Dealing with the Estate Flashcards
(29 cards)
What are the broad steps required to deal with the estate after the grant of representation has been obtained?
Once the grant is obtained, the PRs can start the administration of the estate
Same work for a will or intestacy
Administration of the estate will require the PRs to:
- Collect the deceased’s assets
- Pay the deceased’s funeral and testamentary expenses and debts
- Distribute the legacies; and
- Complete the administration and distribute the residuary estate
What is the administration period?
Commences at moment immediately following death and ends when PRs can vest the residue in the beneficiaries or trustees if a trust of the residuary exists
A PR holds office for life, so they will be required to deal with further assets and liabilities if discovered after transfer of residue
What are the personal representatives’ main duties in relation to dealing with the estate?
Primary duty is to ‘collect and get in the real and personal estate of the deceased and administer it according to the law’
PRs are personally liable for loss to the estate for any breaches they commit as PR (devastavit) - matters where there is loss caused by breach, not whether PR is culpable
- They may be able to escape liability if court decides they acted honestly and reasonably and ought fairly to be excused or if the will protects against liability for mistakes
What is the consequence of a PR failing to properly pay a creditor or beneficiary?
If PRs fail to pay someone entitled as a creditor or beneficiary, they will be personally liable to that person
How can PRs protect themselves from liability from unknown beneficiaries and creditors?
PRs can protect against unknown claims by advertising for claimants in compliance with s27 Trustee Act
Must wait at least 2 months after advertising to protect from liability
- Executors can advertise any time after death
- Administrators can only advertise after obtaining the grant
PRs must give notice of the intended distribution of the estate and require any interested creditor or beneficiary to send the particulars of the claim, by:
- Advertisement in the London Gazette
- Advertisement in a newspaper circulating in the district in which owned by the deceased is situated; and
- Other notices that would have been directed by a court of competent jurisdiction in an action for administration; Should apply for directions if unsure what other notices to give
- Must give at least 2 months for someone to respond
PRs should also check LR and Land Charges Register for other liabilities re property
If they distribute after the time, they are not personally liable, but the unknown claimant can follow the assets into the hands of the beneficiaries who received it
How can PRs protect themselves from liability from missing beneficiaries or creditors?
S27 Trustee Act does not protect PRs against missing, but known beneficiaries
PRs could:
1) Keep back assets until claimant appears
2) Take an indemnity from the beneficiaries that they will meet a claim if the claimant reappears – they might be unable to pay
3) Take out insurance to provide funds – might leave a shortfall which PRs would have to pay and claimant can get interest
4) Applying to the court for an order authorising the PRs to distribute the estate on the basis that the claimant is dead (Benjamin order)
- Court will need evidence that the fullest possible enquiries have been made to trace the person
- Protects PRs from liability, but C can recover assets from beneficiaries
How can PRs protect themselves from a claim under the Inheritance (Provision for Family and Dependants) Act 1975?
PRs personally liable if assets distributed and an applicant under the IPFDA successfully obtains an order for ‘reasonable financial provision’ from the estate
- Protected if they wait more than 6 months from obtaining grant before distributing
- Should keep assets back to satisfy a claim if they need to distribute sooner
How do the PRs collect the assets?
Assets passing under will or intestacy automatically devolve to PRs
- Executors – on death
- Administrators – when grant issued
Devolution gives PRs ownership, but they need to collect the assets ASAP and preserve them pending the completion of the administration
- PRs have same powers as trustees in terms of management and investment and are subject to a duty of reasonable care and skill
Assets passing independently of the will and intestacy are not the PRs problem
After collecting the assets, the PRs will need to pay funeral and testamentary expenses and debts.
What are the preliminary considerations before they do so?
As soon as monies can be collected from the bank account/insurance policies etc, PRs should begin to pay D’s outstanding debts and the funeral account
If the PRs took a bank loan to pay IHT before obtaining the grant, they need to repay this, especially if subject to a ‘first proceeds’ undertaking
Assets in the estate might be sold to pay debts/expenses, but PRs should consider:
- What the will says; usually take from residue but can only take specific legacies if all other assets have been exhausted
- Beneficiaries’ wishes
- Tax consequences and availability of exemptions/reliefs
What payments will the PRs need to make to clear the deceased’s liabilities or those relating to the administration?
D’s debts owed at time of death must be settled and should be paid with due diligence, as PRs will be liable for any loss if they fail to do so
PRs must pay reasonable funeral expenses, but are only liable in so far as they have available assets to make the payment
PRs must pay testamentary expenses which include:
- Cost of obtaining the grant
- Cost of collecting in and preserving D’s assets
- Cost of administering estate (solicitor’s fees, valuer’s fees etc)
IHT payable on D’s property in UK which vests in PRs
- Beneficiary pays IHT on property passing by survivorship for example
What is a solvent estate?
Solvent estate = sufficient assets to pay all expenses, debts and liabilities in full (irrespective of whether all legacies could be paid)
How are secured debts paid in a solvent estate?
Secured debts, such as a mortgage on a property, must be paid by the beneficiary taking the asset, unless the will shows a contrary intention, specifically to that secured debt, like X to take house free from mortgage
- It would then be paid from residue
- General direction to pay debts from residue would be construed only towards unsecured debts
How are unsecured debts paid in a solvent estate?
