Unit 5 Administration: dealing with the assets Flashcards
The administration period
Commences at the moment immediately following the death and ends when the PRs are in a position to vest the residue of the estate in the beneficiaries, or the trustees if a trust arises under the will or the intestacy rules.
PR holds office for life. If further assets or liabilities are discovered after the residue has been transferred, the PRs are still required to deal with them.
Duties of PR’s
Collect and administer estate according to law.
If accept, personally liable for loss to the estate resulting from any breach of duty they commit.
Breach of duty = devastavit.
Court has discretion to relieve a PR from liability for breach if PR ‘acted honestly and reasonably and ought fairly to be excused for the breach’.
OR, may be a clause in the will providing protection from liability for mistakes made in good faith.
3 issues PRs might face
- Creditors they are unaware of or unknown relatives
- Don’t know the whereabouts of some beneficiaries
- Successful claim against the estate under the Inheritance (Provision for Family and Dependants) Act 1975
Protection against liability - Unknown beneficiaries and creditors
Executors may advertise at any time after the death.
Administrators may after obtaining the grant of representation.
Ad in:
(a) London Gazette;
(b) district in which land owned by the deceased is situated; and
(c) other notices as would have been directed by a court.
If doubt as to where to advertise, apply to the court for directions.
Notice must require any person interested to send in particulars of their claim within the time specified in the notice (not be less than 2 months from the date of the notice)
PRs should also make searches which the prudent purchaser of land would make in the LR, Land Charges Register and Local Land Charges Registry.
PRs = protected.
Claimant will have the right to claim back assets from the beneficiaries who received them.
Protection against liability - Missing beneficiaries and creditors
One of the following:
(a) Keeping back assets in case the claimant appears.
(b) Taking an indemnity from the beneficiaries that they will meet any claims if the claimant reappears.
(c) Taking out insurance to provide funds.
(d) Applying to the court for an order authorising the PRs to distribute the estate on the basis that the claimant is dead = a Benjamin order.
Protection against liability - Inheritance (Provision for Family and Dependants) Act 1975
= order for ‘reasonable financial provision’ from the estate.
PRs can protect themselves by waiting more than 6 months following the date of the grant of representation before distributing the assets.
Collecting the assets
Assets which pass under the will or intestacy rules automatically devolve on (ie ownership passes to) the PRs.
For executors devolution happens immediately on the death, for administrators when the grant of representation is issued.
Assets which pass independently of the will and the intestacy rules do not devolve on the PRs.
Payment of funeral and testamentary expenses and debts - solvent estate - secured debts
E.g. mortgage.
s35 - Beneficiary takes asset subject to debt and is responsible for paying.
Applies subject to any contrary intention shown in the will, deed or other document. To constitute a contrary intention for the purpose of s 35 there must be an express reference to the mortgage. e.g. ‘free of mortgage’.
Payment of funeral and testamentary expenses and debts - solvent estate - unsecured debts and expenses
s34
This is the statutory order which the PRs must follow:
1) Property undisposed of by will subject to retention of a fund to meet pecuniary legacies
2) Property included in a residuary gift subject to retention of a fund to pay
3) Property specifically given for the payment of debts
4) Property charged with the payment of debts
5) The fund if any retained to meet pecuniary legacies
6) Property specifically devised or bequeathed rateably according to value
7) Property appointed by will under a general power rateable according to value
Broadly assets forming part of the residue are to be used before using property given to specific legatees.
Subject to a contrary intention shown in the will.
Payment of funeral and testamentary expenses and debts - insolvent estate
Order of distribution - ranks debts and expenses in order of priority for payment.
1) Secured creditors
2) Funeral and testamentary expenses
3) Unsecured debts
By definition, in an insolvent estate there will be insufficient funds to pay all the unsecured debts, and these will therefore abate equally.
Failure to administer an insolvent estate in accordance with the statutory order is a breach of duty by the PRs.
