Probate and Administration - The Administration Period (7) Flashcards
What is the administration period?
The Administration Period: The Administration Period begins on death and typically ends on the distribution of the residuary estate - this is typically no longer than one year from the date of death.
(1) Duty of PRs: PRs have a duty to ‘collect the real and personal estate of the deceased and administer it according to the law’ (s25 AEA). This involves:
- Collection and Preservation of Assets;
- Payment of Debts and Expenses;
- Distribution of Legacies;
- Payment of IHT and other taxes;
- Distribution of Residue; and
- Production of Estate Accounts.
(2) Office for Life: Whilst the administration period will end, PRs have a duty to deal with new assets and liabilities that arise under the estate for life.
How are assets collected and preserved?
Collection of Assets: PRs must collect assets that vest under the will or intestacy, and preserve their value until distribution.
(1) Collection: PRs must collect assets as soon as practicable after they vest (on death for executors, on grant for administrators).
(2) Preservation: PRs should preserve asset value, through investment, insurance and proper storage. PRs owe a duty of reasonable care and skill, and have all the same investment powers as trustees.
How do the PRs deal with the debts and expenses?
Debts and Expenses: Debts and expenses must be paid from the estate before distribution of legacies. The source of funding differs by solvency (and the direction of the will).
(1) Debts: Outstanding bills and tax liabilities of deceased (late payment may incur personal liability for PRs).
(2) Funeral: A reasonable sum paid towards a funeral symbolic of the deceased’s position and circumstance in life.
(3) Testamentary Expenses: Expenses of the administration process: a) costs of grant; b) costs of asset management; c) associated professional fees; d) inheritance tax paid by PRs (s211 IHT).
(4) Power of Sale: PRs have the power to sell estate assets to pay expenses (s31 AEA).
Considerations: Must consider tax consequences and wishes of beneficiaries.
Solvent Estate
Solvent Estate: Solvent estates are those sufficient to pay all debts and expenses (if unclear, treat as insolvent).
(1) Secured Debts: Funded by secured asset, unless will states otherwise with specific reference to asset (s35 AEA).
(2) Unsecured Debts/Expenses: Other debts and expenses disposed of in statutory order, unless stated otherwise:
* Undisposed property (lapsed residue);
* Residuary estate;
* Property specifically to be used for debts;
* Property charged with debts;
* Pecuniary legacy funds;
* Specific legacies (rateably according to value);
* Property appointed under a ‘general power’ (RAtV).
Insolvent Estate
Insolvent Estate: Insolvent estates are those insufficient to pay all debts and expenses in full.
(1) Secured Debts: Funded by secured assets (surplus returned; deficit sought as unsecured debt).
(2) Unsecured Debts: Unsecured debts are paid in the following order (ranked and abating equally):
* Funeral/Administration Expenses;
* Preferential Creditors (Employees Last 4 Months’ Wages Up To £800);
* Ordinary Creditors;
* Postponed Creditors (i.e. Spouse of Deceased).
How sould PRs distribute non-residue legacies?
Legacies
Legacies: After debt payments, PRs should distribute non-residue legacies (subject to waiting 6 months from grant).
Specific Legacies
Specific Legacies: Non-cash legacies to named beneficiaries.
(1) Transfer: Typically physical transfer.
Land: Vested by an assent (1 PR is sufficient to transfer).
Shares: Vested by stock transfer form.
(2) Income: Income generated on a legacy is held for beneficiaries, and only distributed alongside gift. Beneficiaries must pay income tax on any income generated, but can deduct tax paid by PRs (below).
>I.e. dividends earned on shares in the estate.
(3) Costs of Gift: The costs of transferring the gift, including insurance and any litigation, are borne by the beneficiary (unless expressed otherwise).
Pecuniary Legacies
Pecuniary Legacies: Cash legacies to named beneficiaries.
(1) Source of Funds: Sourced according to will, otherwise at the PRs discretion (usually from residue).
Asset Swap: PRs can satisfy a pecuniary legacy by gift of non-cash assets of equivalent value provided beneficiary consents (s31 AEA). Requirement for consent can be removed in the will.
(2) Date of Payment: Should be distributed within one year (legatees entitled to interest at a rate stipulated by will, or at the court rate, for late payment).
(3) Default Interest: Interest is payable by default on: a) debts owed to creditors; b) land; c) legacies to deceased’s minor children; d) legacies for the maintenance of any other minor child
After the legacies have been distributed, what do the PRs have to consider in terms of inheritrance tax?
Inheritance Tax: IHT liability may change over the administration period, due to delayed valuations or new assets arising.
