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Managing the estate

Contents

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 nominate), or appointed by the court, where there is no Will, known as executors-dative. A general term for both of these roles is 'Executors'. 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 executor

It is the duty of the executors 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.

An executor who accepts office and acts in the administration of the estate has a duty to administer it according to the standard which a reasonably prudent person would use in dealing with their own affairs. Failure to do so may lead to personal liability on the part of the executor.

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

Creditors who within the period of 6 months from the date of death lodge claims against the estate have to be treated equally unless they are privileged creditors. The executor ought not to pay non privileged debts nor disburse the estate until 6 months have elapsed unless he has a high degree of confidence that no such debts exist. If the executor pays non privileged debts or disburses the estate within that 6 month period and another creditor lodges a claim within the 6 month period, the executor may be personally liable for payment of that debt. After 6 months have elapsed, the creditor's only remedy is to sequestrate (make bankrupt) the estate. Privileged debts include the funeral expenses, taxes, and the reasonable expenses of winding up the estate.

Powers of the executors

Executors 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 executors have specific powers. However, where the testator (someone who makes a Will) has left a Will, there may be additional or alternative powers expressed in the Will.

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

Power to employ agents

The Trusts (Scotland) Act 1921 allows trustees and Executors 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 Executors require the assistance of an estate agent or a stockbroker. These people are called upon to perform specific functions, for example, where a solicitor or estate agent is instructed to sell the house or flat forming part of the estate.

Reimbursement of expenses

Executors are entitled to reimburse themselves for reasonable expenses incurred in the execution of their duties. An executor 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 provided that the Will entitles him to charge professional fees.

Power to postpone distribution

The Executors are not bound to distribute the estate of the deceased to the beneficiaries before the expiry of six months after the death of the testator. This does not apply to payment of the privileged debts. The debts must be paid promptly and therefore the Executors usually commence payment of these debts within 6 months.

Executors are in a position of trust and therefore must act with the utmost good faith. A sole executor can sell land and give a valid receipt. If there is more than one executor a majority must join in the contract for the sale of land as well as the purchase deed.

Collecting the deceased's assets

The Executors 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 Executors are generally required to produce their Confirmation to whoever may be holding the asset. The Executors will usually have obtained Certificates of Confirmation for individual assets and will send the bank, building society, or relevant institution these certificates together with a request for payment.

Certain property does not fall under the direct control of the Executors. 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 Executors. However, this does not mean that the assets fall outside the estate for Inheritance Tax or Capital Gains Tax purposes.

Distributing legacies

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

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 legacy 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 legacy may well fail. Executors may find themselves in difficulties if they distribute property in ignorance of the existence of a person who may be entitled to a legacy.

  • Adopted children
In the case where adoptive parents died after 10 September 1964, the adopted child has exactly the same rights as a natural child with the exception of rights to succeed to coats of arms and titles

  • Illegitimate children
For Wills executed after 8 December 1986 and in cases of intestacy, the status of illegitimacy is effectively abolished and such children have exactly the same rights as legitimate children. For Wills executed before that date, the position is more complex and legal advice should be sought.

  • Lost beneficiaries
Where a beneficiary cannot be found, the Executors cannot ignore their existence. They will generally advertise for information in a newspaper circulating in the area where the person was last located. They will often also consider insurance cover.

Specific legacies

Once the Executors are satisfied that there is no need for specific legacies to be used for payment of estate debts or expenses, they should consider transfer to the beneficiaries or the trustees if a trust arises. Stock transfer forms are completed to transfer company shares.

The transfer of a specific legacy 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 legacy (insurance or transport) the beneficiary is responsible for those costs unless the Will states otherwise. If the Executors have paid out these expenses on the beneficiary's behalf, they must be refunded.

Cash legacies

As with specific legacies, cash legacies are paid once the Executors 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 legacies be utilised for that purpose. While dealing with the handing over of specific and cash legacies the Executors 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 legacies and any tax liability. Unless the Will states otherwise, interest will run on cash legacies from the date of death.

Funeral & other expenses

Often banks and other deposit holders will pay the funeral account directly from the deceased's funds even before Confirmation has been obtained as the funeral account is a privileged debt. If that has not been done, after the Executors 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 may require a first proceeds undertaking. This means that the Executors must use the money first collected by them during the administration to repay the bank.

