the gift.
Other Powers
Power to insure (s 19 TA 1925)
PRs have the power to take out insurance to insure estate assets comprehensively and for full value.
PRs are authorised to pay the insurance premiums out of either estate income or capital.
Power to invest (ss 3-8 TA 2000)
If PRs retain assets for a period of time they have a duty to preserve the estate and actively invest.
The general power of investment in s 3 TA 2000 applies to PRs just as it does to trustees. PRs are also permitted to acquire freehold or leasehold land in the UK in accordance with s8 TA 2000.
PRs must carry out regular reviews of investments (commonly annually).
When exercising the general power of investment or reviewing their investments the PRs must have regard to the standard investment criteria in s4 TA 2000.
The s 5 TA 2000 duty to obtain advice also applies unless the PRs reasonably conclude that in the circumstances it is unnecessary or inappropriate.
Power to charge for services
Power to charge for services (s 29 TA 2000)
Professional PRs e.g. solicitors may claim reasonable remuneration for their services (i.e. time spent carrying out the administration) provided:
· they are not acting alone, and
· that co-PRs give their written consent.
A lay PR or, a professional PR who is acting alone, needs to be given express power in the will to charge for their services.
S 28 TA 2000 makes it clear that payment as remuneration for services is not to be treated as a gift under s 15 Wills Act 1837.
Reimbursement of PR expenses (s 31 TA 2000)
All PRs (whether or not they are acting in a professional capacity) may reimburse themselves for expenses properly incurred when acting on behalf of an estate. For example, travel costs incurred in the course of carrying out estate administration.
This is not a power to charge the estate for time spent on the administration process, even if, for example, the PR has had to turn down work to carry out this role.
Power to delegate
PRs are permitted to employ agents and delegate their powers, except for the following:
· how and whether assets should be distributed
· whether fees or costs are payable from income or capital
· the appointment of trustees /nominees/custodians
PRs may not appoint a beneficiary as their agent but may appoint one of the PRs if they are sufficiently qualified.
If delegation is required, the PRs must:
· do so in writing to the agent and
· provide them with a written policy statement which the agent must agree to comply with (s15).
The use of an agent and the terms of the policy document need to be kept under review (s22).
It is common to delegate investment powers and law firms often have links with financial advisers to whom they refer work.
Power to appoint trustees (gifts to minors) (s 42 AEA)
Where a legacy is given absolutely to a minor there is no general power to pay the legacy to the beneficiary until they reach 18 because a minor cannot give valid receipt.
The PRs therefore need to hold the relevant assets on trust for the minor, investing these assets in accordance with the statutory powers and utilising their statutory powers of maintenance and advancement where appropriate, until the minor attains 18. (These powers are held in their capacity as trustee and, therefore, not considered in this element.)
However, under s 42 AEA PRs could instead appoint trustees (usually the minor’s parent/guardian) of the legacy and give the legacy to the trustees rather than retaining it.
Power to accept receipt from parent
It is thought that under s.3 Children Act 1989 a minor’s parent or guardian has the power to give a good receipt to the PRs on behalf of a minor. However, this power is commonly included expressly for clarity.
If the testator does not want the parent or guardian to receive the legacy on behalf of the minor, the will can be drafted expressly to give the legacy to trustees to hold until the child reaches majority.
Note that an express clause within a will which permits PRs to accept receipt from a minor beneficiary aged 16 or older is effective.
Power to run a business
If a testator was a shareholder, the ‘company’ as an entity will survive the testator’s death. The company articles and / or shareholders agreement will often contain provisions that apply on the death of a key shareholder.
If the testator was a partner in a business partnership, the partnership agreement should contain terms which enable the partnership to continue after the death of a partner.
If a testator ran a business as a sole trader business, there is a limited common law power to enable PRs to sell the business as a going concern within a year of death.
Power to run a business
PRs may only access assets in the business at the date of death (not other estate funds) and are personally liable to business creditors (but may indemnify themselves from the estate for liabilities incurred when running the business for realisation only).
As the default power is limited it is common to include an express power so PRs can run/manage a sole trader business in accordance with the testator’s wishes.
Express powers (in Will or Codicil)
In practice most firms draft express PR powers using a will precedent that already contains a set of express provisions (some of which restate the existing statutory position and others which amend it).
Further amendments are then made on a case by case basis.
Many firms refer to or incorporate the STEP provisions into the wills they prepare.
Express powers (in Will or Codicil)
Many firms refer to or incorporate the STEP provisions into the wills they prepare.
These are a set of express powers drafted by the Society of Trusts and Estate Practitioners and are recognised by the Law Society.
The STEP provisions contain the powers considered most useful for the greatest number of estates. You will come across these provisions in practice but the content of the provisions is beyond the scope of the module.
Can a joint PR act alone?
If more than one PR is appointed then, similarly to trustees, they are required to make decisions together and should exercise discretionary powers unanimously (unless the PRs are joint executors appointed by will and the will states otherwise).
However, when exercising a lawful power to sell or transfer an estate asset during the administration, a jointly appointed PR will usually have the authority to act alone. For example: a PR acting alone has authority to pass title to the deceased’s personal possessions to a third party and so bind the other PRs.
Note that, as an exception, a sole PR may not deal with stocks and shares which are registered in the joint names of the PRs.
Summary
PRs derive their powers to carry out their duties from statute and from a testator’s will / codicil.
PRs must act within the scope of their powers to avoiding acting in breach of duty.
Statutory PR powers apply by default, but where express provisions within a will conflict the express powers take priority.
Many of the PR powers are identical to those that apply to trustees of a trust.
PR Liability and Protections
Overview
To understand why a PR will be concerned about their own personal liability you must appreciate the obligations that PRs are subject to:
· PRs have statutory and common law duties to carry out the administration of the estate.
