WILLS CIAN- 13.6 ADMINISTRATION OF ESTATES

What are the duties of personal representatives?

• To collect deceased’s assets (only property which devolves on personal reps not those passing directly to beneficiaries) within reasonable time (produce grant of representation to relevant people to deal with assets)

• To administer the estate and realise any investments not proper to retain. Personal reps then pay off debts and legacies and distribute residue in accordance with wills/intestacy rules.

• To act with reasonable skill and care (with honesty and integrity) accounting for any specialist knowledge/experience expected of them if professional personal reps (Trustee Act 2010). The will usually excludes liability for breach and they are not liable for loss unless negligence is an issue.

What powers do personal representatives have?

• Sell, mortgage, or lease property to pay administration expenses. (sell house to pay for funeral/debts)

• Appropriate assets to satisfy legacies or interests in the estate, provided the beneficiary consents. (transfer a share in the deceased's business to a beneficiary to satisfy a legacy.)

• Accept receipts for a minor's property (although there is some uncertainty about this power).

• Insure trust property. (insure jewellery against risk of theft)

• Delegate functions to agents. (delegate task of selling deceased’s car to an auction house)

• Reimburse themselves for properly incurred expenses. (may reimburse themselves for the cost of travelling to the deceased's holiday home to prepare it for sale.)

• Run the deceased's business (but only to sell it as a going concern, unless the will provides otherwise). (i.e. may run the deceased's restaurant as a going concern until it can be sold.)

• Invest trust assets in any kind of investment, including land (but only for investment, occupation by a beneficiary, or some other reason). (i.e. may invest the deceased's money in shares and bonds.)

Why might a testator restrict investment powers in a will?

To prohibit unethical investments.

Consider the standard investment criteria:

• the suitability to the trust of the investment, and

• the need for diversification of the trust’s investments

What additional statutory powers of Personal Representatives

• Obtain and consider proper advice by qualified persons on proposed and existing investments

• Maintain a minor i.e. apply income to maintenance, education, or benefit. If the minor reaches 18 and their interest is contingent, the ongoing income must be paid to them until their interest is satisfied.

• May advance capital to a beneficiary with a vested or contingent interest in capital (s32 of Trustee Act). The entire vested or presumptive share may be advanced, but any prior life interest beneficiary must give their consent.

Points to recognise about personal representatives

• A sole personal representative has the same powers as two or more.

• Joint personal representatives have joint and several authority, but all must join for the transfer of land and shares.

• Personal representatives' powers are fiduciary and must therefore be exercised in good faith in the interest of the estate as a whole.

What protections are available to the personal representatives if there are unknown beneficiaries or creditors?

Usually personal reps are personally liable for unpaid beneficiary/creditor unless they comply with s27 Trustee Act 1925 i.e. advertise in London Gazette, local newspaper (where estate is) to contact personal rep’s sols within minimum of 2 months

What protections are available to the personal representatives if there are missing beneficiaries or creditors?

They can:

• Make payment owed to the beneficiary/creditor to the court and distribute the rest

• Distribute everything under an indemnity from the beneficiaries (risk on personal representatives as indemnity could be worthless if beneficiary has no funds)

• Seek a Benjamin order (Re Benjamin [1902])- court order giving personal reps leave to distribute estate based on assumption set out in the order i.e. treat missing as died. Full enquiries sought first and full protection if obtained order

• Purchase insurance against risk of missing claimant appearing. Full enquiries sought first and cheaper and quicker than court.

What other risks and protections affect personal representatives?

• claims for financial provision under the Inheritance (Provision for Family and Dependants) Act 1975- the personal rep should wait 6 months passed from the issue of the grant to protect themselves from a claim from applicant who claims they have not been reasonably provided for

• Liability for failed potentially exempt transfers or chargeable lifetime transfers by the deceased can arise if the inheritance tax due is still unpaid after 12 months unless the personal reps have made full enquiries and have obtained a certificate of discharge.

For future and contingent liabilities, what could a personal representative do to deal reasonably and responsibly?

1. Estimate and set aside an appropriate amount: This can be a difficult and uncertain process, and the personal representative may need to take professional advice.

2. Seek indemnity from the beneficiaries: This is a risky option, as the beneficiaries may not be able to afford to pay the indemnity if a liability arises.

3. Arrange insurance and distribute the entire estate: This is a more expensive option, but it can provide peace of mind for the personal representative and the beneficiaries.

4. Apply to the court for directions: This can be a complex and lengthy process, but it can provide certainty for the personal representative.

What should be a personal representative’s priority?

To have sufficient funds to pay off any loan taken to cover the estate inheritance tax liability especially unsecured loans (even by means of legal action).

Do personal representatives have wide powers to settle claims made by or against the estate?

Yes. This includes claims that arose during the deceased's lifetime, as well as claims that arise after the deceased's death.

What happens to claims vested in the deceased at the date of death?

These claims will survive for the benefit of the estate. This means that the personal representatives can pursue these claims on behalf of the estate.

What happens if there are claims against the deceased?

