Wills notes workshop 2

• Commences the moment immediately follow the death and ends when PR's are in a position to vest the residue of the estate in the beneficiaries. PR holds office for life so if further assets are found after residue has been transferred, they need to deal with that as well. 

Duties of PR's- 

• Administration of Estate Act 1925 states the PR's are under a duty to 'collect and get in the real and personal estate of the deceased and adminster it according to law.' Duties are onerous. A PR who has accepted liability is personally liable for loss to the estate due to his breaches of duty. The Trustee Act 1925 s61 gives the court power at its discretion to relieve a PR from liability if it is satisfied that 'the PR has acted honestly and reasonably and ought fairly to be excused for the breach.' An executor may be able to rely on a clause in the will excusing mistakes made in good faith. 
• Protection against liabiilty- Missing beneficiaries- Trustees Act 1925 s27 will not protect PR's from claims from known beneficiaries that they cannot find. Can only fully protect themselves from known beneficairies with a Benjamin order from court. Court will require evidence that the fullest possible enquiries were made to trace the person. If the advertisments were insufficient court will direct they make more enquiries. An application to court is expensive so may take 

• out insurance instead. 
• Inheritance (Provision for Family and Dependents) Act 1075- PR's will be personally liable where an applicant successfully obtains an order for 'reasonable financial provision from the estate.' Can protect themselves from this by waiting more than 6 months following the grant of representation to distribute the estate. If earlier distribution is required, the PR's should retain sufficient assets to satisfy an order should an applicant be successful within 6 months of the grant. 

Administrative powers of PR's- 

• Statutory powers- Administration of Estates Act gives some powers and so do the Trustee Act 1925 and 2000. Trustee covers personal representatives. A duty of care requires the trustees when exercising many of their powers under the act to exercise the skill and care reasonable in the circumstances, having regard to any special knowledge or skill of the trustee. 
• Powers granted by will- many of the statutory powers can be modified by express provision in the will. If there is no executors but the will is proved by administrators with the will annexed, they also have modified powers. 

• A will often grants additional powers that are not available at law such as advancing capital to a person with a life interest. In absense of any express power, this cannot be done. It is good practice for the will to set out in full all the powers of the executors so that the position is clear on the face of the will, avoiding the possibility of a particular power being overlooked. 

Most important additional powers- 

• Power of maintenance- statute- where trustees are holding a fund for a minor beneficiary, TA 1925 s31 gives them the power to use income they recieve for the minors maintenance, education or benefit. If they continue to hold trust over the age of 18, they must pay income to the beneficiary. If a trust is created by will it is the date of death, not execution which is relevant.
• Summary of the effect of TA 1925 s31- 1) beneficiaries under 18 with vested or contingent interests cannot insist on recieving income as the trustees have a discretion to apply income or accumulate it. 2) beneficaries reaching 18 who become entitled to capital at that age are entitled to recieve capital and any accumulated income. 3) beneficiaries reaching 18 who have a right to income but not capital are entitled to recieve the available income each year, plus any income from previous years which was accumulated instead of being paid to them. 

• 4) beneficiaries reaching 18 who become entitled to capital at a later age have the right at 18 to available income. At the age they are entitled to recieve the capital, they will get the capital and any income accumulated before they were 18. 
• Power to advance capital- TA 1925 s32 allows trustees in certain circumstances to permit a beneficiary with an interest in capital to have the benefit of his capital entitlement sooner than he would recieve it under the basic provisions of the trust. If a trust is created by will it is the date of death, not the date of execution which is relevant. Where more than one beneficiary has an interest in a trust fund, any advance must be bought into account on final distribution (s32(1)(b)). Advances are brought into account at their case value at the date of advance, unless the trustees make the advance on the basis that it is to be treated as a proportionate part of the capital (s32(1A)). 

Collecting the deceased's assets- 

• PR's have no duty or obligation to deal with assets that pass independently of the intestacy rules or will. Assets which pass under the will or intestacy rules devolve on the PR's who are under an obligation to collect and administer them for the benefit of those entitled. To collect property PR's normally produce their grant of representation to whoever is holding the asset.

• Property not devolving on the PR's- those in which people have a life interest or those with a joint tenancy. There also may be the proceeds of life insurance made for someone elses benefit. Death in service benefit recipients will be decided by the trustees of the fund. 
• Paying deceased's funeral, testamentary expenses and debts- these should be paid from immediate sources of money eg bank accounts. Administration expenses will arise during the course of administration and will have to be settled from time to time while the administration is proceeding. Funeral expenses must be reasonable but this is a question of fact. Testamentary expenses are considered to be those incident to the proper performance of the duties of the PR. 
• If a loan was taken out to pay inheritance tax, it will probably be a 'first proceeds' undertaking. This means the PR's must use the money first realised by them to repay the bank. Failure to do so breaches the undertaking. 
• Which assets to sell? Must take considerable care with this. It will generally be incorrect for PR's to sell property given specifically by will unless all other assets have been exhausted in the payment of debt. Should respect the wishes of beneficiaries where possible and should consult them before sale takes place. Should also consider the amount of CGT gains and losses likely to arise. Full use should be made of the annual exemption. May be relief is sold at a loss. 

