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).
Indemnity
The PRs could seek an indemnity from the beneficiaries they can trace.
The beneficiaries promise to reimburse the PRs for any loss the PRs suffer as a result of being sued by a disappointed beneficiary or creditor.
An indemnity from the existing beneficiaries is only as good as the person giving it. Also, it may prove difficult in the future to trace those providing the indemnity. As such this may not be a preferred option for the PRs.
Payment to Court
PRs could pay the legacy amount into court and distribute the balance of the estate. Although the person who would otherwise benefit from the share paid into court may not favour this option.
While the purchase of insurance would be a preferable option re a missing beneficiary, a payment into court may be suitable where a beneficiary can be located but is refusing to accept their inheritance.
Exoneration by Court
Under s.61 Trustee Act 1925 a PR may apply to the court for an order exonerating them, in whole or part, from personal liability for breach.
An order will not be made unless the court considers that the PR:
· acted honestly and reasonably,
· ought fairly to be excused for the breach of trust and for omitting to obtain directions of the court in the matter
[S.61 refers to trustees, which includes a PR for these purposes]
Exemption Clauses in a will
The testator’s will may contain clauses which exclude or restrict liability for a PR’s wrongdoing. These clauses may cover a range of scenarios from innocent mistake to gross negligence and may offer different levels of protection to lay and professional PRs.
See the example below for a clause which exempts lay executors from liability (but still allows claims against professional executors) and also excludes the statutory duty of care for all executors:
“None of my Executors (other than a professional executor) shall be liable for any act or omission save for an act or omission involving willful fraud or dishonesty and I further declare the duty of care contained in section 1 of the Trustee Act 2000 shall not apply to any of my Executors”
Summary
PRs are personally liable for a failure to carry out their duties properly. Beneficiaries and creditors can bring a claim for devastavit against a PR.
Where PRs are unsure of their obligations, they may seek court directions or make a s 48 AJA 1985 application to rely on a written legal opinion.
To avoid liability to an unknown beneficiary/creditor who comes forwards after the estate has been distributed the PRs should follow the notice procedure in s 27 TA 25.
Summary
Where there is a known but missing beneficiary/creditor the PRs have a number of options available to minimise the risk of personal liability e.g. obtaining a Benjamin Order or taking out insurance.
A PR may be protected generally by exemption clauses within a will.
Post Grant Steps
After obtaining the grant of representation the PRs have evidence of their authority to collect in and administer the estate and can continue with this part of the administration.
The PRs should consider their powers and duties, and what protections may be necessary with regards beneficiaries and estate creditors.
In this element we consider the process of collecting in the deceased’s assets and payment of debts.
Collecting Assets
The method of collection will vary depending upon the asset involved and the procedures that the institutions have in place.
- Most bank and building societies require withdrawal forms to be completed to collect the balance of bank accounts.
- Personal possessions (for example, jewellery) once collected should be stored and safeguarded.
- The sale or transfer of investments can usually be arranged by a financial advisor.
- Land registered at the land registry can be transferred into the name of the PRs if not being directly transferred to a beneficiary.
Money collected should be paid into
- a PR’s bank account (opened specifically to hold estate money and to prevent this being mixed with their personal funds), or
- law firm client account.
Solicitors’ Accounts rules apply to money held in the firm’s client account and the firm must provide credit interest of a “fair and reasonable” sum.
Payment of Debts
As soon as assets can be collected PRs should begin to pay the deceased’s outstanding debts and funeral expenses.
PRs have a duty to pay debts with ‘due diligence’ – this is not defined but creditors should normally be paid before the end of the ‘executor’s year’.
If a PR fails to pay debts, even though they have assets available they will be liable to the creditor and to any beneficiary for consequent loss (e.g. costs of proceedings incurred by the creditor to recover the debt).
Express Clause
An express clause in the will may limit a PR’s liability to the beneficiaries but it cannot relieve them of liability to creditors.
However, if PRs comply with the s.27 TA 1925 notice procedure, they may obtain protection against personal liability to unknown creditors.
Payment of Expenses
In addition to the deceased’s debts the PRs should ensure that any pre-grant loan the PRs took out to pay IHT is repaid as soon as possible to minimise the expense of interest payments.
This is particularly important if the PRs have given a ‘first proceeds’ undertaking to a bank in connection with the loan – where PRs promise to use the first moneys raised during the administration to repay the loan. Failure to comply will be a breach of this undertaking.
PRs should also pay general administration expenses as and when they arise during the administration.
