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.