Solvent estate-

• Statutory order for payments of debts contained in s34(4) of the AEA 1925. Part 2 of the First Schedule lays out the order the PR's must follow when deciding which part of the deceased's estate should be used for payment of funeral, testamentary expenses and debt. Under the order generally, assets forming part of the residue should be used before property given to specific legatees.
• s34(4) is subject to two important provisions. s35 says that where there is a secured debt, the beneficiary taking the asset takes it with the debt and is responsible for paying for it. The will can vary the position in s34(4) and 35. To vary s35 it must have express reference eg I give my daughter my house mortgage free. A direction to pay off debts from residue is not sufficient to vary s35. 

Insolvent estate- 

• estate is insolvent if the assets are insufficient to discharge the full funeral, testamentary and administrative expenses, debts and liabilities. In such cases, creditors will not be paid in full or at all and beneficiaries will recieve nothing. In doubtful cases, PR's should adminster as if

• insolvent. Failure to administer an insolvent estate in accordance with the statutory order is a breach of duty. Should follow the Administration of Insolvent Estates of Deceased Persons Order 1986. Secured creditors are in a better position than others since they can just realise the security. 

Paying the legacies- 

• PR's should then consider discharging the gifts arising on death. May also consider making interim distributions to the residuary beneficiaries on account of their entitlement. 
• Specific legacies- once you know their property doesnt need to be sold, should consider transferring it. Method of transfer depends on the nature. With specific gifts they vesting in the beneficiary is retrospective to the date of death so they also gain any income. Only get it when it vests in him. He will be liable to be assessed for income tax due on that income since death. Any costs of transferring the property to the legatee are the responsibility of the legatee and should reimburse the PR's of any expense they incurred. 
• Pecuniary legacies- can make it clear these should be paid from residue in the will. Legacies should be paid from the fund of residue before the division of the balance between residuary beneficiaries. 

• For pecuniary legacies where the will makes no provision, these should be paid primarily from residuary personalty. Preferable to make express provision for payment of legacies. 
• Pecuniary legacy payment- general rule is that they are payable at the end of the executors year ie one year after the testators death. AEA 1925 s44 provides that PR's are not bound to distribute before this date. If delayed beyond this date, the legatee is entitled to interest in the way of compensation. The rate will be either in the will or rate payable on money paid to the court. If the testator states the legacy is to be paid 'immediately following death' etc then interest is payable from the day following death, the future date or the date the contingency occurs. 
• Interest payable from date of death- 4 situations when the legacies are a) payable in satisfaction of a debt owed by the testator to a creditor b) charged on/and owed by the testator to a creditor c) payable to the testators minor child and d) payable to any minor where the intention is to provide for their maintenance. 

Completing adminstration and distributing residuary estate- 

• Once everything above has been done they can consider distributing the residuary estate with the will or intestacy rules. Before doing this they must deal with all outstanding matters. 

• Adjusting inheritance tax assessment- may arise because of the discovery of additional assets or liabilities, discovery of a lifetime transfer within 7 years or death or the agreement of amount was provisionally estimated. This might be the case with shares or property, that may sell for a different amount than thought. Additionally may be agreement between PR's and HMRC of tax liability in relation to income and CGT before death. Or there may have been sales made by the PR's after the death which have given rise to inheritance tax loss relief. 
• Inheritance tax loss relief- may sell assets for less than their value on the date of death. Loss on sale relief can reduce the IHT liability of the estate. When 'qualifying investments' are sold within 12 months of death for less than their market value at date of death, the sale price can be substituted and IHT adjusted accordingly. (IHTA 1984 s178-189). Qualifying investments are shares quoted on recognised stock exchanges or holdings in authorised unit trusts. Relief must be claimed, it is not automatic. Cant claim a loss for IHT where already claimed it for CGT. When claiming the relief PR's must report all sales of qualifying investments made in the 12 months. s180 restricts the relief where the appropriate person buys new qualifying investments within the period starting with death and ending two months after last sale. 
• Inheritance tax by installments- the PR's continue to be liable for the remaining installments even if they have already transferred the asset. If the beneficiaries are insolvent or disappear

