Managing the estate

Managing the estate

When someone dies having left a valid will, it is necessary to ensure that their estate is divided in accordance with their wishes. Often this is a relatively simple process, but in certain circumstances, there are a multitude of possibilities that can arise, from trust funds to situations where a beneficiary wants to refuse a gift left to them.

In addition there are other issues that need to be considered such as tax, debts, and funeral expenses.

Managing the estate

Following a death, the estate will have to be managed either by a person or persons appointed in the will for that purpose (known as executors), or appointed by the court, where there is no will. A general term for both of these roles is 'personal representative' or 'PRs'. Those appointed will be involved in collecting the assets of the deceased, paying the estate debts and expenses and ensuring that the assets are distributed to the beneficiaries.

Duties of the personal representatives

It is the duty of the personal representatives (PRs) to collect and get in all the property of the deceased and administer it according to law. This duty includes paying the deceased's debts without delay and taking reasonable care in preserving the deceased's estate.

A PR who accepts office and acts in the administration of the estate is personally liable for loss to the estate resulting from any breach of duty they commit as PR. This can occur where the PR fails to preserve the value of the asset or administer the estate properly.

If a PR's co-representative fails to safeguard the assets and it results in loss to the estate, that loss is not automatically attributable to the PR who was not involved. The PR may be liable if they fail to prevent a co-representative from committing a breach of duty particularly if they knew of the situation or should reasonably have known of it.

Where the PR has acted honestly and reasonably and the court is of the view that the PR ought fairly to be excused for the breach, it can excuse the PR from liability.

Failure to pay an unknown creditor or beneficiary is a breach of duty by the PRs. As a positive step, a PR should obtain protection against liability to creditors or beneficiaries of whom they are unaware. This can be achieved by advertising. The form of advertising is set out, in England and Wales, in the Trustee Act 1925 and for Northern Ireland, in the Trustee Act (NI) 1958.

In the case of a missing beneficiary, the PR does not have the same protection. In order to obtain protection, the PR must make an application to the court for a Benjamin order which takes its name from the case Re Benjamin [1902]. An application is made to court and an order is normally made permitting distribution of the assets on the assumption that the missing beneficiary died before the testator (someone who makes a will) leaving no children. Before the court is prepared to make an order, it will require evidence that the fullest possible inquiry was made to trace the missing person. The court may regard the advertising in terms of the Trustee Act 1925 as satisfactory but if insufficient, may direct a further inquiry to be made. The PRs distributing on the basis of a Benjamin order are protected from any liability should the assumption transpire to be inaccurate. However, a beneficiary who did not receive what he was entitled to can recover from any 'overpaid' recipients of the deceased's estate.

Powers of the personal representatives

Executors and administrators are given certain powers by law to enable them to properly administer the estate. The powers that are granted to them must be used in full for the benefit of the beneficiaries.

If a person dies intestate (without having left a valid will - see 'Dying without a will'), the administrators have specific powers. However, where the testator (someone who makes a will) has left a will, there may be additional powers expressed in the will.

The powers available as a matter of law to the PRs during the administration period include:

Power to employ agents

The Trustee Act 1925 and its Northern Irish equivalents, the Trustee Act (NI) 1958 and 2001 allow trustees and PRs to utilise the services of an agent. In addition, they will not be liable for the default of the agent, provided the agent was employed in good faith. This power is very often used where the PRs require the assistance of an estate agent or a stockbroker. These people are called upon to perform specific functions. For example, the estate agent is instructed to sell the house or flat forming part of the estate.

Delegation by power of attorney

The Personal Representatives are permitted to grant a power of attorney to some other person to act on their behalf. Such powers can only be granted for a maximum of twelve months.

A power of attorney is granted where the authority to act in the estate has been obtained, but the Personal Representative is not available, due to a temporary absence, to deal with a particular aspect of administration.

Reimbursement for expenses

PRs are entitled to reimburse themselves for reasonable expenses incurred in the execution of their duties. A personal representative who acts in a professional capacity is entitled to receive reasonable remuneration out of the estate for any services that he provides to or on behalf of the estate (even if they are services which are capable of being provided by a lay personal representative) if each of the other personal representatives has agreed in writing that he may be remunerated for his services.

Power to appoint trustees of a child beneficiary's property

Where a child is absolutely entitled to property, the PRs may appoint a trust corporation (a bank) or more commonly two or more persons to be trustees of the property for the child. If the PRs transfer the property to the trustees, they may obtain a signed receipt and that will release the PRs from their responsibilities.

Power to postpone distribution

The PRs are not bound to distribute the estate of the deceased to the beneficiaries before the expiry of one year after the death of the testator, although historically, the expiry of the first year after death has been a significant cut-off point. This does not apply to payment of the estate debts. The debts must be paid promptly and therefore the PRs usually commence payment of the estate debts within the first year.