General Administration Expenses
- Cost of valuing the estate assets
- Probate fees
- S.27 notice costs
- Professional legal fees for services provided to the estate
Burden of Debts and Expenses
All the deceased’s property constitutes assets which can be made available for the payment of the deceased’s debts and liabilities and any clause to the contrary in a will is void (s 32 Administration of Estates Act 1925 (‘AEA’)).
However, there are rules which determine the order in which estate assets are used for these purposes. The rules differ depending on whether the:
Estate is solvent or insolvent
Debts are secured or unsecured
Solvent or Insolvent Estates
An estate is solvent if the assets are sufficient to pay all the funeral, testamentary and administration expenses, debts and liabilities, and will be insolvent if the assets are insufficient to do so. It is immaterial whether legacies can be paid in full or not.
Legislation: For an insolvent estate debts must be paid in the statutory order in the Administration of Insolvent Estates of Deceased Persons Order 1986.
You do not need to know the detail of this statute for this module.
Secured Debts
There are specific rules for secured debts.
A debt is secured if it has been charged on part of the deceased’s property during their lifetime. E.g. a mortgage on the deceased’s house.
Legislation: Charged property will bear primary liability for payment of the debt secured against it unless a contrary intention is shown in the will (Section 35 AEA).
If the amount of the outstanding loan is less than the value of the asset secured (usually the case) no other estate assets can be used to repay the secured debt.
Secured Debts
To the extent the outstanding loan is greater than the value of the asset, the creditor will usually rank as an unsecured creditor.
Example: 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 s 35 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.
Unsecured Debts/Expenses
For solvent estates the order in which unsecured debts are met is not a primary concern for a creditor as they will be paid in any event. However, the choice of assets used to pay these amounts will affect the beneficiaries because if “their part” of the estate is used, that beneficiary will receive less.
Legislation: There is a statutory order (Sch 1 Part II AEA) regarding the application of assets towards the payment of unsecured debts and administrative expenses i.e. which assets are used.
Unsecured Debts/Expenses
The assets used to repay unsecured debts e.g. credit card debt/utility bills and expenses are taken in the following statutory order unless varied by the terms of the will.
An explanation of the statutory order follows. Note that assets in each category are exhausted in full before moving to the next as required.
Statutory Order
- Property not disposed of by a will (i.e.passing by full/partial intestacy) but subject to the retention of £ for any pecuniary legacies – (‘pecuniary legacy fund’)
- Residue (subject to retention of ‘pecuniary legacy fund’ if not already done)
- Property the will sets aside (or charges with) the repayment of debts
- £ in the pecuniary legacy fund (if £ is insufficient, the legacies abate (i.e. are reduced) proportionately according to value)
- Property specifically given (e.g. chattels)
Marshalling
If PRs do take assets ‘out of order’ to pay creditors then the beneficiaries whose assets have been ‘wrongly taken’ can use the doctrine of marshalling.
The creditors are not bound by the rules and are under no obligation to return the money paid to them.
The general principle of marshalling allows a beneficiary who is disappointed that his inheritance has been reduced (because assets to which he was entitled have been wrongly used to pay a creditor) to compensate himself by going against the property which ought to have been used to pay the debts.
This means the disappointed beneficiary could claim against the assets inherited by another beneficiary if those assets should have been used to repay the debts.
Choice of Assets for Sale
Having identified the appropriate part of the estate to use to meet the debts / expenses (most often the residue) the PRs should use the available cash to make these payments.
However, if there is insufficient cash the PRs may need to sell non-cash assets.
PRs have a general power of sale over the whole of the estate but when deciding which assets to sell they must comply with the rules discussed previously regarding the appropriate part of the estate and the statutory order in which property should be taken.
CGT Considerations
- Capital gains tax (‘CGT’) implications of sale
- How easily or quickly a sale can be carried out
- Wishes of beneficiaries
CGT considerations
PRs acquire estate assets at their market value on the date of death (probate value).
If PRs sell an asset which has increased in value after death the ‘profit’ they make may be subject to CGT if the gain is greater than any tax-free allowance.
To avoid CGT (or using the tax-free allowance unnecessarily) PRs should consider selling assets which have not risen in value.
CGT Considerations
Assets falling rapidly in value should usually be sold in any event to preserve the value of the estate.
Assets that have risen in value may be transferred directly to a beneficiary without triggering a CGT charge. This is because the transfer from a PR to a beneficiary is not treated as a “disposal” for CGT purposes and the beneficiary inherits the asset at its probate value.