Unless the Will states otherwise, the residue of the estate meets the whole expense of winding up.

Before selling assets, the Executors should consider whether there is a liability to capital gains tax (CGT) and whether any exemption 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 Executors, 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 as are the expenses of winding up the estate, for example, the cost of obtaining Confirmation, the cost 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 Executors either at the outset of the administration or at all. The Executors have no personal liability if they wait till 6 months from death have elapsed before distributing the estate. After that period, creditors can sequestrate the estate (make it bankrupt) but cannot claim against the executors personally.

The Executors should also consider making searches that any responsible purchaser of land would make in the Registers of Scotland. 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.

  • The Will will generally expressly provide for payment of funeral and testamentary expenses but in any event they are paid out of residue unless the contrary is stated in the Will.
The order of payment is as follows:

  • Privileged debts – these include funeral expenses, the reasonable expenses of administration and taxes
  • Other debts
  • Specific legacies (i.e. legacies of particular items)
  • Demonstrative legacies (i.e. legacies like the whole proceeds of a specified bank account)
  • Pecuniary legacies (i.e. cash legacies)
  • Residue , being that which is left after settlement of the foregoing legacies
Completing administration

Once the Executors have paid the debts and funeral expenses and any specific or demonstrative or pecuniary legacies specified in 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 Executors before they can apply for Confirmation. Any adjustment to this liability may give rise to additional tax or a reduction of tax. Where the Executors have elected to use the instalment option, there will be an ongoing obligation. The Executors 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 Executors 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 Executors may become liable. The Executors 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 Executors 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 Executors after the death of the deceased, and changes that are made to the Will by the beneficiaries after death.

Once the Executors 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 Executors to take in relation to IHT is to obtain confirmation from HMRC in respect of any further claim to IHT. HMRC will issue a confirmatory letter 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 letter is to release all persons, in particular the Executors 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 letter of confirmation cannot be issued to the Executors if they are paying the IHT by instalments. However, it is possible in such cases for the Executors to obtain a full letter of confirmation that expressly excludes instalments payable on the instalment option. Once the instalments are paid, the Executors can apply for the full letter of confirmation.

Income tax and capital gains tax

Immediately following the death the Executors 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 the 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 Executors 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 Executors 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 28% for individuals with total taxable income and gains in excess of the income tax basic rate band (for the 2014/15 tax year, this will apply to the extent the total income and gains exceed £31,865). Those with income and gains below that amount will pay capital gains tax at 18%. The Executors 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 legacies, and payment of tax, the Executors 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 16 years cannot take a transfer of assets. The property must be held for them until they reach the age of 16. However, if the Will contains a clause giving the Executors authority to do so, the Executors may be able to hand over the assets to the parent or, guardian of the beneficiary until they attain the age of 16 years. If the sum is less than £5,000 they should advise the recipients of their obligations to look after the money for the benefit of the child. If it is more than that, unless the transfer is to a trustee under a deed of trust set up to administer the child's property, they should apply to The Accountant of Court (a government official) for directions. Although individuals between 16 and 18 can receive assets, since they can afterwards apply to a court to have a transaction set aside if they are able to suggest that it was a prejudicial transaction and that advantage was taken of their youth, executors may consider applying to the court for ratification of the proposed transfer. Legal advice should be sought in these circumstances.

Moveable property can be transferred to the beneficiary by delivery. No formalities are required.

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.

Executors transfer land to a beneficiary by means of either:

(a) a docquet on a Certificate of Confirmation relating to the land in question or

(b) by means of a Disposition which is recorded in the Register of Sasines or registered in the Land Register of Scotland, depending upon the nature of the deceased's title to the land.

A docqueted Certificate of Confirmation is often registered in the Books of Council and Session for preservation but it does not affect the recorded or registered title at the Registers of Scotland. A Disposition does affect the recorded or registered title and is normally used where the recipient is likely to want to borrow money on the security of the land in question or to keep it a long time before selling it.

Estate account

The final step in the administration of the estate is likely to be the preparation of the statement of account for the residuary beneficiaries. The purpose of the account is to show all the assets of the estate, the payment of debts, administration expenses, 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 releasing the Executors from further liability to the beneficiaries in the absence of fraud or failure to disclose assets.