Unit 5 - Administration: Dealing with the Assets Flashcards
A man died six months ago. He owned assets in his sole name worth £1,500,000, including a cottage (worth £300,000), which was subject to a £50,000 mortgage. The man had one other debt (£10,000 owed to his credit card provider). In his valid will, the man left his cottage to his niece and the residue of his estate to his nephew. Both gifts are effective. The will was silent on the burden of inheritance tax (‘IHT’) and all debts, including the mortgage secured on the cottage.
Which of the following best describes the position in relation to the burden of the IHT and all the debts?
A) The residue will bear the burden of all the debts, including the mortgage, and the IHT attributable to the cottage.
B) The residue will bear the burden of all the debts, including the mortgage, but not the IHT attributable to the cottage.
C) The residue will bear the burden of the credit card debt but not the mortgage and not the IHT attributable to the cottage.
D) The residue will bear the burden of the IHT on the cottage, and the credit card debt but not the mortgage.
E) The residue will bear the burden of the IHT on the cottage but not on any of the debts.
CORRECT ANSWER D - The will is silent on the payment of debts and testamentary expenses. The mortgage is a secured debt and so the beneficiary who is given charged property bears the burden of the debt (s 35 Administration of Estates Act 1925). All other debts and testamentary expenses (including the IHT payable on property in the UK which vests in the PRs) are borne by the residue. The residue therefore bears the burden of the credit card debt and the IHT.
A man died six months ago. In his valid will, he left a legacy of £5,000 to a school friend and the rest of his estate to his son. Nobody knows the current whereabouts of the school friend or whether he is still alive. The man left nothing to his partner with whom he had been living for three years before his death. They were not married and had
not formed a civil partnership. The partner is threatening to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975. The personal representatives (‘PRs’) obtained the grant of representation three months ago and immediately placed advertisements complying with s 27 Trustee Act 1925 in the London Gazette and in a local newspaper. Having received no response, they distributed the whole estate to the deceased’s son last week.
Which of the following best describes the PRs’ protection from personal liability on claims by creditors, claimants and beneficiaries?
A) The PRs are protected against all possible claims.
B) The PRs are protected against possible claims by unknown creditors but not against possible claims by the school friend and the partner.
C) The PRs are protected against possible claims by the school friend and the partner but not against claims by unknown creditors.
D) The PRs are protected against possible claims by unknown creditors and the school friend, but not against possible claims by the partner.
E) The PRs are protected against possible claims by unknown creditors and the partner, but not against possible claims by the school friend.
CORRECT ANSWER B - The PRs have followed the requirements of s 27 Trustee Act 1925, including waiting more than two months from the placing of the advertisements before distributing
the estate. This protects the PRs against claims by unknown creditors/beneficiaries. Section
27 does not protect against claims by creditors/beneficiaries who are known about but cannot be traced, such as the school friend. To secure protection the PRs should have taken additional steps regarding the school friend, such as obtaining a Benjamin order. The PRs
are not protected against possible claims under the Inheritance (Provision for Family and Dependants) Act 1975 because they distributed within six months from the grant (the time limit for making claims under the Act).
A person died with an estate including shares worth £213,000 at the date of death and a painting worth £480,000 at the date of death. During the period from death to the end of the tax year the only relevant events were that the personal representatives (‘PRs’) sold the shares for £225,000 and transferred the painting to the beneficiary entitled to it at a time when it had risen in value to £510,000. In this period the Capital Gains Tax (‘CGT’) rate was 20% and the annual exemption was £3,000. Assume that there were no disposal costs associated with these events.
What is the amount of CGT that the PRs must pay on the estate for the tax year in which the person died?
A) £1,800
B) £7,800
C) £8,400
D) £2,400
E) £5,400.
CORRECT ANSWER A - because the sale of the shares makes a chargeable gain of £12,000.
After deducting the annual exemption of £3,000 the £9,000 gain is taxed at 20%. £9,000 x
20% = £1,800. The transfer of the painting to the beneficiary is not a disposal for CGT purposes and so no CGT is payable. The beneficiary acquires the painting at its probate value.
Option B is wrong as it includes the increase in value for the transfer.
Option C is wrong as it includes the increase in value for the transfer and also does not deduct the annual exemption.
Option D is wrong as while it correctly only includes the gain on the sale it does not deduct the annual exemption.
Option E is wrong as it does not tax the gain on the sale, but taxes the increase in value of the transfer instead.
A woman died last week. In her valid will, she gave her daughter ‘the property which at my death constitutes my main residence’ and she gave the residue of her estate to her son. At the date of the will, the woman owned 4 Church Mews. Before she died, she sold 4 Church Mews and bought Oak Cottage. Oak Cottage was the woman’s main residence at the time of her death. The will was silent on the burden of inheritance tax (‘IHT’) and any mortgage on the residence.
Which of the following best describes the daughter’s entitlement under the will?
A) The daughter is not entitled to anything under the will because the gift of 4 Church Mews has lapsed.
B) The daughter is not entitled to anything under the will because the gift of 4 Church Mews has adeemed.