PRs are in a position of trust and therefore must act with the utmost good faith. A sole PR can sell land and give a valid receipt. If there is more than one PR they must all join in the contract for the sale of land as well as the purchase deed. However, where property is held on trust, two trustees or a trust corporation is required in order to give a valid receipt following the sale of land.

Collecting the deceased's assets

The PRs have a duty and responsibility to collect the property of the deceased and to administer it according to law. This involves taking stock of the assets in the estate and considering what steps should be taken to protect them.

In order to collect the property, the PRs are generally required to produce their grant of representation to whoever may be holding the asset. The PRs will usually have obtained office copies of the grant and will send the bank, building society, or relevant institution the office copy together with a request for payment.

Certain property does not fall under the direct control of the PRs. This includes property passing by survivorship, an insurance policy where the deceased has nominated a beneficiary, a pension scheme where the lump sum is payable at the discretion of the trustees under the pension scheme, and nominated property.

Several statutes permit a person entitled to certain funds and investments to dispose of them by a written nomination operating at his death. Instances include a sum payable by a Friendly Society, Industrial and Provident Society and Trade Union: in each case the sum nominated cannot exceed £5,000. In all the above cases, the assets do not fall into the estate and under the control of the PRs. However, this does not mean that the assets fall outside the estate for Inheritance Tax or capital gains tax purposes.

Distributing gifts

Once provision has been made for the payment of debts and expenses, the PRs must consider payment of gifts.

Construction of the will

Where there is a will, the provisions must be examined closely to correctly identify the beneficiaries, the nature and extent of their entitlement (whether the gift is subject to the beneficiary reaching a certain age) and the property they are to receive.

Identity of the beneficiaries

If a beneficiary cannot be identified, the gift may well fail. PRs may find themselves in difficulties if they distribute property in ignorance of the existence of a person who may be entitled to a gift.

  • Adopted children

The PRs and the trustees (in the case of a trust) will not be under a duty before transferring property to enquire whether any adoption has taken place or not. They will not be liable to any such person if they had not received notice of the position prior to the transfer of the property.

  • Illegitimate children

In the case of illegitimate children, the PR or trustee does not have the same protection. PRs will have to be more cautious in making enquiries of the testator's (someone who makes a will) relatives and known beneficiaries. There may also be merit in advertising in the London Gazette or the Belfast Gazette and a local newspaper in the area where the deceased owned property. As further protection the PRs can consider taking out insurance.

  • Lost beneficiaries

Where a beneficiary cannot be found, the PRs cannot ignore their existence. They must advertise for information in a newspaper circulating in the area where the person was last located. They must also consider an application to court for an order permitting them to distribute the assets and as further security they should consider insurance cover.

Specific gifts

Once the PRs are satisfied that there is no need for specific gifts to be used for payment of estate debts or expenses, they should consider payment to the beneficiaries or the trustees if a trust arises. In the case of land, a specific document called an assent is used to transfer the land to the beneficiary and stock transfer forms are completed to transfer company shares.

The transfer of a specific gift takes effect from the date of death of the testator. Where the property produced income, for example, dividends, the beneficiary will be entitled to the dividends. If there are any costs involved in the transfer of the gift (insurance or transport) the beneficiary is responsible for those costs. If the PRs have paid out these expenses on the beneficiary's behalf, they must be refunded.

Cash gifts

As with specific gifts, cash gifts are paid once the PRs are satisfied that they will not be required for payment of the estate debts and expenses. Only in the event of there being insufficient funds available to cover expenses will the cash gifts be utilised for that purpose. While dealing with the handing over of specific and cash gifts the PRs can also consider interim payments to beneficiaries who are entitled to what is left (the residue). They must ensure, however, that adequate provision is made for payment of debts and expenses, the cash gifts and any tax liability.

Time for payment of cash gifts

The general rule is that a cash gift is payable at the end of the 'executor' year, that is one year after the testator's death. For all practical purposes, PRs may find that it is not possible to make payment within the first year. If that is the case, the beneficiary will be entitled to interest by way of compensation.

Funeral & other expenses

After the PRs have collected the monies in the deceased's accounts from the banks and building societies they should begin to pay the deceased's outstanding debts and funeral account. Administration expenses, for example, estate agent and valuer's fees will arise during the course of administration and will have to be settled from time to time.

Where it has been necessary to borrow monies from the bank to finance the payment of Inheritance Tax (IHT), the bank usually requires a first proceeds undertaking. This means that the PRs must use the money first collected by them during the administration to repay the bank.

