COLLECTING AND REALISING ASSETS

Question 1

5

In General

Answer 1

1. The PRs’ priority should be to realise sufFIcient funds to pay of any loan taken out by the PRs to cover the estate inheritance tax liability.
2. The PRs have wide powers to settle claims made by or against the estate.
3. Generally, causes of action vested in the deceased at the date of death survive for the beneft of the estate (the same applies for actions against the deceased).
4. The PRs may have an action to recover damages on behalf of dependants of the deceased if the deceased was killed by a wrongful act. Any damages recovered do not form part of the estate.
5. The PRs have no obligation—or power—to deal with assets passing outside the will or intestacy.

Question 2

2

SALE OF ASSETS

Answer 2

1. In deciding to sell assets, reference should be made to** the will and beneficiaries’ wishes**. For example, any property specifcally gifted in the will should not be sold unless oth-er assets have been exhausted. A beneficiary may have expressed a wish to receive a particular asset to satisfy a pecuniary legacy or as their share of the residue.
2. The tax implications of disposals are another consideration, both for inheritance tax loss on sale reliefs and any potential capital gains tax (‘CGT’) liability. If capital losses are made, these can be offset against capital gains made by the PRs. If an asset is vested in a ben-efciary, the beneficiary acquires it at the value on the date of death. This is not a chargeable event under the tax laws.

Question 3

A solvent estate

Answer 3

A solvent estate is one where the reasonable funeral, testamentary, and administration expenses, debts, and other liabilities can be paid in full.

Question 4

Testamentary and administration expenses

Answer 4

1. Testamentary and administration expenses include** inheritance tax** payable on death on property which vests in the PRs and the costs of obtaining the grant, collecting in and preserving the deceased’s as-sets, and administering the deceased’s estate. Whether the legacies under the will can be satisfed in full is irrelevant to solvency.

Question 5

Secured Debts

Answer 5

A secured debt (for example, a mortgage on a property) should be discharged from the property against which it is secured—subject to the testator showing any contrary intention in the will.

Question 6

2

Unsecured Debts

Answer 6

Unsecured creditors should be paid from the estate’s assets in the following order:
*Property undisposed of by the will (for example, in a par-tial intestacy); and
*Residue.

Question 7

4

When Debts Cannot Be Paid from Residue
Solvent Estate

Answer 7

If the deceased has exonerated the residue in their will frompaying such debts (that is, if the will provides that debts shallnot be paid from the residue), then the debts will be paid from:
*Property specifcally given for the payment of debts (if any);
*Property specifcally charged with the payment of
debts—this occurs when the testator has directed what happens to any surplus arising after using such assets;
*The pecuniary legacy fund—unless the testator has specifed otherwise, such legacies will abate proportionately so that each legatee bears a share of the burden of payment; and
*Property specifcally devised or bequeathed, rateably according to the property’s value.

Question 8

Marshalling

Answer 8

The doctrine of ‘marshalling’ can be invoked by a disappoint-ed benefciary (that is, one whose legacy is used by the PRs to pay a debt when the legacy is within a category which is not, as between the benefciaries, liable to the burden of that debt).

Question 9

3

Contrary Will Provisions

Answer 9

1. The Marshalling rule can be set aside by contrary provision in the will. For example, if a gift of residue says it is “subject to” or “after payment of debts, the residue clearly can be used to
   pay debts.
2. Similarly, a testator might make a gift of residue on trust for sale with a direction for payment of debts out of the proceeds (before division amongst the benefciaries). In such instances, the residue as a whole is liable for payment of the debts.
3. A gift of a property “free of mortgage” will mean the mort-gage on the property must be paid out of the residue to the extent of the residue.

Question 10

INSOLVENT ESTATE

Answer 10

An insolvent estate is one that has insufficient assets to pay expenses, debts, and liabilities in full. The benefciaries will receive nothing. If the estate is insolvent, remember that se-
cured creditors enjoy priority over unsecured creditors to the value of the property securing the debt.

Question 11

4

Payment to Unsecured Creditors
Insolvent Estate

Answer 11

The PRs must pay the unsecured creditors in the correct order. If they do so, the PRs will be protected from a claim, provided they have acted in good faith and not preferred one creditor over another in the same category. The prescribed order is as follows:
1. Reasonable funeral and administration expenses;

2. Preferred debts—wages and salaries of the deceased’s employees in the four months prior to death, up to a max-imum of £800 each;
3. Ordinary debts—including money owed to HMRC and the balance of preferred debts;
4. Interest on preferred and ordinary debts; and

Question 12

2

PROTECTION OFTHE PERSONAL REPRESENTATIVES

Answer 12

1. If PRs pay a category of debt, knowing that there are higher ranking debts, the payment is an implied warranty that there are sufficient assets to meet all the higher level debts of which they have notice. If there are not sufifcient assets, the PRs are personally liable. However, PRs are not liable if they paid an inferior debt without notice of a debt in a higher cat-egory, provided they did not do so with undue haste.
2. PRs must not prefer one creditor over another in the same category. However, they are protected if payment to a cred-itor in one class was made in full before payment to others, and the estate later turns out to be insolvent. To be protected from liability, the PRs must have been acting in good faith at the time and with no reason to believe the estate was insol-vent.