C) The daughter is entitled to Oak Cottage but will take it subject to IHT and any mortgage.
D) The daughter is entitled to Oak Cottage and will take it free from IHT and any mortgage.
E) The daughter is entitled to Oak Cottage and will take it free from IHT but subject to any mortgage.
CORRECT ANSWER E -
The legacy of the house does not fail by ademption because Oak Cottage fulfils the description of ‘the property which at my death constitutes my main residence’. Where the will is silent, the legatee takes the property free of IHT (which is borne by the residuary beneficiary) but subject to any charge (s 35 AEA 1925).
Option A is wrong. Lapse refers to the situation where a beneficiary predeceases the testator, which did not happen here.
Option B is wrong because the legacy was not of the residence owned at the date of the will. The wording of the gift prevents ademption unless the testatrix owned no residence at all when she died.
Option C is wrong because where the will is silent, legatees take their legacies free of IHT (it is borne by residue).
Option D is wrong because, where the will is silent, the legatee takes the property subject to any charge (s 35 AEA 1925).
A man died last week. In his valid will, he left the residue of his estate to
‘such of my children who are living at my death, and if more than one equally, PROVIDED that if any child of mine shall die before me leaving a child or children living at their death such child or children shall provided they attain the age of 18 take by substitution and if more than one in equal shares the share of my Residuary Estate which their parent would have taken had they survived me’. The man was survived by a son, aged 30, who has no children. The man’s daughter predeceased him, leaving two infant children.
Who is entitled to the residue of the man’s estate?
A) The son and the daughter’s estate are each entitled to half of the residue.
B) The son is entitled to the whole of the residue.
C) The son is entitled to half of the residue. The daughter’s children have vested interests in the other half of the residue.
D) The son is entitled to half of the residue. The daughter’s children have contingent interests in the other half of the residue.
E) The son is entitled to half of the residue. The other half of the residue will pass on the man’s intestacy.
CORRECT ANSWER D - There is a substitutional gift for a predeceased beneficiary’s share
of residue. It will pass to the predeceased beneficiary’s children. The interests of the daughter’s children are contingent on their attaining the age of 18, and they have not done so yet because the facts say that they are infants.
Option A is wrong. The substitutional gift does not provide for the daughter’s estate to take her share of the residue. This would mean that her share would pass under her will or intestacy.
Option B is wrong. The wording of the substitutional gift would only allow the son to take the daughter’s share if she had no children.
Option C is wrong because, as explained above, the interests of the daughter’s children are contingent.
Option E is wrong. The substitutional gift has prevented a partial intestacy.
A woman died six months ago. She appointed her brother and sister to be her executors, left each of them £10,000 in her will and gave the residue of her estate to her partner. The will did not vary the executors’ powers.
In place of the cash legacy, the brother would prefer to take one of the woman’s public company shareholdings (now worth £10,000 but likely to increase in value in the near future).
Which of the following best describes the advice that should be given to the brother?
A) The statutory power for executors to appropriate assets instead of a cash legacy would apply provided the woman’s partner consents.
B) There is no power for executors to appropriate assets to pecuniary legatees.
C) The statutory power for executors to appropriate assets instead of a cash legacy would apply but, in this case, it would be a breach of the brother’s fiduciary duty.
D) The statutory power for executors to make advancements of capital would apply to allow the brother to give himself the shares instead of the cash legacy.
E) The legacy to the brother is void because executors cannot be beneficiaries.
CORRECT ANSWER C - Section 41 AEA 1925 gives PRs the power to appropriate any assets in the estate in or towards satisfaction of any legacy. However, as an executor, the appropriation would give rise to a conflict of interest, which would be a breach of the brother’s fiduciary duties.
Option A is wrong. Section 41 AEA 1925 requires only the consent of the beneficiary to whom the PR is appropriating.
Option B is wrong. Section 41 has not been excluded by the will.
Option D is wrong because this is not an advancement (the payment of trust capital to a beneficiary earlier than they would otherwise be entitled).
Option E is wrong because executors (unlike witnesses) can be beneficiaries.
Which one or more of the following statements is correct?
A) None of the deceased’s debts are ever paid in an insolvent estate.
B) All of the pecuniary legacies will be paid in a solvent estate.
C) Some of the deceased’s debts may be paid in an insolvent estate.
D) All of the deceased’s debts will be paid in a solvent estate.
E) Some of the pecuniary legacies will be paid in an insolvent estate.
CORRECT ANSWERS C & D - A solvent estate is one in which there are sufficient assets to pay the debts, so all of the debts will be paid. Even though an estate is solvent, there may not be sufficient assets to pay all the pecuniary legacies (B is wrong). An insolvent estate is one in which there are insufficient assets to pay the debts. There may be sufficient assets to pay some of the debts (A is wrong), but by definition there will never be sufficient to pay any of the pecuniary legacies (E is wrong).
TRUE OR FALSE:
An executor can only exercise administrative powers that are expressly set out in the will.
FALSE - Many administrative powers derive from statute, not from the will. The statutory powers are sometimes repeated in a will, but this is not necessary for the executors to be able to exercise those powers. (It is open to the testator to modify the statutory powers in the will).