Unsecured debts require the assets be applied in a statutory order to pay the debts:
1) Property undisposed of by will subject to retention of a fund to meet pecuniary legacies
- There will be some cases where the terms of the will simply fail to dispose of the entire estate or where the testator has tried to dispose of it in the will but failed, eg a lapsed share of residue
- The property which is undisposed of will be applied first
2) Property included in a residuary gift subject to retention of a fund to pay pecuniary legacies not already provided for
- In most estates the residue will bear the burden of the debts and expenses
3) Property specifically given for the payment of debts
- T directs in the will that a particular asset is to be used for this purpose, but leaves no direction as to what is to happen to any money left over
- Eg ‘my debts are to be paid from the proceeds of sale of my shares in X Co’
4) Property charged with the payment of debts
- T directs in the will that the asset is to be used for this purpose but provides that any money left over is to go to a beneficiary
- Eg ‘my debts are to be paid from the proceeds of sale of my shares in X Co and the balance paid to John’.)
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 rateably according to value
Unsecured debts usually paid out of residue, but T can say that a gift is subject to tax, so contrary intention can arise
How are debts paid in an insolvent estate?
Insolvent estate = insufficient assets to discharge all debts fully
- Assets applied until used up, so creditors may remain unpaid + beneficiaries will get nothing
Debts and expenses are ranked in order of priority for payment in insolvent estates, so secured creditors paid first and unsecured creditors afterwards
- Funeral and testamentary expenses paid in priority to ordinary unsecured debts
- Remaining debts abate equally, so a proportion goes to each
Failure to administer an insolvent estate in accordance with the statutory order is a breach of duty by the PRs
Treat doubtful cases as insolvent estates
After payment of debts, testamentary expenses etc, legacies will be paid next.
How are specific legacies paid/dealt with?
Land – legal estate should be vested in V via an assent, which B must send to LR for registration
Shares – stock transfer form to transfer to B
Any income produced by the property since death belongs to B, which they receive when the property vests in them. B will be liable to income tax for this income
Costs of transferring property to specific legatee are borne by B, subject to contrary direction in the will
How are pecuniary legacies paid?
If pecuniary legacies are provided for in the will, by stating the residuary estate is ‘subject to’ or ‘after payment of’ the pecuniary legacies, they will be paid by the residue
If the will does not contain an express provision, PRs will decide which assets to use to pay them
- Paid from residuary, personalty favoured over realty
What are the general rule and exceptions on the time for payment of pecuniary legacies?
General rule – payable at the end of the ‘executor’s year’
- If payment is delayed beyond this, they are entitled to interest
4 exceptions where interest is payable on a pecuniary legacy from the date of death:
- Legacy payable in satisfaction of a debt owed by the testator to a creditor
- Legacy charged on land owned by the testator
- Legacy payable to testator’s minor child - only applies to legacies where there are no other funds for the child’s maintenance
- Legacy payable to any minor where the intention is to provide for the maintenance of that minor
Once the testamentary expenses, debts and legacies under the will are paid, the distribution of the residuary estate is considered.
When will the IHT assessment need to be updated?
An adjustment to the amount of IHT payable on all property in the estate may be needed if:
- More assets/liabilities discovered since IHT account submitted
- Lifetime transfers within 7 years of death identified
- Agreement needed on provisionally estimated values
- There are sales made by PRs which have given rise to a claim for IHT loss relief
What is IHT loss relief?
IHT loss relief is relevant when PRs sell assets to meet debts and sell certain assets that fluctuate for less than their value at date of death
Qualifying investments sold within 12 months of death for less than market value at date of death (probate value) have the sale price substituted for the market value at death and IHT liability adjusts
- QIs = shares or securities quoted on recognised stock exchange + holdings in authorised trust units
- Relief must be claimed
What is the PR’s continuing IHT liability?
Liable for the annual instalments on instalment type property, so they should retain sufficient assets to cover remaining tax, rather than transferring everything + relying on Bs to pay tax
General rule is that donees of LCT or charged PETs are primarily liable for IHT
- If the tax remains unpaid 12 months after the end of the month in which they died, PRs may become liable
What is the corrective amount for IHT?
When all variations in the extent or value of the deceased’s assets and liabilities are known, and all reliefs to which the estate is entitled have been quantified, the PRs must report all outstanding matters to HMRC
This report is made by way of a corrective account
What is IHT clearance?
PRs can apply for confirmation that there is no further claim to IHT
HMRC confirms via clearance certificate
- Discharges everyone, including PRs, from further IHT liability
There may also be issues around income tax and CGT to resolve before the residuary estate can be distributed.
How is the deceased’s liability to income tax dealt with?
Immediately after death, PRs must make a return to HMRC of income and capital gains of D for the period starting 6th April before death and ending with date of death
- PRs can claim same reliefs and allowances as D
- Any liability to tax is a debt of D’s, which is deductible when calculating IHT
What income tax might the PRs themselves be responsible for?
PRs are subject to income tax on any income paid to the estate during the administration (property earning rent income/savings earning interest)
PRs pay tax at the following rates:
- Dividends – 8.75%
- Other income – 20%
Threshold:
- Income of £500 or less – no income tax
- Income of over £500 - taxed on whole amount
PRs can claim income tax relief on interest paid on a bank loan to pay IHT, so that reduces taxable income
Remaining net income after tax paid to beneficiaries and will be included in their gross return of income and will be assessable for income tax, depending on their income tax position
- They will get a certificate from PRs to say some has been paid already