These claims will also survive for the benefit of the estate. This means that the personal representatives can defend these claims on behalf of the estate.

What happens if the deceased was killed by a wrongful act?

The personal representatives may have an action to recover damages on behalf of the deceased's dependants. These damages will not form part of the estate.

Can photocopies of a grant be used when dealing with institutions of the estate?

No, official copies are required.

Do personal representatives have any power/obligation to deal with assets outside of the estate?

No

What should be considered when deciding whether to sell assets?

Reference should be made to the will and beneficiaries’ wishes.

For example, if a property is specially gifted this should not be sold unless other assets have been exhausted.

Tax implications of disposals must also be considered both for inheritance tax loss on sale reliefs and any potential capital gains tax liability.

If capital gains made, these can be offset against capital gains made by PR. If not, other options should be sought.

When does the beneficiary acquire an asset if it is vested in them?

At the date of death. This is not a chargeable event under tax laws.

What is a solvent estate?

This is where reasonable funeral, testamentary and administration expenses, debts and other liabilities can be paid in full.

It’s irrelevant if the legacies under the will can be satisfied in full.

What is testamentary and administration expenses?

• costs of obtaining the grant #

• costs of collecting in and preserving the deceased’s assets

• costs of administering the deceased’s estate, for example, solicitors and valuers’ fees, and

• inheritance tax payable on death on property which vests in the personal representatives.

When should a secured debt (i.e. mortgage) be discharged?

It should be discharged from the property against which it is secured unless specified otherwise in the will.

What is the order in which unsecured creditors should be paid from the estate’s assets?

• property undisposed of by the will (for example, in a partial intestacy), and

• residue – this normally suffices to pay the creditors.

If the deceased exonerated the residue in their will, we should consider what?

• If the deceased left a house to their child and specifically directed that the house be sold to pay their debts, the debts would be paid first from the proceeds of the sale of the house.

• If the deceased left all of their money to their spouse and specifically charged their bank account with the payment of their debts, the debts would be paid first from the deceased's bank account.

• If the deceased left £10,000 to each of their children and there was not enough money in the estate to pay all of the debts, the personal representatives would reduce the amount of each child's legacy proportionately.

• If the deceased left their house to their child and their car to their grandchild, and there was not enough money in the estate to pay all of the debts, the personal representatives would sell the house and the car to pay the debts.

What is the doctrine of marshalling?

This can be invoked if a beneficiary is unhappy that their asset is being used to pay off debt- they will be compensated from the residue.

If the estate is insolvent, what is the order of payment?

Secured creditors > Unsecured creditors. Beneficiaries receive nothing.

1. reasonable funeral and administration expenses

2. preferred debts (wages and salaries of the deceased’s employees in the 4 months prior to death, up to a maximum 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

5. deferred debts – that is, loans from the deceased’s spouse.

Are personal representatives liable paid an inferior debt without notice of a debt in a higher category?

No, as long as this is not done with undue haste.

What is a disclaimer?

A beneficiary can disclaim an inheritance orally or in writing (required for inheritance tax and capital gains tax), unless they accepted any benefit from the gift.

This gift would fall into the residue or partial intestacy if already in residue.

The disadvantage is the original beneficiary has no control over the ultimate destination of the gift.

What is a variation?

A variation allows a beneficiary to change who receives their inheritance which the original beneficiary has control over.

This must be in writing and within 2 years of death.

The personal representatives must sign the election if the inheritance tax liability increases.

Unlike a disclaimer, a partial variation is possible. Also, a variation can be made even if the original beneficiary has accepted a benefit.

The type of property being transferred determines the method used to vest gifts:

• For chattels, transfer is achieved by delivery, in return for a receipt. Insurance should be cancelled.

• For company shares, a stock transfer form should be completed and sent with an office copy of the grant and the share certificate.

• For land, transfer requires an assent in writing. Insurance should be cancelled. The beneficiary needs to register their interest at Her Majesty’s Land Registry

Where are pecuniary legacies paid from?

The residue.

In practice, the procedure used for payment of unsecured debts is also used for paying pecuniary legacies.

What is abatement of debts and legacies?

This is when there are insufficient funds to satisfy all creditors, their debts are abated (reduced) proportionately to somewhat satisfy legacy.

For legacies, what is the key difference regarding abatement?

If there is a priority given specially to any particular legacy- this is prioritised over other creditors.

PR typically receive receipts once obligations satisfied, what happens if there is a minor beneficiary?

The PR will:

• hold the property until the child reaches 18

• use the power of appropriation, with the minor’s parent or guardian or the court giving any consent (this negates the need to retain the asset(s) until the child reaches 18 (and can save capital gains tax overall))

• appoint trustees to receive and hold the property until the child attains 18, or

• obtain their discharge by payment of the legacy into court.

Should personal representatives take into account the income tax and capital gains tax of both the deceased and the administration period when administering an estate?

Yes.

• Income tax: Personal representatives are responsible for paying any income tax that was due by the deceased before their death. They must also file a tax return for the deceased for the period up to the date of death.