Example: PRs need to raise cash by selling an item from residue and may choose:
- Car (probate value £4,000, current value £4,000)
- 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.
Ease of sale and wishes of beneficiaries
Some assets in the estate will be quicker and easier to sell than others.
Quoted shares and other financial investment products can usually be sold (subject to any penalty charges that might apply) fairly quickly and easily.
Unquoted shares, business interests and land will usually take longer to sell.
Cars and household possessions can usually be sold fairly easily but may not produce the amount needed.
PRs are not bound to comply with the wishes of a beneficiary but should take these into account when reaching a decision. The PRs have the power to appropriate assets in satisfaction of:
- a general legacy
- an entitlement to the residuary estate
So in simple terms, if a beneficiary wants to receive a particular item as part of their inheritance (and there is no legal objection) the PRs ought to respect these wishes and avoid selling the item where possible.
Summary
· PRs should collect in the assets using the method prescribed by the asset holder.
· Estate cash should be held in a PR bank account and/or a law firm client account.
· The PRs owe a duty to estate creditors to pay the deceased’s debts.
· An estate is solvent where its value is sufficient to meet debts, liabilities and administration expenses (even if legacies cannot be paid in full).
Summary
· Subject to a contrary intention in the will:
- an asset subject to a charge bears the burden of the debt secured to it
- the order of application of assets to meet unsecured debts/expenses is prescribed by statute. If the PRs do not apply the order correctly the doctrine of marshalling can assist a disappointed beneficiary.
Administration: Income tax and capital gains tax
PR Responsibilities
PRs have a responsibility to:
- Finalise the deceased’s IT and CGT position for the tax year of death:
The deceased is likely to have died part way through a tax year so will either owe outstanding tax to HMRC or the estate will be due a refund.
- Pay IT and CGT that becomes due during the administration period:
PRs must pay CGT on taxable gains made following a disposal of estate assets and pay IT on any income received during the administration period.
You will study the calculation of IT & CGT for an individual in another module.
Deceased’s income & gains
PRs are liable to pay any IT and CGT that the deceased owed at the date of their death (or alternatively, the PR must claim any tax refunds the deceased was entitled to).
The PRs should record information and notify HMRC by submitting a tax return on behalf of the deceased for the period 6 April to date of death.
Deceased Incomes and Gains
These tax liabilities are an estate expense and payable from the estate assets. The liabilities are deductible when valuing the taxable estate as a whole for IHT purposes. Conversely, refunds due are an asset of the estate and should be included when valuing the IHT estate.
The PRs must differentiate between the deceased’s income and gains and the estate’s income and gains because different rates and reliefs apply.
Deceased’s income
When working out the deceased’s income tax liability the PRs will need to access the deceased’s financial records. When calculating the IT due PRs should utilise the deceased’s tax-free allowances and pay tax at the rates applicable to the deceased.
The PRs will need to account for:
- untaxed income due and paid before death
- some income paid after death which relates to a period before death. E.g.
Deceased Income
o Rent due on properties the deceased let, but which had not been paid
o Final dividends declared before death but not paid.
No date apportionment is needed for bank interest (CIR v Hendersons Executors). Bank interest paid before death is taxed as the deceased’s. Bank interest paid after death is taxed as the PRs’ (even if part of it relates to a period prior to death).
Deceased Gains
To work out whether the deceased had any outstanding CGT liability on the date they died the PRs will need to consider the disposals made by the deceased before they died.
These matters relate to assets that the deceased no longer owned on the date they died.
When calculating the CGT due PRs should utilise the deceased’s tax-free allowances and pay tax at the rates applicable to the deceased.
Deceased Gains
Death is not a disposal for CGT purposes and does not give rise to a CGT liability.
On death, the base cost of assets in the estate is ‘up-lifted’ to the date of death value. This has the effect of wiping out the gains that have accrued during the deceased’s lifetime (sometimes referred to as a “tax free uplift”).
Estate Income
PRs may be liable to pay IT if the estate assets generate income in the hands of the PRs i.e. income arises between the date of death and the date the assets are distributed.
The estate may receive interest (in respect of bank accounts), dividends (in respect of shares) and rent (in respect of let properties). This income is taxed as estate income in the hands of the PRs.
PRs pay IT at the basic rate (the % will depend on the type of income). The starting and higher rates do not apply to PRs in the same way they do for individuals.
Estate Income
PRs are not entitled to claim an income tax personal allowance.