· PRs may only exercise the powers conferred on them by statute and/or will.
· The role of PR is fiduciary in nature and PRs are subject to fiduciary duties.
A PR is personally liable for any loss resulting from a breach of duty which they commit. A PR may also be liable for breaches committed by other PRs if they did not make a reasonable effort to monitor the co-PRs’ conduct.
PR Liabilities
PRs owe duties to the estate beneficiaries and creditors.
A claim of action against a PR for breach of their PR duties is called a devastavit (wasting of assets) and may be brought where there is loss to the estate because of PR wrongdoing. The claimant will seek a court order that the PR makes good the loss using their personal assets.
Even if there is no loss, if a breach of fiduciary duty has occurred, the claimant may seek an account of unauthorised profit and/or for a transaction to be set aside.
Types of claims on PRs
A claim against a PR may be based on:
Maladministration
Misuse of assets
Negligence
Breach of fiduciary duty
Maladministration, Misuse and Negligence
Maladministration could include:
- Incorrectly administering the estate by making distributions to the wrong beneficiaries
- Using the residuary estate to meet liabilities which should have been paid from other parts of the estate
- Paying legacies before debts without retaining sufficient funds for creditors
Misuse of assets could include:
- Making personal use of the estate assets
Negligence might include:
- Unreasonable delay in carrying out the administration
- Failing to invest or making poor investment decisions in breach of the duty of care
Breach of fiduciary duty could include:
- Acting as both buyer and seller of estate assets unless the transaction is authorised (breach of ‘no conflict’ duty even where a fair price is paid)
- Receiving unauthorised remuneration (breach of ‘no profit’ duty)
- Self-dealing
Removals as PR
In addition to any personal liability, a PR who fails to carry out their duties properly may be effectively removed as PR by:
· A court order under s.50 Administration of Justice Act 1950 appointing a replacement PR
· An administration action, where the court would take over the administration itself
Protection for PRs
If PRs also act in a trustee capacity, they will be subject to trustee duties and be personally liable for loss suffered as a result of a breach of trust.
There are a number of ways of obtaining protection from personal liability, many of which are equally applicable to PRs and trustees, but in this element we focus on the action that PRs can take for breach of their duties in that capacity.
Methods of Protecting PRs
· Seeking court directions
· S 48 AJA 1985 application
· S.27 Trustee Act 1925 notice
· Benjamin Order
· Presumption of Death Act
· Insurance
· Payments into court
· Indemnity from beneficiary
· S.61 Trustee Act 1925
Court Guidance
If PRs foresee difficulties in the administration (e.g. the construction of the will is ambiguous) and are concerned this may lead to them incurring personal liability (e.g. by making distributions to the wrong beneficiaries) they may seek court guidance.
Administration proceedings could take the form of:
- an administration action application to have the estate administered by the court.
- specific relief, an application for guidance on a particular matter.
S48 AJA 1985
Although seeking court directions is the most prudent course of action, it is also very expensive and time consuming.
In cases where there is a question over the construction of the will, the PRs may instead make an application under s 48 Administration of Justice Act 1985 to distribute in accordance with a written legal opinion (providing the opinion is given by a person who meets the criteria in s 48 and there is no dispute making it inappropriate for the court to grant permission to rely on the opinion).
S27 Trustee Act 1925
PRs who distribute the estate remain personally liable to unpaid beneficiaries and creditors, even if the PRs were unaware of their claim at the time of the administration.
To prevent liability to unidentified beneficiaries and creditors, the trustees may publish a notice of their intention to distribute to known beneficiaries two months after the date of the advertisement.
The notice must be placed in the London Gazette, a newspaper circulating in the area in which any land held on trust is situated, and any other newspaper which is appropriate e.g. if the deceased owned a business, the relevant trade paper may be appropriate.
Section 27 of the Trustee Act
Section 27 only protects against claims by unknown beneficiaries and creditors.
It does not protect the PRs if they distribute assets ignoring the claim of a known but missing beneficiary or creditor.
It also does not protect other beneficiaries who receive more than their entitlement to the estate. A disappointed creditor/beneficiary may still claim against the beneficiaries.
This means PRs who are also beneficiaries may still be liable to other beneficiaries. S27 protects PRs from claims against them in their capacity as PR but not in their capacity as beneficiary.
Benjamin Order
In the case of known but missing beneficiaries, the PRs will not be able to rely on s 27 TA 1925 and may instead seek a Benjamin Order permitting them to distribute the estate on the basis that the missing beneficiaries have died.
Although this is the common situation in which a Benjamin Order is used, it might also be used to permit the trustees to distribute the estate on the basis of a different assumption, such as the assumption that the missing beneficiary had no children.
Effect of the Order
The order relieves the PRs from personal liability if they administer an estate in accordance with the court order and the assumption turns out to be incorrect. As with s 27 TA 1925, a disappointed beneficiary or creditor can still make a claim against other beneficiaries to whom the property had been distributed.
Before an order is awarded the PRs must make full enquiries to attempt to establish the true position (Re Benjamin 1902) and demonstrate there is no reasonable prospect of knowing the true position without disproportionate expense.
Presumption of Act 2013
The PRs may make an application under this act for a court order declaring that a person thought to have died, or not known to have been alive, for seven years or more has died.
The order will confirm the presumed date of death and relates generally to the deceased’s property and affairs.
If the criteria for application can be met it may be quicker and easier to use this process rather than requesting a Benjamin Order.
Insurance
The PRs could purchase insurance to cover the risk that the beneficiary or creditor returns after the administration is complete and makes a claim against the PRs for the share they should have received.
However, it may not be possible to obtain insurance if the risk is too high. Insurance premiums may also be very expensive (although are likely to be less expensive than seeking a Benjamin Order).