Pecuniary legacies – no provision by will for payment
In essence pecuniary legacies are paid from the residuary estate, with personalty being used in preference to realty.
Time for payment of pecuniary legacies
Payable at the end of ‘the executor’s year’, ie one year after the testator’s death.
PRs are not bound to distribute the estate to the beneficiaries before the expiration of one year from the death.
If payment is delayed beyond this date, the legatee will be entitled to interest by way of compensation
Inheritance tax loss relief
Where ‘qualifying investments’ are sold within 12 months of death for less than their market value at the date of death (ie ‘probate value’) then the sale price can be substituted for the market value at death and the inheritance tax liability adjusted accordingly.
‘Qualifying investments’ are shares or securities which are quoted on a recognised stock exchange at the date of death and also holdings in authorised unit trusts.
The relief must be claimed; it is not automatic. It is normally available only when the PRs make the sale and not where a beneficiary to whom assets have been transferred does so.
PRs’ continuing inheritance tax liability
- Inheritance tax by instalments
PRs may have opted to pay inheritance tax by instalments on the property in the deceased’s estate.
By the time they are ready to transfer the assets to those entitled, it is likely that only one or two instalments will have been paid. The PRs continue to be liable for the remaining instalments. - Inheritance tax on lifetime transfers
Donees of lifetime transfers are primarily liable for the tax, the PRs of the donor’s estate may become liable if the tax remains unpaid by the donees 12 months after the end of the month in which the donor died.
Liability is limited to the extent of the deceased’s assets.
Time for payment of pecuniary legacies - exceptions
(a) payable in satisfaction of a debt owed by the testator to a creditor
(b) charged on land owned by the testator
(c) payable to the testator’s minor child
or
(d) payable to any minor (not necessarily the child of the testator) where the intention is to provide for the maintenance of that minor.
Income tax
PRs are subject to income tax in their capacity as PRs on any income paid to the estate during the administration.
PRs do not pay income tax at any higher rate(s) but nor do they benefit from any of the allowances available to individuals.
Rates:
dividends , 8.75%
other income , 20%
Capital gains tax
On death, there is no disposal for CGT purposes, so that no liability to CGT arises.
The PRs acquire all the deceased’s assets at their probate value at death.
PRs may claim the annual exemption - 6k - for disposals made in the tax year in which the deceased died and the following two tax years.
Loss may be relieved by setting it against gains arising on other sales by the PRs in the same, or any future, tax year in the administration period.
Rate of tax payable by PRs is 20% except for gains on residential property which are taxed at 28%.
If PRs transfer assets to beneficiaries, they do not make a disposal. The beneficiary acquires the asset at market value at the date of death.
Estate accounts
Final task of the PRs is usually to produce estate accounts for the residuary beneficiaries.
No set form.
Wil drafting - attestation clause
All wills should contain an attestation clause reciting that the formalities required by Wills Act 1837, s 9 have been complied with.
Formalities:
- testator to sign or acknowledge their signature
- in the presence of two witnesses present at the same time and the witnesses to afterwards sign (or acknowledge their signatures) in the presence of the testator.
An attestation clause raises a presumption of due execution.
The attestation clause will have to be adapted if the execution of the will did not follow the standard procedure.
Will drafting - professional conduct issues to be aware of
- Taking instructions from a third party
Paragraph 3.1 of the SRA Code of Conduct requires you to only act on instructions from client.
Should not take instructions from anyone but the client for the drafting of a will - Legacies to the solicitor drafting the will
Paragraph 6.1 of the SRA Code of Conduct requires:
‘You do not act if there is an own interest conflict or a significant risk of such a conflict.’
If client wants to gift make sure they receive independent legal advice. - Appointment of the solicitor as executor
Own interest conflict because the solicitor will charge remuneration for acting as executor. Shouldn’t tell them appointing you is essential.
Principle 7 best interests of client - sometimes best to appoint solicitor if complex and family issues.