(1) IHT Loss Relief: Qualifying investments sold at a loss within 12 months of death may lower IHT liability of estate. Relief must be applied for.
Qualifying Investments: a) Stock Exchange Shares; b) Holdings in Authorised Trust Funds.
(2) Continuing Liability: PRs may have to pay IHT on instalments, lifetime transfers, and reserved property.
Instalments: 10 annual instalments (Harris v Commissioners).
Lifetime Transfers: Donees liable, but PRs liable for default from 12 months of end of month of death.
Reserved Property: As above.
(3) IHT Corrective Account: Once the new liability is quantified, HMRC must be informed via a ‘Corrective Account’.
(4) Form IHT30: At the end of administration, PRs must seek confirmation that IHT has been paid on Form IHT30.
Clearance Certificate: This is confirmed by HMRC in a Clearance Certificate, discharging PRs from IHT liability (subject to fraud/non-disclosure).
Lifetime Transfers: HMRC has discretion to confirm IHT has been paid on lifetime transfers.
Death Transfers: HMRC must confirm IHT has been paid on the death estate.
After the legacies have been distributed, what do the PRs have to consider in terms of income tax?
Income Tax: PRs may be liable to pay income tax on estate for pre-death and post-death liabilities.
(1) Pre-Death Liability: PRs must make tax return and pay tax for deceased from 6 April-Death.
Reliefs: Reliefs and allowances apply as if deceased lived for the entire tax year.
Effect: Pre-death tax is paid as a debt (above), so may reduce the IHT liability of estate.
(2) Post-Death Liability: PRs must pay income tax on income generated from assets and investment.
Deductions: Interest paid on IHT loans taken by PRs are tax deductible.
Reliefs: There are no reliefs/allowances.
Rate of Tax: Flatrate applies (differs by asset).
Standard: 20%.
Dividends: 8.75%.
Exception: Items generating income of less than £500 are not subject (beneficiaries pay all).
Payment Date: Income tax is paid before the net income is distributed to beneficiaries.
Additional Tax: Beneficiaries are liable for any income generated on a gift at their ordinary rate of income tax. They can deduct any sum paid by the PRs on the same income.
>PRs must provide a Gross Income Certificate in order to use deduction.
After the legacies have been distributed, what do the PRs have to consider in terms of capital gains tax?
Capital Gains Tax: PRs may be liable to CGT on estate for pre-death and post-death liabilities.
(1) Pre-Death Liability: As above.
(2) Post-Death Liability: CGT is paid on the sale of estate assets (but not on the distribution of legacies).
Calculation: Value of Sale - Costs of Sale - Probate Value
Exemption: Annual exemption of £6,000 (for each of first 3 years - but does not carry).
Losses: Losses may be set against gains in current/future years (but not from beneficiary gains).
Rate of Tax: Flat rate applies.
Standard: 20%.
Residential Property: 28%.
After the legacies have been distributed, what do the PRs have to consider in terms of income and capital gains tax returns?
Tax Returns: PRs have to file tax returns for income tax and CGT paid during administration period for complex estates.
(1) Complex Estates: Tax must be paid alongside tax return for complex estates. This is either:
High Estate Value: Value of estate exceeds £2,500,000.
High Taxation: Tax owed exceeds £10,000.
High Asset Sale Value: Value of assets sold in a single tax year exceeds £500,000.
(2) Non-Complex Estates: Tax is paid without tax return in a lump sum towards the end of administration period.
(3) Residential Land Gains: Gains on residential land must be paid within 60 days of sale.
What are estate accounts?
Estate Accounts: PRs should produce estate accounts. When signed by the residuary beneficiary, they are discharged.
(1) Contents: Lists all assets, expenses, debt payments, gifts, interim payments, and residue balance. No prescribed format, but should be clear and concise.
(2) Signature: Residuary beneficiaries must sign approval, releasing PRs from liability (bar fraud/non-disclosure).
(3) Income and Capital: Accounts should distinguish income from capital (unless it is a small estate). This is useful for determining life and minority interest responsibilities if vesting to trustees.
What are residuary estates?
Residuary Estate: Once the above is completed, the residue should be transferred (minus any interim payments made).
(1) Means of Vesting: Residue should vest according to the will. By default, adults inherit absolutely, and minors inherit either on trust or until any contingency is met (unless a guardian gives good receipt).
(2) Means of Transfer: Method of transfer differs. PRs must deliver/vest to themselves if holding on trust.
Personalty: Physically delivered (shares require stock transfer form).
Realty: Vested by assent (in signed writing, naming recipient). Deed is not required, but is practical.