• the PR's will be liable for unpaid tax but may have no assets to meet the cost. They should consider holding back sufficient assets in the estate. If any installment option property is sold, any outstanding inheritance tax becomes due immediately. 
• IHT on lifetime transfers- if the deceased dies within 7 years of making a PET or chargeable transfer, more inheritance tax may be payable. Although the general rule is that the donees of lifetime transfers are primarily liable, the PR's of donors estates may become liable if the tax remains unpaid for 12 months after the end of the month of the death. The PR's liability is limited to the extent of the deceased's assets which they would have recieved in the administration of the estate but for their neglect of default. If the deceased gave away property in his lifetime but reserved a benefit in that property, such property is treated as part of his estate on death. PR's should consider how they can protect themselves if the liabilities materialise. 
• Corrective account- the PR's must report all outstanding matters to HMRC by way of a corrective account on Form C4. 
• Clearance- the PR's must obtain confirmation from HMRC that there is no further claim to inheritance tax. The effect is to discharge all persons from further liability to inheritance tax. Also extinguishes any charge imposed by HMRC on the deceased's property for inheritance tax. 

• Income tax and CGT- immediately following the death the PR's must make a return to HMRC of the income and capital gains of the deceased in the period starting April 6 before death and ending with the date of death. Even if he died half way through the year you still get full allowances. Any liability to tax is a debt to be paid by the PR's. Debt will be deductible when working out IHT. Also if a refund of tax is obtained, this is an asset of the estate. 
• Administration period- for each income tax year or part during the administration period, the PR's must make a return to HMRC of income recieved on assets and gains they make on disposals of chargeable assets. 
• Income tax- dividends are charged at 7.5% and other income at 20%. The PR's may be able to claim relief for interest paid on a bank loan to pay inheritance tax. 
• Beneficiaries income tax liability- once the tax position has been settled, the remaining net income will be paid to the beneficiary. The grossed up amount of this income should be included by the beneficiary in his return of income for the tax year to which it relates. PR's must supply the beneficiary with a deduction of tax on Form R185 which the beneficiary should send his own inspector of taxes as evidence of payment of tax by PR's. 
• Capital gains tax- no disposal on death so no CGT arises. The probate value becomes the 'base cost' of all the deceased's assets for future CGT purposes. 

• Calculation of the PR's liability- if PR's dispose of assets during the administration of the estate to raise cash, they are liable to CGT. The rate is 20% and 28% for residential property. Can deduct probate value and costs of disposal. PR's can claim the annual exemption for the tax year the deceased died and the following two years if adminstration lasts that long. 
• Sale at a loss- if sell for less than their value at death, allowable loss arises. This loss can be relieved by setting it against gains arising on other sales by the PR's in the same or future tax years in the administration period. Any loss unrelieved cannot be transferred to beneficiaries. PR's should plan sales carefully to ensure they can obtain relief for all the losses they realise. 
• Transfer the assets to the legatees- no chargeable disposal here. They are assumed to have acquired it at probate value. Base cost of the asset will be relevant on future disposal. 

Transferring assets to residuary beneficiaries- 

• The PR's must remember payments already made to the beneficiaries on account of their entitlement. 
• Adults- if they have a vested interest, their entitlement can be transferred to them. If contingent, it will be held by trustees until the contingency arises. 
• Minors- held on trust until age of majority is reached or contingency satisfied.

• If a minor has a vested interest the PR's may be able to transfer his entitlement to him (if expressly said in the will) or to parents on his behalf. 
• Personal property- PR's indicate they no longer require the property for administration purposes when they pass title through assent. Normally passes by delivery. The beneficiaries title derives from the will. Company shares are transferred by stock transfer form. PR's must produce grant to the company. They then transfer shares as PR's to X who then applies to be a registered member of the company in place of the deceased. 
• Freehold or leasehold- PR's vest the legal estate in the land in the person entitled by means of assent which then becomes a document of title to the legal estate. If as trust, PR's should formally vest the legal estate in themselves as trustees for the beneficiary. By AEA 1925 s36(4) an assent must be in writing, signed by the PR's and must name the person in whose benefit it is made. If the title to the land is registered, the assent must be in the form specified by the Land Registration Rules 2003. PR's can a) apply to be registered as proprietor in place of the deceased, in which case they must produce a grant of representation when making the appliction or b) can transfer the property by assent without being registered as proprietor themselves, in which case the beneficiary must be given a certified copy of the grant of representation so he can present it with his application for registration. 

• The final task of a PR is to produce estate accounts for residuary beneficiaries. This is to show all assets of the estate, the payment of debts, administration expenses and legacies and the balance remaining for the residuary beneficiaries. Balance will normally be represented by a combination of assets transferred to the beneficiaries in specie and some cash. The residuary beneficiaries sign the account to indicate they approve of them. In absense of fraud or non disclosure, their signatures will also release the PR's from further liability to account to the beneficiaries. 
• There is no prescribed form. Any presentation adopted should be clear and concise. If interim distribution payments were made to the residuary beneficiaries they should be included.