Administration of Estates — SQE1 FLK2 Wills and Administration of Estates

An executor is one of three residuary beneficiaries under his mother's will. The estate includes a painting, valued at £25,000 at the date of her death, which nobody has been left specifically. The art market has moved since, and it would now fetch £34,000. He would like to keep it as part of his own share, at the £25,000 figure. He has not consulted the other two. Can he? No.

He is wrong twice over, and both mistakes are the kind that cost a personal representative money out of his own pocket. This episode is about what personal representatives actually have to do: collect, pay, distribute, account. And about the several ways in which getting the order or the timing wrong makes them personally liable. Keep the painting in mind.

Here is the route. The duties and the standard they are judged by. Then collecting and securing the assets. Then debts: funeral expenses, the order of payment, and advertising for creditors. Then selling and appropriating. Then the executor's year and the order of distribution. Then personal liability, and the four ways of protecting against it. And last, accounts and completion.

Start with the job itself. Personal representatives must collect and preserve the assets. They pay the funeral, testamentary and administration expenses, then the debts. Then they distribute what is left to those entitled, keeping accounts as they go. And the standard they are judged by is that of a reasonably prudent person administering their own affairs. Not perfection. But honest mistakes can still cause loss, and loss is what liability attaches to.

Collecting first. Identify the assets, secure them, insure them. An empty property is the classic exposure: vulnerable to damage, theft and squatters, and a policy may become void if the house stands unoccupied too long. Assets are valued as at the date of death for inheritance tax, and if they are sold later at a different figure, that difference raises capital gains tax questions instead.

Funeral expenses come first among the outgoings. They must be reasonable, judged by the deceased's station in life and the family's wishes, and they are payable ahead of the general creditors. Extravagance can be challenged, so keep the invoices and record why the decisions were made.

Then the debts, and the first job is to find out what they are. Mortgages, loans, credit cards, utilities. And not every claim is a good one: verify each before paying it, ask for proof, and challenge anything that looks inflated. Paying a bad claim out of the estate is itself a loss.

Now the point candidates most often get wrong, so listen carefully. The statutory order of payment between creditors is reached only where the estate is insolvent, that is, where it cannot meet its liabilities in full. In a solvent estate no question of ranking between creditors arises at all, because every single one of them is paid in full.

And a secured creditor stands outside that order altogether. It does not queue. It realises its security and proves for any shortfall alongside the ordinary creditors. So if a question hands you a solvent estate and asks in what order the creditors rank, the honest answer is that they do not rank; they are all paid.

What does matter in a solvent estate is the order in which the assets are applied, which is a different question. That order is fixed by s.34(3) of, and Schedule 1 to, the Administration of Estates Act 1925. It starts with property undisposed of by the will, then residue, which is what protects the specific and pecuniary gifts. And by section 35, charged property bears its own charge, unless the will shows a contrary intention.

Where the estate is insolvent, the order does bite, and it runs: reasonable funeral, testamentary and administration expenses. Then preferential debts. Then ordinary unsecured debts. Then interest on those debts. Then deferred debts. And an insolvent estate is not a job to take on without specialist advice, because wrongful distribution lands on the personal representative.

Which brings us to the single most useful protective step in the whole topic. Advertise for creditors under section 27 of the Trustee Act 1925. A notice in the London Gazette, and one in a newspaper circulating where the deceased lived. Two months after the Gazette notice, the personal representative is protected against debts he did not know about.

Read that limit carefully, because it is where the marks are. Section 27 protects against unknown debts. It does nothing at all about a debt you already know of. And it protects the personal representative, not the beneficiaries: a creditor who surfaces later may still follow the assets into the hands of the people who received them.

Selling assets. Personal representatives have power to sell, under the will or under the Trustee Act, and a duty to obtain the best price reasonably obtainable. Market it properly. Take professional advice. Do not simply accept the first offer. And document what you did, because underselling an estate asset is one of the commonest routes to a claim.

And now back to the painting. Section 41 of the Administration of Estates Act 1925 lets personal representatives appropriate an asset towards a beneficiary's entitlement, with that beneficiary's consent, and without prejudicing a specific gift. So appropriation is available. The executor's two mistakes are about how.

First, the value. The asset is taken at its value on the day it is appropriated, not at the figure returned for probate. So £34,000 comes off his share, not £25,000. The rise since the death belongs to the estate, which means it belongs to all three of them. Second, the consent. He is on both sides of the transaction, and he cannot supply his own.

That is the self-dealing rule. An appropriation to himself is liable to be set aside, unless the will authorises it, the court approves it, or the others agree with full knowledge. This will confers no special powers, so he needs the other two beneficiaries. Appropriation to a personal representative is not forbidden. It is regulated.

The executor's year next. Personal representatives have one year from the date of death in which to administer without being obliged to distribute. It is not a deadline; it is a guideline, and a complex estate may legitimately take longer. But after it, beneficiaries may press for their inheritance, may claim interest on legacies from the end of that year, and may apply to the court.

Distribution runs in order. Funeral and testamentary expenses. Then debts and liabilities. Then specific legacies. Then pecuniary legacies. Then residue. Distribute out of that order and you may find there is nothing left for a claim you should have met first.