Income generated by the assets after they have been distributed to beneficiaries is taxed as the beneficiary’s income.
IT will have been collected at source where this income is paid net (e.g. dividends) or paid by PRs for income paid gross (e.g. rent from estate properties).
PRs give a Form R185 to beneficiaries when the estate income is distributed. R185 records the income tax paid by PRs in respect of the income a beneficiary receives.
· Beneficiaries who don’t pay income tax can use R185 to claim a tax refund.
· Beneficiaries who are higher/additional rate taxpayers will need to make a ‘top-up’ payment to HMRC and use R185 when completing their own tax return.
Estate Income
There is no requirement for the PRs to report to HMRC or pay income tax on estate income unless the total income received (of any kind) is more than £500 per tax year of the administration. If, however, the total income exceeds the £500 tax free amount, income tax is payable on the whole amount.
Where the estate income distributed to beneficiaries is within the £500 limit, there will have been no tax liability paid by the PRs on that income. That income is also not taxable income for the beneficiary who receives it and is not recorded in the R185.
Estate Gains
PRs are potentially liable to CGT if they make a disposal / sale of estate assets during the administration period.
If assets have increased in value since the date of death there will be a gain when they are sold. If the amount of the gain is greater than the tax-free allowance PRs will pay CGT. PRs are entitled to claim the same tax-free allowance as an individual (unlike IT).
If assets have fallen in value since the date of death there will be a loss. The amount of the loss can be off-set against other gains made during the 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. Losses are useful only where there are taxable gains against which they can be applied.
Only post death gains are chargeable
It is important to appreciate that only post-death gains are chargeable.
Gains made by the deceased during their lifetime in relation to assets which they still own at the date of death i.e. increases in value from the date they acquired an asset and the date of death, are not taxed. When a person dies these lifetime gains are ignored.
The value of estate assets for CGT purposes is re-set (re-based) to their date of death value for future CGT purposes.
Estate gains Example
Deceased acquires asset: Value 3 yrs before death: £50,000 Death: Probate value: £80,000 PRs sell asset during administration: Sale proceeds: £100,000
Death is not a disposal. Latent gain of £30,000 accrued during deceased’s period of ownership is ignored and not taxed.
Estate gain of £20,000 following PR disposal is subject to CGT in the hands of the PRs and is paid from estate funds.
Estate Gains Example
When carrying out the administration of non-cash assets the PRs will either:
Sell an asset to raise cash and then distribute this to the entitled beneficiary/creditor. PRs have a power of sale in relation to all estate assets.
Transfer an asset directly to a beneficiary. PRs have a power of appropriation in relation to the estate assets i.e. they can transfer assets in satisfaction of a beneficiary’s entitlement.
Subject to any specific obligation PRs are free to decide whether to sell or transfer items in the estate. The CGT implications of each should be considered by the PRs before they make a decision. Consider the examples which follow:
Sale of Asset example
Re example above: PRs acquire the assets at probate value and make a gain of £20,000 following a subsequent sale during the administration.
The gain is taxed as theirs.
Transfer of Asset Example
Re example above PRs acquire the asset at probate value. The subsequent transfer to a beneficiary is not a disposal so no chargeable gain occurs.
For CGT purposes the beneficiary acquires the asset at probate value (£80,000), not the value at the date of transfer (£100,000).
When the beneficiary disposes of the asset they are treated as making a gain of £60,000 and not £40,000. The beneficiary can use their tax free allowance.
Tax Efficiency
If an asset is going to be sold the PRs should consider whether it is more tax efficient for PRs to:
- sell it as part of the administration; or
- transfer it to the beneficiary so the beneficiary sells it.
If the beneficiary has no tax-free allowance of their own left to use, or would otherwise pay tax at a higher rate, it is likely better for the PRs to sell the assets and use the estate tax-free allowance and then distribute cash to the beneficiaries.
Tax Efficiency
Conversely, if the PRs have used their tax-free allowance but the beneficiary has not, it is likely to be better for the PRs to transfer the asset to the beneficiary and for the beneficiary to sell it and make the gain so the beneficiary makes use of their tax-free allowance.
The PRs cannot claim main residence relief. Where applicable, a property can be transferred to a beneficiary and the beneficiary can sell it later once they satisfy the criteria for main residence relief.
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.
Summary
PRs are required to finalise the IT and CGT for the deceased.
PRs will pay IT in respect of income generated during the administration and CGT in relation to gains made on the disposal of estate assets during the administration.
Death does not constitute a CGT disposal.
