#10283 - Administration Of Estates - Private Client

• Once the PRs have obtained the grant, they have full power to undertake the administration of the estate.

• The administration of an estate may be divided as follows:

  1. considering the duties of and powers available to the PRs in carrying out their task;

  2. collecting the deceased’s assets;

  3. paying the deceased’s funeral and testamentary expenses and debts;

  4. distributing the legacies; and

  5. completing the administration and distributing the residuary estate.

• ‘Administration period’: starts at moment immediately following death and ends when PRs are in a position to vest the residue of the estate in the beneficiaries (or trustees).

Duties

• The Administration of Estates Act 1925 (AEA 1925), s 25 (as substituted by AEA 1971, s 9) states that the PRs of a deceased person shall be under a duty to ‘collect and get in the real and personal estate of the deceased and administer it according to law’.

• A PR who has accepted liability is personally liable for loss to the estate resulting from any breach of duty he commits as PR (not generally liable for breaches committed by co-PR)

Types of breach:

1. failing to protect the value of assets;

2. failing to pay the people entitled to assets.

• TA 1925, s 61 gives court power & discretion to relieve PR from liability for breach of duty if satisfied that the PR acted honestly and reasonably and ought fairly to be excused for the breach’.

• NB. Executor may also be able to rely on clause in will for mistakes made in good faith

Inheritance (Provision for Family and Dependants) Act 1975

• The PRs will be personally liable where an applicant under the I(PFD)A 1975 successfully obtains an order for ‘reasonable financial provision’ from the estate.

• Can protect themselves against such liability by waiting more than six months following the date of the grant of representation before distributing the assets. If earlier distribution is required, PRs should ensure they retain sufficient assets to satisfy an order should an applicant be successful within six months of the grant.

Power of maintenance

Statutory provisions:

• Where trustees are holding a fund for a minor beneficiary, the TA 1925, s 31 gives them power to use income they receive for the minor’s maintenance, education or benefit. The section provides that if the trustees continue to hold the trust funds after the beneficiary reaches 18 (for example, where the interest is contingent on reaching 21 or 25), they must pay the income to the beneficiary from 18 onwards.

• TA ’25 (as amended by TA ’00), s.31:

1. Applies to any property held in trust for any interest. Subject to prior interests or charges the trustees may;

1. At sole discretion pay any income to parent or guardian of infant beneficiary or apply money to maintenance, education, or any other benefit that is reasonable, whether or not there is:

   1. Another fund doing the same, or

   2. Any other person bound by law to do the same.

2. When the child reaches 18 and still doesn’t have a vested interest, the trustee must then pay the income of the property and any accretion to him.

2. While under 18 the trustee(s) shall accumulate residue of income (not used for maintenance) and invest it.

Extending s.31:

• May want to remove ‘reasonable’ limitation (giving trustees complete discretion).

• May want to remove right of contingent beneficiary to receive income on reaching 18.

Power to advance capital

Statutory provisions:

• The TA 1925, s 32 allows trustees in certain circumstances to permit a beneficiary with an interest in capital to have the benefit of up to half of his capital entitlement sooner than he would receive it under the basic provisions of the trust.

• s.32:

  1. Trustees may, at their discretion, apply capital money subject to a trust for the advancement or benefit of any person entitled to the capital, whether or not contingent on age, and whether in remainder or reversion, provided that;

     1. Benefit widely construed (education/living expenses)

     2. Money doesn’t exceed half of that person’s interest.

     3. The money is taken into account when that person becomes absolutely entitled.

     4. The advancement doesn’t prejudice someone else’s interest (unless they consent in writing).

Extending s.32:

• May want to extend limit of (1)(a).

• May want to supersede (1)(b) – i.e. remainder still split equally between beneficiaries regardless of advancement to one.

• May want to allow loans to people w/ interest only in income and not capital.

Duty of the PRs

• Some assets pass independently of will & intestacy rules – see earlier.

• Those that don’t, must be collected by the PRs.

• Generally, will have to produce their grant of representation to whoever is holding the asset.

Which assets to sell?

• The PRs must take considerable care when deciding which assets they will sell to raise money for payment of the various outgoings from the deceased’s estate.

• Should bear in mind:

  • Provisions of the deceased’s will – e.g. specific legacies shouldn’t be used to pay off debts if other options!

  • The beneficiaries’ wishes.

  • Tax consequences – consider the impact of selling a particular thing on capital gains (or losses), and the availability of any exemptions etc. Full use should be made of annual exemption for CGT. If assets are sold at loss, may get ‘loss relief’ for IHT.

Funeral expenses

• Reasonable funeral expenses are payable from the deceased’s estate. In all cases, it is a question of fact what funeral expenses are reasonable.

Testamentary expenses

• The phrase ‘testamentary and administration expenses’ is not defined in the AEA 1925, but it is generally considered to mean expenses incident to the proper performance of the duties of a PR. The phrase will include:

1. the costs of obtaining the grant;

2. the costs of collecting in and preserving the deceased’s assets;

3. the costs of administering the deceased’s estate, for example solicitors’ fees for acting for the PRs, valuers’ fees incurred by PRs in valuing the deceased’s stocks and shares or other property; and

4. any IHT payable on death on the deceased’s property in the UK which vests in the PRs (IHTA 1984, s 211).

Solvent estates

• Section 34(3) of the AEA 1925: look at Part II of First Schedule for order to pay debts out of.

• Under the order generally, assets forming part of the residue are to be used before using property given to specific legatees.

• However, this order is ‘subject to’ two important rules or provisions:

  1. The AEA 1925, s 35, which deals with secured debts. A common example is a loan secured by legal mortgage on the deceased’s house. The effect of this rule is that a beneficiary taking the asset takes it subject to the debt and will be responsible for paying the debt.

  2. The deceased’s will can vary the provisions implied by the AEA 1925, ss 34(3) and/or 35. To vary s 35 it is necessary to have an express reference to the mortgage.

     • e.g. ‘I GIVE my country cottage to my daughter free of mortgage.‘

     • A direction to pay ‘debts’ from residue is not sufficient to vary s 35.

Insolvent estates

• An estate is insolvent if the assets are insufficient to discharge in full the funeral, testamentary and administration expenses, debts and liabilities.

• Failure to administer an insolvent estate in accordance with the statutory order is a breach of duty by the PRs.

• In the case of an insolvent estate which is being administered by the deceased’s PRs out of court (this being the most common method of administration), the order of distribution in the Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999) should be followed.

• NB. Secured creditors may...