If assets need to be realised to provide money for payment of the estate’s debts and administration expenses, consult closely with the beneficiaries as to which are to be sold and which are to be retained for final distribution to the beneficiaries, so that their wishes are complied with as far as the law allows.

ADVERTISEMENTS FOR CREDITORS AND CLAIMANTS

Before distributing the assets of the estate among the beneficiaries, a personal representative who has not already done so should consider publishing the statutory advertisement for claimants and creditors referred to under ‘Debts and liabilities’ on pp. 92 and 93 for the reason given there.

WHAT DEBTS AND LIABILITIES MUST BE PAID?

Most debts, contracts and liabilities of a person survive death and must be paid or fulfilled by the personal representative. An exception is that contracts to the performance of which the personality of the deceased is essential, e.g. of a musician to perform at a concert or an author to write a book, do not survive death. The personal representative has a right to be reimbursed, out of the assets of the estate, for the payments he makes and the liabilities he incurs in the performance of his duties. He has no right to claim payment for work done in respect of the estate unless the will authorises payment.

TO WHOM SHOULD PAYMENT BE MADE?

Bankrupts

Payment should not be made to a beneficiary or to a creditor who is bankrupt; the entitlement is that of the trustee in bankruptcy. To discover whether a person is or is not bankrupt a search should be made against that person’s name in the Alphabetical Index of Names at the Land Charges Registry. The current fee for such a search is £1 per name and search forms can be purchased from law stationers. In the event of difficulty a solicitor can be requested to make the search.

Persons of unsound mind

Similarly, if a debt is owing to a person who is not believed to be of sound mind, the debt should not be paid to that person personally but to his receiver or to his attorney appointed under an enduring power of attorney made before the creditor lost his sanity.

Future debts

If the personal representative knows of debts or liabilities of the estate which might arise in the future, then before distributing the estate, he should protect himself and make provision for settling them. He can do this by:

• 1.obtaining an indemnity from the beneficiary against the claims; or
• 2.retaining a sufficient sum from the property in respect of which the liability may arise, or if the liability is not contingent in respect of any particular asset of the estate, from the general estate; or
• 3.asking a court to direct him as to what should be done to cover the liability.

The risk with course 1 is that an indemnity is only as good financially as the person who gives it. The problem with course 2 is quantifying the extent of the liability and obtaining the beneficiary’s agreement to that sum, and the problem with course 3 is the expense to the estate of the court application.

INCOME AND CAPITAL GAINS TAX

Remember before distributing the estate that the final position in respect of income and capital gains taxes (including tax on income received since death and prior to final distribution of the estate, and capital gains made upon the sale of assets during that period) must be established by completing income tax returns for the administration period and any outstanding tax paid. This is dealt with in detail on pages 90 to 91 and 143 to 147.

FINALISING INHERITANCE TAX

If inheritance tax has been paid on stock exchange securities (other than those quoted on the AIM market), shares in common investment funds, unit trusts and land or buildings which are sold in the course of administration of the estate at a loss compared with their value as declared in the probate papers, it might be worth reconsidering the value attributed to them for inheritance tax purposes with a view to obtaining a partial refund of the tax.

Before deciding to elect for an Inheritance Tax revaluation, bear in mind that if assets are re-valued for Inheritance Tax purposes to reflect a fall in value between the date of death and the date they are disposed of by transfer to the beneficiary or sale, the reduced value becomes the base cost (i.e. the value at which the assets are deemed to have been acquired), for the transferee for Capital Gains Tax purposes and check the Inheritance Tax Rates and the Capital Gains Tax rates at the relevant date.

To obtain agreement by the Revenue to a revaluation in the case of stock exchange securities, shares in common investment funds and unit trusts, the personal representatives must have sold them within 12 months of the date of the death. To recalculate the amount of tax properly payable, the loss is deducted from the declared value of the estate and is calculated by deducting the gross proceeds of sale from the value declared for probate purposes. No allowance is made for the expenses of sale and all the quoted investments in the estate must be taken into account, not merely those sold at a loss. If the personal representatives reinvest the proceeds of sale by buying further unit trusts, common investment funds or quoted investments within two months of the last sale during the 12-month period, the amount of repayable tax will be restricted.

Similar principles apply in the case of land or buildings, the differences being that the period for the sale is four years instead of 12 months, the period for reinvestment is four months after the last qualifying sale in the period of three years from death instead of two months during the period of 12 months from death, and sales at a profit in the fourth year after death or which result in a profit or loss of less than 5 per cent or £1,000 are ignored.

INSOLVENT ESTATES

In cases in which the assets of the estate are sufficient to pay all the funeral and testamentary expenses and the debts and liabilities of the deceased, there is no problem as to which should be paid, but if the estate is insolvent i.e. the assets are insufficient to pay them all, there is a complicated special order in which they must be discharged. It is as well to consult a solicitor if the estate is insolvent because a personal representative who wrongly pays a creditor before another who has precedence, incurs personal liability to the wronged creditor.