Transferring assets to a beneficiary does not constitute a CGT disposal.
Post death gains are taxed in the hands of PRs if assets are disposed by PRs during the administration or taxed in the hands of a beneficiary who disposes of the asset after it has been transferred to them by the PRs.
Distributions to beneficiaries
Once the PRs have collected in assets and paid debts, funeral, testamentary and administration expenses (or have a sum set aside for their payment) they have a duty to distribute the remaining estate assets to beneficiaries in accordance with their legal entitlement under the will and /or intestacy rules.
The PRs will make payments of legacies other than the residuary legacy first. It is not possible to identify the exact value of residuary gifts until the administration is complete. Full distribution of the residue is the final step in the administration.
Consequences of Delay
The delay in getting money to residuary beneficiaries can sometimes give rise to financial difficulty for the beneficiary. Therefore, provided PRs are confident that sufficient assets will remain within their control to meet any outstanding payments later, they may make early payment of part of a residuary beneficiary’s share before the end of the administration – referred to as interim distributions. The beneficiary receives a balancing payment at the end.
Distributions to beneficiaries
To ensure the PRs fulfil their duty to accurately distribute the estate they must carefully consider:
Identity of the beneficiaries
Nature of the interest
Property to which they are entitled
Identity of the beneficiaries
Review the will to identify those entitled to legacies & apply rules of construction. (Consider the effect of class gifts, substitution clauses, s15 / 18 / 33 Wills Act).
Apply intestacy rules if full or partial intestacy occurs.
Nature of the interest
Establish if a beneficiary has a vested or contingent interest, or, an interest under an express trust in the will.
Assess what ‘share’ each beneficiary is entitled to.
Property to which they are entitled
Establish which items fall within a general gift of chattels or collection of items. Apply the effect of s 21 / 24 Wills Act.
Distributions to beneficiaries
Provided an asset is not required for the payment of debts, or a legacy has not failed, the PRs can make a transfer to the beneficiary entitled. In doing so they should consider the following practical matters:
Method of Transfer
Chattels: delivery to the beneficiary
£ legacies: cheque or bank transfer
Shares: stock transfer form
Land: Assent for a legal estate in land (land registry form AS1)
Relieving Provisions
Unless the will specifically provides otherwise, the beneficiary must bear the cost of the transfer of the asset (but inherits the item free of IHT).
Timings Considerations
While PRs have a duty not to delay the administration and should complete this within a year of death, before making significant distributions, the PRs need to consider:
Claims against estates
If a claim under the IPFDA 1975 may be brought the PRs may wish to delay distributions until ten months of the grant being issued (there is a six month deadline for issuing a claim and a further four months to serve notice of this).
S 27 TA Notice
PRs should not make distributions until after the two month deadline for being notified of claims by unknown beneficiaries and creditors.
Order of payments
In general law, unless the will states otherwise, legacies are paid in the following order:
1.specific
2.general
3.residuary
If it is not possible to pay all of the legacies they abate (reduce) in reverse order. So:
- If funds are insufficient to pay all other legacies the residuary beneficiary takes no benefit.
- If funds are insufficient to pay all specific legacies, the general beneficiaries take no benefit. If there are sufficient funds to meet all specific gifts but not all general legacies, the general beneficiaries take a reduced inheritance. (Demonstrative legacies abate with general legacies once the specific fund set aside has been exhausted.)
- specific gifts take priority.
Within each category, if not all of the legacies can be paid, they abate proportionately.
Specific and General Legacies
Assuming all legacies can be paid the PRs need to consider which items they will transfer to a beneficiary.
The nature of a specific legacy (e.g. “my gold ring”) is that the PRs will know the exact item within the estate to transfer.
The nature of a pecuniary or other general legacy is that there is often no direction as to which particular assets in the estate should be used to meet them. For example:
“I give £1,000”
“I give 100 ordinary shares in ICI plc” (rather than “my” shares)
If the will contains a direction as to the order in which assets should be used to pay legacies the PRs must comply with it. In the absence of any such direction assets will be taken so that general legacies are paid from residue.
Ascertain and Distribute Residue
When all of the debts, testamentary expenses and other legacies have been paid the PRs can ascertain the value of the residue.
To calculate the value of the residue it is necessary to have final accurate figures for tax liabilities (including IHT) and other expenses such as interest payable on loans and professional legal fees.
If a law firm has been involved then money in the client account can be used to pay the final invoice for fees and the balancing figure would be distributed in accordance with the residuary entitlement.