A few distribution points worth carrying. A gift to a minor cannot be paid over. It is held on trust until 18, or whatever later age the will sets, and the personal representatives become trustees of it. Where there is a life interest, their duties continue: invest, pay the income, keep accounts. And beneficiaries may take assets in specie or in cash, which is a question of what is fair and practical.

Distributing early is where personal representatives get hurt. If a creditor surfaces after the assets have gone, they must meet the claim themselves. An unpaid creditor may also follow the assets into the hands of beneficiaries who were overpaid, and a personal representative who has met the claim may pursue that recovery. That is the claim in equity recognised in Ministry of Health v Simpson, the Re Diplock litigation.

But be clear what that is worth. It is a recovery to be pursued, not a defence to the claim against him, and it depends on what the recipients still have. An express indemnity taken before distribution, and advertising under section 27, are far better protection than a right to chase.

Where there are several personal representatives, the rule is more precise than people remember. Each answers for his own breaches, and not automatically for those of a co-representative. But the office cannot be delegated by private agreement between them. One who hands the administration to a co-representative and asks nothing about it for a year commits a breach of his own. Passivity is the breach.

And where two or more are in breach, their liability is joint and several. Each can be held liable for the entire loss, not a share of it. The beneficiaries choose whom to sue, and the one who pays seeks contribution from the others.

So how does a personal representative protect himself? Four ways. Advertise under section 27. Take indemnities or releases from beneficiaries, on informed consent. Apply to the court for directions on anything genuinely doubtful, because the cost of the application is usually less than the cost of getting it wrong. And, before doing anything at all, consider renouncing.

Renunciation has a cut-off, though. Once an executor has intermeddled, that is, acted as executor, he can no longer renounce and is committed to the administration. Acts of a trivial character do not necessarily count. Collecting the post, or paying for the funeral out of his own pocket, may be no more than that.

Accounts, briefly. Estate accounts show what was collected, what was paid, what income came in, and what was distributed. Beneficiaries are entitled to see them, and residuary beneficiaries have wider rights than a specific legatee. Get them approved in writing before final distribution, because approval makes it much harder to reopen matters the accounts disclosed.

And finally, when is it over? When the assets are collected, the debts and expenses paid, and everything distributable has been distributed. But watch for a continuing trust. Where a will creates a life interest, the administration ends and the personal representative holds from that point as trustee. That is the point decided in Attenborough v Solomon, from 1913. The office changes. The duties do not stop.

A word on how SQE1 tests this. You will not be asked to recall case names or section numbers. You get a scenario, five answers, and one instruction: pick the best. What is tested here is almost always the same thing: whether the personal representative is personally on the hook, and what he should have done instead.

If you keep only three. Section 27 of the Trustee Act 1925, because it protects against unknown debts and nothing else. Section 41 of the Administration of Estates Act 1925, because appropriation is at the value on the day it happens. And the rule that a personal representative answers for his own breach, because passivity is a breach of his own.

Traps the examiners set. One: the statutory order of debts is an insolvency rule. If the estate is solvent, every creditor is paid in full. No queue. Two: a secured creditor never takes a place in that queue anyway. It looks to its security first.

Three: appropriation at probate value. It is the value at the date of appropriation, and the difference belongs to the estate. Four: a personal representative who is also a beneficiary cannot consent to an appropriation to himself. He needs the will, the court, or the others.

Five: section 27 and known debts. Advertising does nothing about a debt you already knew of, and it protects the personal representative rather than the beneficiaries. Six: the executor's year is not a deadline. It is when interest on legacies starts to run.

And seven, the one that decides whole questions. Dividing the work between co-executors does not divide the liability. A personal representative who leaves it all to a co-representative and asks nothing has committed a breach of his own, and their liability is joint and several.

Quick check. Three siblings are the executors of their mother's will. They agreed the brother who lived nearest would deal with the house. The other two left it entirely to him and asked him nothing about it for a year. He sold the house to a friend for £180,000, instructing no agent and obtaining no valuation. It was worth £260,000. The residuary beneficiaries want the £80,000 made good.

From which of the three may they recover it? Three candidate answers. One: from the brother who sold the house alone, the other two having known nothing. Two: from any of the three, each liable for the whole loss, with contribution between them. Three: from each of the three equally, each answerable for one third. Pause here if you want a moment.

The answer is two. All three are in breach. One by selling to a friend at a gross undervalue without advice. The other two by standing back, because the office is not delegable by private agreement, and each must keep himself informed. Their liability is joint and several, so the beneficiaries may sue whichever they choose for the whole £80,000.

Why the others fail. One treats ignorance as a defence, and ignorance produced by not asking is no defence. Three divides the loss into thirds, which is not how it works between beneficiaries and executors. Thirds may reappear later as contribution between the executors, but not as a limit on what the beneficiaries recover.

Five things to take away, and the painting covers the first two. One: appropriation under section 41 is at the value on the day it is appropriated, so the rise since the death belongs to the estate. Two: a personal representative who is also a beneficiary cannot consent to an appropriation to himself.

Three: the order of payment between creditors is an insolvency rule, and a secured creditor stands outside it anyway. In a solvent estate what matters is the order of assets. Four: section 27 advertising buys protection against unknown debts only, and never against one you knew about.

Five: each personal representative answers for his own breach. But leaving the whole administration to a co-representative and asking nothing is itself a breach, and then the liability is joint and several. Next time, Inheritance Tax.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.