Great care must be taken when it is necessary to sell assets in order to pay the debts and expenses. A reasonable starting point is the will and/or codicil (a document that alters an existing will). There may be express provision to pay the funeral and testamentary expenses from the residue of the estate (the residue being that which is left after payment of specific gifts).

In the absence of a will or express direction, the PRs must follow the statutory rules which are contained in the Administration of Estates Act 1925 or its Northern Irish equivalent, the Administration of Estates Act (NI) 1955. Notwithstanding the fact that the PRs have powers to sell assets forming part of the residue, it is good practice to consult with the residuary beneficiaries to establish their views on the matter.

Before selling assets, the PRs should consider whether there is a liability to capital gains tax (CGT) and whether any exemptions or relief applies. If an asset is sold at a higher value than the value placed on the asset at the death of the testator, and the gain exceeds their annual allowance (equal to the same amount as individuals for the year of death and the two years of assessment following) CGT will be payable.

If assets are sold at a loss, i.e. at the date of sale by the PRs, the asset is sold at a value less than the value at the date of death of the testator (someone who makes a will). Inheritance Tax relief may be available.

Reasonable funeral expenses are payable from the deceased's estate. Testamentary and administration expenses are not specifically defined but will most likely include costs of obtaining the grant, costs of collecting and preserving the assets, administration costs, for example valuer's fees and IHT payable on death.

There may be debts and expenses that are not apparent to the PRs either at the outset of the administration or at all. Unfortunately, this does not relieve the PRs of their responsibility to the beneficiaries. The PRs must therefore protect themselves and this can be done by advertising in accordance with the provisions of the Trustee Act 1925 or its Northern Irish equivalent, the Trustee Act (NI) 1958.

The PRs must give notice of the intended distribution of the estate requiring any person interested to send in particulars of their claim whether as a creditor or beneficiary. The notice should appear in the London Gazette or the Belfast Gazette in Northern Ireland, and a local newspaper circulating in the district in which land owned by the deceased is situated.

Such other notices, elsewhere in England and Wales and Northern Ireland, as are appropriate should also be given. Each notice must require any person interested to send in particulars of their claim within the time specified in the notice. The time should not be less than two months from the date of the notice. Therefore it is advisable to advertise as early as possible after obtaining the grant of representation.

The PRs should also make searches that any responsible purchaser of land would make in the Registry of Deeds and/or Land Registry, Land Charges Register, and Local Land Charges Register. The purpose of these searches is to reveal the existence of any liability in relation to the deceased's ownership of an interest in land, for example, a second mortgage.

When the time limit in the notice has expired, the PRs may distribute the deceased's estate taking into account only those claims of which they have actual knowledge, or that are discovered from the advertisement. Although the PRs will no longer be responsible for a debt that subsequently arises, a creditor to whom money is owed can still approach the beneficiaries.

The will may not expressly provide for payment of funeral and testamentary expenses or from what part of the estate those expenses should be paid. In these circumstances or in the case of intestacy (dying without having left a valid will), there are specific guidelines that must be followed. For estates in Northern Ireland guidance can be sought in the Administration of Estates Act (NI) 1955. Generally, the position is as follows:

  • The PRs are not directed specifically to use any particular type of property for the payment of funeral and testamentary expenses.
  • All property is made available for payment of these expenses.
  • Where the deceased's estate contains property charged with the payment of money, for example, a mortgage, the property bears the charge. In other words the money due under the charge will not be paid out of the residue. The property will pass to the beneficiary subject to the charge.
  • The funeral and testamentary expenses are then paid according to a specific order.

The order of payment is as follows:

  • Property not disposed of by the will will be subject to keeping a fund sufficient to meet any cash gifts. This is property, which may have been left to a beneficiary who died before the testator and there was no substitutional clause. The result is a partial intestacy (see 'Dying without a will'). It is this property that will be used to pay the expenses but only after provision is made by way of a fund for any cash gifts;
  • Residuary gifts, being that which is left after payment of specific gifts subject once again to the retention of a fund to meet any cash gifts.
  • Property specifically left for the payment of debts.
  • Property charged with the payment of debts.
  • The fund set aside for cash gifts.
  • Specific gifts.

Completing administration

Once the PRs have paid the debts and funeral expenses and any specific gifts given by the will they can consider the distribution of the rest of estate in accordance with the will or the intestacy rules (see 'Dying without a will').

Adjusting the Inheritance Tax

The non-instalment option of the IHT must be paid by the PRs before they can apply for the grant of representation. Any adjustment to this liability may give rise to additional tax or a reduction of tax. Where the PRs have elected to use the instalment option, there will be an ongoing obligation. The PRs will have to decide how to deal with this obligation. If any instalment option property is sold, the outstanding IHT becomes payable immediately.