• Capital gains tax: Personal representatives may be liable for capital gains tax on any profits made from the disposal of assets from the estate.

What is corrective accounts?

A corrective account is filed when the incorrect amount of inheritance tax was initially paid. If there is a change in inheritance tax due, the residue will be affected.

What is certificate of discharge?

This is obtained via form IHT30 and it avoids further inheritance tax liability though not if there is evidence of:

• fraud

• failure to disclose material facts

• subsequent discovery of further assets, or

• changes in the inheritance tax liability due to a variation.

When does HMRC issue a limited certificate?

If the personal representatives have to pay future instalments of inheritance tax, due to their claiming the instalment option on qualifying property.

No certificate is required for an excepted estate.

There is an automatic discharge 35 days after a grant of representation, unless circumstances change.

What should be considered when paying any legal/professional costs?

• complexity

• time spent

• value of the estate, and

• number and importance of documents involved.

Under what circumstances are PR’s entitled to remuneration:

• Legacy to the proving executor: If the will leaves a specific or general legacy to an appointed executor, it is presumed that this legacy is conditional on them accepting office. This presumption can be rebutted by a clause in the will.

• Express charging clauses: Professional personal representatives often have express charging clauses included in the will. These clauses typically cover sole professional trustees and also remove the need for the other trustees' agreement to payment when the professional is one of several trustees.

• Agreement with beneficiaries: Personal representatives can also be paid out of assets to which the beneficiaries are entitled, if the beneficiaries agree.

• Court authorisation: The court can also authorise remuneration for personal representatives for past, present or future services.

Estate accounts shows what’s left for the residuary beneficiaries, what are they three accounts (with commentary)?

• income account

• capital account, and

• distribution account.

What happens if there is a life interest in the residue?

Separate income and capital accounts are required.

What happens if there is income that relates to the period before death but is received post-death?

This is added to the capital account, the post-death income will be apportioned to the income account.

What is a commentary and what does it do?

This is a document that is sent with the estate accounts.

It assists the beneficiaries and:

• Identifies gross & net values of the estate

• Indicates the estate’s disposition and

• Deals with any other relevant matters such as interim distributions and distribution in specie

What is an income account?

This should:

• provide details of income receipts

• itemise details of expenditure from income (i.e. income tax, interest paid on legacies)

• show the net amount to be distributed

What is a capital account?

This should:

• Itemise all assets at probate value

• Show any sales by the PR

• Provide details of liabilities discharged, pecuniary and specific legacies paid and expenses (including tax) paid and

• show the balance available for distribution

What is the purpose of a distribution account?

This shows how the beneficiary’s entitlement is to be met and includes interim distributions.

What is the order of endorsement for a PR to be discharged?

PR endorses accounts - residuary beneficiaries to confirm with agreement to formally discharge PR & indemnify them against claims & demands.

If beneficiary refuses PR can go to court to approve/pay beneficiaries share.

How to deal with the difficulty with regards to discharge if there is a minor/mentally incapable beneficiary?

To resolve issue with minors- appoint trustee who retain assets until minor 18 yrs.

Mentally incapable beneficiaries- inform deputy appointed by Court of Protection and proceed as instructed by court/ PR make payments into court.

What is an assent?

This is when the personal representative acknowledges that they do require an asset for the purposes of administration and transfers it to a beneficiary.

An assent relates back to the date of death so a beneficiary is entitled to rents and other income from that date.

If land is registered PR has two options:

• apply to be registered as owner in place of deceased, producing grant when making the application

• transfer the property by assent to a beneficiary, who then applies to be the registered owner, submitting a certified copy of the grant.

Should an assent be in writing?

Yes (even if the PR is the beneficiary) and it should be signed by the PR and person benefiting from this should be named.

What happens if the PR is to hold the property in a different capacity under trusts arising via will/intestacy rules?

An assent is needed to formally vest the legal estate in them as trustees to hold for the beneficiaries.

What protections are given to buyers purchasing land from beneficiaries/PRs?

If a purchaser has a statement in the conveyance confirming no previous assent was made, unless they had notice to the contrary, this acts as protection for the buyer when buying from a PR.

When buying from a beneficiary an assent in the favour of the beneficiary is enough evidence to prove the beneficiary is the legal owner, unless the buyer knew the assent was given to the wrong person.

What is a chose in action?

This is the beneficiary’s right to have the deceased’s estate properly administered until it is complete.

What rights do specific gift recipients have?

They have the right to income accruing from the deceased’s death and residuary beneficiaries have the right to intermediate income regardless of whether the interest is immediate or contingent.

Contingent pecuniary legacies do not carry a right to income unless the gift is to a child with entitlement at age 18- can be overriden in the will.

Beneficiaries have the option to administration proceedings and actions to recover loss suffered which include:

• Action against PR taken unless they acted honestly, reasonably and ought fairly to be excused

• Beneficiaries have right to trace and recover property of estate from the PR/ recipient. The right is lost against a bona fide purchaser (innocent purchaser with no knowledge of another party’s claim against the property) or if inequitable.

• Personal action against persons who have wrongly received estate assets.