The pitfalls of dealing with complex estates as a lay executor
Karen Bacon explains just a few of the tricky issues that probate presents that can
mean It’s far from a DIY matter.
It has become common for executors to administer estates without enlisting legal advice. There’s a considerable amount of information available online on government websites and elsewhere, and many people believe that dealing with a deceased person’s estate is just a simple matter of filling in a few forms and they can save thousands of pounds of solicitor fees.
While that may be the case with the simplest estates, such as those containing only English bank and building society accounts and a very straightforward will, many people’s affairs and relationships are more complex than this.
The examples given below are some of the matters which can cause lay executors problems in even apparently straightforward estates.
Deceased or bankrupt beneficiaries
Where a beneficiary or legatee has died and the will does not specifically state what happens to the gift, executors may make an incorrect assumption as to what happens to that gift – for example, that it should pass to the beneficiary’s spouse. If the mistake comes to light after the gift has been made, the executors will be personally liable to the correct beneficiary if they can’t recover the gift from the incorrect beneficiary.
If a beneficiary is bankrupt and the executors pay them, rather than the beneficiary’s trustee in bankruptcy, again, the executors may find themselves liable.
Investment bonds
It’s quite common for the deceased’s investments to include non-UK investment bonds, which will terminate on the death of the last of the lives assured (which may be the deceased). The insurance company will issue a chargeable event certificate showing the income, which is chargeable in the tax year the bond terminates; however, unlike UK bonds, there is no credit for basic rate tax, and the executor must report this and pay the tax as part of the administration of the estate.
As HMRC receives details of the chargeable event direct from the investment company, the executors may be surprised to receive a demand for many thousands of pounds of tax after they have distributed the estate.
Where the deceased is not the last life assured, which may be the case where an investment bond is written ‘in trust’, professional advice should always be sought before dealing with the bond.
Property and shares
Many estates will contain a property, or shares, which will need to be sold. If the property or shares have increased in value since the date of death, there is a potential capital gains tax liability.
In this case, it is vital that executors take legal advice before arranging a sale, as it may be possible to save tax by formally ‘appropriating’ the property or shares to the beneficiaries, so that the gains are taxed on them. This is important where there are charitable beneficiaries, as gains made by them are exempt. Once contracts have been exchanged, it is too late for appropriation.
Creditors and claims against the estate
Executors need to be aware that certain categories of people are entitled to make a claim against the estate within a period of six months after the grant of probate, if the deceased has not made reasonable provisions for them. If the executor has distributed the estate within that period, they may be personally liable, should a successful claim be made and they cannot recover what they have distributed.
The same applies if the executors become aware of a creditor but have distributed the estate without placing a deceased estates notice in The Gazette and in a newspaper local to the deceased, under the Trustee Act.
Executors should also be aware that the Department for Work and Pensions (DWP) may make an enquiry in relation to means-tested benefits including pension credit, and this may not be made until many months after the date of death. Executors should not distribute the estate until DWP has confirmed the position.
Insolvent or insufficient estates
If the deceased’s estate is insufficient to pay their debts, there is a specific order for payment of these; and if the estate is solvent but insufficient to cover all the legacies and specific gifts in the will, there is a specific order for the gifts and legacies to be satisfied. Executors may be liable if they do not comply with this.
Gifts
Executors must be careful to make detailed enquiries as to gifts made during the seven years (and in certain cases, 14 years) prior to the deceased’s death, which includes gifts of items and payments made by the deceased on behalf of another, rather than just gifts of cash. There are penalties for deliberately or negligently failing to declare gifts.
Trusts
Many professionally drawn wills contain trusts, such as property protection trusts to preserve a share of the deceased’s home against their partner’s remarriage, or long-term care fees, or discretionary trusts, particularly in wills made prior to the introduction of the inheritance tax (IHT) nil-rate band. Executors should always seek advice in these circumstances to ensure that the trust is properly set up at the outset, and that the trustees know their responsibilities and duties during the life of the trust.
Where the deceased received income from a will trust during their lifetime, executors are often surprised to find that the capital value of the trust aggregates with the value of the deceased’s own estate for the purpose of calculating IHT in the deceased’s estate. This may mean that the estate is subject to IHT, even though the deceased’s own assets are under the nil-rate band. There may be penalties for failing to disclose any such trust, in addition to the tax and interest on late payment.
Following the introduction of the transferable nil-rate band, the ‘nil rate’ discretionary trust is no longer required to save IHT, but it is not uncommon for executors to ignore its presence in a will, and to distribute the entire estate to the surviving spouse. This does not dispose of the trust, as the legacy to the trust remains outstanding, and it is necessary to either implement the trust or to wind it up by deed of appointment, preferably made within two years of the death. Executors should take legal advice as to the options available, as there may be planning opportunities that they are unaware of.
Assets abroad
It’s not unusual for there to be a Jersey bank account among the deceased’s investments, which will require a Jersey grant of probate. This is something that lay executors might find difficult to handle without assistance. Assets such as holiday homes outside the UK will be subject to UK IHT, and may also be taxed in the country where the asset is situated, although a double taxation treaty may apply. In these circumstances, the assistance of a specialist UK lawyer and/or lawyer within the jurisdiction will usually be required.
While this is not an exhaustive list of potential pitfalls, it does indicate that
even where there might not appear to be anything complex about the deceased’s estate,
it is always best to seek advice to ensure that there are no hidden traps.
About the author
Karen Bacon is an associate legal executive in the wills, probate and tax team at Steeles Law,
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