Where the deceased made a gift during their lifetime and died within seven years of making the gift, the PRs will have to account to HMRC for payment of additional IHT, if any. The general rule is that the person who received the gift is ultimately responsible for payment, but if the IHT is not paid within twelve months after the end of the month in which the donor died, the PRs may become liable. The PRs will only be liable to the extent of the deceased's assets that they have received or would have received but for their negligence.

If there is any risk that further IHT will be payable the PRs must consider whether it is appropriate to hold back assets in order to cover any potential IHT liability.

Adjustments to the amount of IHT payable on the instalment and non-instalment option property in the estate may arise for a number of reasons. These include discovery of additional assets or liabilities, the discovery of assets transferred during the deceased's lifetime, sales made by the PRs after the death of the deceased, and changes that are made to the will by the beneficiaries after death.

Once the PRs have checked on all aspects that may affect the liability for IHT, they must report all outstanding matters by way of a corrective account.

Certificate of discharge

The last step for the PRs to take in relation to IHT is to obtain a certificate of discharge from HMRC in respect of any further claim to IHT. HMRC will issue a confirmatory certificate stating that their enquiries are settled and that no tax is due, or that all tax has been paid or that all tax has been paid except that which is deferred. The effect of a certificate is to release all persons, in particular the PRs from further liability to IHT unless there is deferred tax to pay and unless there is fraud or failure to disclose important facts.

A full certificate of discharge cannot be issued to the PRs if they are paying the IHT by instalments. However, it is possible in such cases for the PRs to obtain a full certificate of discharge that expressly excludes instalments payable on the instalment option. Once the instalments are paid, the PRs can apply for the full certificate.

Income tax and capital gains tax

Immediately following the death the PRs must make a return to HMRC of any income and capital gains of the deceased starting with the 6th April prior to the death and ending with date of death. Notwithstanding the fact that the deceased may have died half way through the tax year, they will still be entitled to all the reliefs and allowances for the full tax year. The payment of tax is a debt in the estate and has to be paid by the PRs during the course of the administration of the estate. It is also a debt that is deductible when calculating IHT. Furthermore an Income Tax return must be submitted for every tax year during the course of the administration period.

On death, no liability for CGT arises. It is only if the PRs elect to sell assets and there is a gain in value that they become liable to pay CGT. The rate of capital gains tax is 20% (24% for gains on residential property) for individuals with total taxable income and gains in excess of the income tax basic rate band (for the 2024/25 tax year, this will apply to the extent the total taxable income and gains exceed £37,700). Those with income and gains below that amount will pay capital gains tax at 10% (18% gains on residential property). The PRs as a body are entitled to the same annual allowance as an individual for the year of death and the two years of assessment following.

Transferring assets to beneficiaries

Having dealt with the estate debts and expenses, the specific and cash gifts, and payment of tax, the PRs will be in a position to dispose of the remaining assets to residuary beneficiaries, being those beneficiaries entitled to what is left. In doing so they must remember to take into account any interim payments made on account of a beneficiary's entitlement.

If the beneficiaries are adults and are immediately entitled to the property, there is no difficulty in the assets being transferred. However, if there is a condition attached, for example age, the property cannot be transferred.

Beneficiaries under the age of 18 years cannot take a transfer of assets. The property must remain in trust until they reach the age of majority. However, if the will contains a clause giving the PRs authority to transfer, the PRs may be able to hand over the assets to the parent, guardian or the beneficiary who has attained the age of 16 years. The PRs have a further option and can transfer the property to two trustees or a trust corporation to hold until the child reaches majority. Invariably the PRs will appoint the parents where possible.

Moveable property can be transferred to the beneficiary by delivery. No formalities are required. The title of property is said to pass by means of an assent. Thus, the asset may be oral, in writing or simply inferred from conduct, such as delivery of an item.

In the case of National Savings accounts or National Savings Certificates, special withdrawal or transfer forms will have to be completed and company shares will require the completion of stock transfer forms.

PRs transfer land to a beneficiary by means of an assent. This form of assent must be in writing, signed by the PRs and it must name the person in whose favour it is made. The beneficiary can then register their right to the land with the Land Registry or Registry of Deeds.

Estate account

The final step in the administration of the estate is likely to be the preparation of the estate administration accounts for the residuary beneficiaries. The purpose of the accounts is to show all the assets of the estate, the payment of debts, administration expenses and gifts, income accrued, payments on account made and legacies paid and the balance remaining for the residuary beneficiaries. The balance will normally be represented by a combination of assets transferred to the beneficiaries in kind or cash. Approval of the accounts is shown by signature of the beneficiaries on the accounts. Their signature will also release the PRs from further liability to the beneficiaries in the absence of fraud or failure to disclose assets.

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