The value of an estate which devolves on the PRs is £400,000. The total amount of debts, expenses and liabilities is £50,000. The deceased left a will which contains pecuniary legacies of £30,000 and leaves the residue to the deceased’s spouse.
The value of the residue will be: £320,000 (£400,000 less £50,000 less £30,000).
Appropriation
When paying general and residuary legacies the PRs are free to choose which assets to appropriate to the beneficiaries in settlement of their entitlement (s.41 Administration of Estates Act 1925 (‘AEA’)).
The power of appropriation does not allow appropriation where the value of the asset at the date of appropriation exceeds the entitlement of the beneficiary concerned.
If the value of the asset at the date of appropriation is less than the beneficiary’s entitlement the PRs will need to make a further balancing transfer.
By will a beneficiary is left “£500”. The beneficiary has asked the PRs if they can be given the deceased’s flute (probate value of £100) instead of a cash sum of £500. The PRs have the power to do this. If the value of the flute at the date of transfer is £70 the PRs should also make a cash transfer of £430 – so the total value received by the beneficiary is £500.
Appropriation Example
A deceased’s estate contains:
house £200,000
chattels £3,000
cash in bank £250,000
The deceased’s will leaves:
chattels to A
£5,000 legacy to B
residue equally between C and D
The total of all debts/ expenses is £10,000
Explaination
The total estate is worth £453,000 and there are sufficient funds to pay all debts and legacies.
The PRs will pay the debts/expenses and the cash legacy to B using cash in the bank (£250,000 - £10,000 - £5,000 = £235,000) and transfer the chattels to A.
This leaves a residue of £435,000 (comprising house worth £200,000 and remaining cash of £235,000). The residue will be divided between C and D equally so each is entitled to £217,500. Assuming C would like the house, the PRs can appropriate the house + £17,500 to C, and a cash sum of £217,500 to D.
Obtaining Receipt
PRs should obtain confirmation of receipt from the beneficiary when making a distribution.
An issue arises if minor beneficiaries have a vested interest because they cannot give good receipt. Where this applies the PRs have the following options:
An express clause in the will which gives PRs the power to accept receipt from a minor aged 16 or 17 (but no younger) is enforceable
s 3 Children Act 1989
By virtue of s 3 Children Act 1989 (where a parent/guardian provides receipt)
PRs to hold the gifted property themselves until the child is 18
Appoint trustees to hold the property for the minor (s 42 AEA) and make payment to the trustees
Pay the legacy into court (s 63 Trustee Act 1925)
Estate Accounts
PRs have a duty under s 25 AEA to keep an account of the estate assets (a record of the estate assets and how these have been administered). The PRs or their legal advisors will prepare the estate accounts.
The estate accounts should be signed/approved by both PRs and residuary beneficiaries (who by signing indicate their agreement with how the estate was administered and the residue was calculated). The date the accounts are signed is usually treated as the ‘end’ of the administration.
There is no prescribed format for the estate accounts, but they should be clear and comprehensible to the beneficiaries. Three component parts usually follow a summary:
Capital Account
Income Account
Distribution Account
Capital Account
Sets out the estate assets and liabilities at death.
Records what has happened to each item during the administration, for example, whether assets have been sold or transferred to a beneficiary.
Liabilities such as pecuniary/specific legacies and IHT are included, as are any solicitor’s fees for carrying out the administration.
The capital account will then show a balance which is available for distribution to the residuary beneficiaries.
Income Account
Sets out the income received in relation to the estate assets during the administration and summarises how this was spent
Income expenses are then deducted as liabilities
The income account will then show a balance which is available for distribution to the residuary beneficiaries
If the PRs receive rent from the tenant of an estate property the income would be shown in the income account and any income tax payable on the income would be shown as an income liability.
Distribution Account
The distribution account sets out the residuary beneficiaries’ entitlement.
It includes distributions made during the course of the administration of the estate (‘interim distributions’) and the final balance due to be distributed.
A is entitled to a ½ share of the residue worth £100,000.
During the administration A received interim payments totalling £40,000 so a balance of £60,000 is due to him. Each interim payment and the final balance will be shown on the distribution account.
Summary
PRs must work out who should inherit the deceased’s assets and what they are entitled to receive by reference to the deceased’s will and/or intestacy rules.
PRs must establish whether there are sufficient funds to pay all the debts/expenses as well as the legacies. If funds are insufficient to meet all the legacies, the residue followed by the general legacies abate in priority to the specific legacies.