Which one the following statements is correct?
A) PRs should wait six months from death before distributing the estate. They will then be protected if someone makes a claim under the Inheritance (Provision for Family and Dependants) Act 1975.
B) PRs should wait six months from the grant before distributing the estate. They will then be protected if someone makes a claim under the Inheritance (Provision for Family and Dependants) Act 1975.
C) PRs should wait two months from the grant before distributing the estate. They will then be protected under s27 Trustee Act 1925.
D) The best way to protect the PRs from personal liability is to ensure that they take a personal indemnity from the beneficiaries.
E) PRs should wait two months from the grant before distributing the estate. They will then be protected if someone makes a claim under the Inheritance (Provision for Family and Dependants) Act 1975.
CORRECT ANSWER B - PRs are only protected from liability under the Inheritance (Provision for Family and Dependants) Act 1975 once they have waited six months from the grant.
Under s27 Trustee Act 1925 PRs must wait two months from the date of placing the advertisements.
PRs can take an indemnity from beneficiaries, but it is not the best way to protect them from liability as the beneficiary may have no assets available when the indemnity is needed.
TRUE OR FALSE :
Personal representatives may be held liable for the inheritance tax payable on lifetime gifts made by the deceased.
TRUE - Although the general rule is that the donees of lifetime transfers are primarily liable for the IHT, 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.
TRUE OR FALSE:
In a solvent estate the unsecured debts and expenses will always be paid from the residue.
FALSE - s34(3) Administration of Estates Act 1925 sets out which assets are to be used for the payment of debts and expenses. In most cases the effect of s34(3) will be to place the burden on the residue, but this will not always be the case. s34(3) is also subject to a contrary intention shown in the will, so the testator is free to put the burden on assets other than the residue.
Drew dies on 24 June 2024. Included in his estate is his house, worth £500,000 at the date of death. Drew made no disposals in the tax year 2024/25.
On 30 November 2024 Drew’s PRs sell the house for £550,000. They make no other disposals in the tax year 2024/25.
Which of the following statements about capital gains tax is correct?
A) The PRs have made a gain, but they can deduct the annual exemption because PRs have a full annual exemption available to them in the tax year of death.
B) The PRs have made a gain, but they can deduct Drew’s unused annual exemption.
C) The PRs have made a gain, but they can deduct Drew’s unused annual exemption and their own annual exemption.
D) The PRs have made a gain, but no annual exemption is available to them.
E) The PRs have made a gain, but have not incurred any tax liability.
CORRECT ANSWER A - The PRs have an annual exemption equal to that of an individual in the tax year of death and the two following tax years. They cannot make use of an unused annual exemption of the deceased.
The PRs of an estate have paid all the specific and pecuniary legacies and are about to complete the administration of the estate by paying the amount due to the residuary beneficiary, Raj. They receive £4,000 income in dividends on shares held for him.
Which one or more of the following statements is correct?
A) The PRs are not liable to income tax on the £4,000.
B) The PRs are liable to higher rate income tax on the £4,000.
C) The PRs must give Raj a certificate of deduction of income tax.
D) Raj may have to pay additional income tax on the £4,000.
E) The PRs are liable to basic rate income tax on the £4,000.
CORRECT ANSWERS C, D &E - The PRs are liable to income tax on income of an estate, but only at the basic rate.
The PRs must pay the basic rate tax and must then give Raj a certificate of deduction of income tax. This will satisfy his liability to basic rate tax. However, if he is liable to tax at a higher rate, he will have to pay more income tax.
TRUE OR FALSE:
The purpose of the estate accounts is to notify HM Revenue and Customs how much inheritance tax is payable on the estate.
FALSE - The estate accounts are prepared for the residuary beneficiaries. The purpose of the accounts is to show all the assets of the estate, the payment of the debts, administration expenses and legacies, and the balance remaining for the residuary beneficiaries.
ake, in his capacity as executor, is dealing with the administration of an estate. Jake is also one of the beneficiaries named in the will. Jake places the advertisements required by s27 Trustee Act 1925, waits for two months to elapse and then distributes the estate.
Which of the following statements is correct?
A) If an unknown creditor now comes forward, they can recover assets from the other beneficiaries, but not from Jake.
B) If a missing beneficiary now comes forward, they will have no right to recover anything from the estate.
C) If an unknown beneficiary now comes forward, they can recover assets from the beneficiaries, but not from the Jake in his capacity as executor.
D) If a missing beneficiary now comes forward, they can recover assets from the beneficiaries, but not from Jake in his capacity as executor.
E) If an unknown creditor now comes forward, they can recover assets from the Jake in his capacity as executor, but not from the beneficiaries.
CORRECT ANSWER C - Jake has followed the requirement under s27 which protects him from unknown claimants in his capacity as a PR, but not as beneficiary (A and E are wrong). A claimant who appears outside the two-month period can still recover assets from the beneficiaries even though the PRs have no personal liability. s27 does not afford any protection for PRs or the estate against missing beneficiaries (B and D are wrong).
