What is the 'estate'?
Everything the deceased person owned at the time of their death is referred to as their estate. This can include tangible property such as their home and all of its contents as well as any money they had at the bank at the time that they died.
Who is responsible for managing the estate?
If the deceased person left a Will, the executors named in the Will have responsibility for managing the estate.
If the person died intestate, that is to say they did not leave a valid Will, you will need to apply to the Probate Registry for Letters of Administration, which will then enable you to deal with the estate. Not everyone is entitled to apply for Letters of Administration, so you may wish to seek legal advice as to whether you are entitled to apply, or whether another member of the deceased person’s family should apply instead.
The executors (if there was a Will) or administrators (if there was no Will) are sometimes referred to as “personal representatives”.
Wills should be clear and concise. However, even when a Will has been left there can still be confusion over what is to happen. This may be because the Will is not clearly worded, a beneficiary has already died or cannot be traced or items mentioned in the Will are not in existence anymore. An executor should always seek legal advice if they are unsure of any aspect of the Will, as they may be held personally liable if the estate is incorrectly administered. This means that a beneficiary that has lost out could seek compensation from the executor because of their mistakes.
Under certain circumstances it may be that a Deed of Variation should be set up in order to amend the Will. The reason for doing this is to protect the estate from further Inheritance Tax liability, creditors and bankruptcy among other things. A solicitor should be able to advise you whether there is any advantage in doing this at an early stage. This should be considered early on as there is a time limit for setting up a Deed of Variation.
In addition, there are a number of things that can go wrong. Someone may challenge the Will, or produce a newer Will that you were previously unaware of. In such cases it is necessary to go to a solicitor for advice.
What do the personal representatives have to do?
As a Personal Representative, you are responsible for managing the deceased’s money, property and belongings and making sure that it is distributed according to the wishes set out in the Will (if there was one) or the Intestacy Rules (if there was no Will).
A Personal Representative is under a duty to act reasonably and in the best interests of the estate and its beneficiaries. Managing an estate is an onerous and time-consuming job which requires a thorough, diligent and business-like approach. As a personal representative, you will need to personally account for any loss suffered by the estate.
Managing an estate is never easy, particularly if the estate is complex and included lots of different types of assets. Many people find the process daunting, especially if they have never done it before and are not sure about what to do.
There are steps that executors can take to protect themselves from the personal liability that the role carries. If you are in any doubt whatsoever about your responsibilities, you need to take legal advice.
The first steps
The first task that the Personal Representatives is to assemble as much information as possible about the assets and liabilities (debts) of the estate.
This in itself is a big job because it involves looking for bank statements, insurance policies, personal loan agreements and any other financial documents. There will be a lot of paperwork to wade through and try to make sense of. It is also necessary to obtain valuations for any property contained in the house, and possibly the house itself.
Once all of the assets have been gathered in and valued, it will be possible to obtain a total monetary value for the estate. It is important to arrive at as accurate a valuation as possible.
This is because the value of the estate will determine whether it is subject to Inheritance Tax. Secondly, an accurate valuation will ensure that all of the beneficiaries receive their proper share of the estate.
If a person has left a Will, Executors will be appointed by the Will and are entitled to apply for a Grant of Probate. If a person has passed away without a Will then their next of kin will apply for a Grant of Letters of Administration. Both documents give the executor / administrator the same powers.
Once you have gathered all of the information about the estate, the value and extent of the assets should be known. This will determine whether or not you will need to obtain a grant from the Probate Registry. An estate valued at over £30,000 will normally require a grant. Smaller estates may require a grant depending on the assets that were held by the deceased.
The banks or building societies where the deceased person had accounts will advise you whether or not they require a grant to close the account. – Different banks have different policies. You cannot complete on the sale of the person’s house without having first obtained Probate.
Obtaining Probate can be a complicated and time consuming process. There are forms that need to be filled in correctly, which many people find difficult and stressful. In addition it can be difficult to determine whether the estate is or is not subject to inheritance tax. If you are in any doubt whatsoever, you must seek legal advice. Your solicitor will be able to obtain Probate on your behalf.
How soon after the death should you apply for probate?
Although there is no legal time limit for applying for Probate, it is a good idea to apply as soon as possible following the death.
If there is inheritance tax due to be paid from the estate then this must be paid within six months from the date of death, otherwise interest on the tax due will begin to be incurred.
If you are feeling overwhelmed by the process, a solicitor will be able to give you the helping hand you need.
After obtaining probate
You will now need to locate the heirs and beneficiaries and make sure that the estate is distributed according to the terms of the Will or the Intestacy Rules, subject to any debts and tax liabilities of the estate.
As a minimum, personal representatives will need to ensure that any debts, funeral expenses and inheritance tax due are paid before the estate is distributed to the beneficiaries. Again it is necessary for Personal Representatives to act diligently throughout the process. There are a number of possible pitfalls that you need to be aware of.
Some assets cannot pass by Will. For example if the deceased owned a house jointly with someone else, the house will usually pass to the surviving joint owner. The same applies to joint bank accounts. A solicitor will go through the estate with you and advise you what property can legally pass by Will and what can’t.
When it comes to selling assets that form part of the estate, you must ensure that you get a fair price on the open market. Whilst it can be tempting to sell things at undervalue to obtain a quick sale, this will result in a loss to the estate which the person who authorised the sale will need to repay. This needs to be borne in mind especially when it comes to the sale of the most valuable assets in a person’s estate, such as the house or the car.
If there is a Will, you need to check the terms carefully and make sure that the items you propose to sell have not been specifically gifted to anyone. If you mistakenly sell a gift that was intended for someone, that person will be entitled to make a claim against you.
The process can be complicated by the fact that a gift in a Will could have been intended for a person who has already died. In some cases a substitute beneficiary will have been named in the Will, so the gift will go to that person instead. If no substitute has been named, you need to get advice from a solicitor to make sure that the failed gift is dealt with correctly.
In some cases there will not be enough money to cover all of the debts and gifts. Personal Representatives are under a legal duty to ensure that the estate’s debts are settled before anything is distributed to the beneficiaries. If after payment of all the debts there is no money left, the beneficiaries do not then inherit anything. Again there are particular rules which apply to dealing with insolvent estates, so it is essential that you seek legal advice.
What is Inheritance Tax and how is it calculated?
Essentially, Inheritance Tax is a Government tax which is payable on death and some lifetime gifts. Personal Representatives must make sure that it is paid out of the estate before the distribution of any gifts to beneficiaries.
Inheritance Tax is a complex area of law. It is payable if the value of an estate exceeds £325,000 (during the tax year 2017-18) and must be paid within six months of the date of death, to avoid accrual of interest on the sum due.
The value of the estate which exceeds the £325,000 threshold is payable at a flat rate of 40%.
There are many allowances and reliefs that can be claimed such as Residential Property Relief, Business Property Relief and Agricultural Property Relief. Advice needs to be sought, often from a Solicitor and Accountant to ensure all available reliefs are obtained.
Even if no tax is payable on the estate, it is still necessary to file an account with HM Revenue and Customs.
The basic rule set out above is complicated by the fact that some gifts given by the deceased person whilst they were still alive can also be subject to Inheritance Tax.
If you feel that the estate you are administering is subject to Inheritance Tax, or you are aware of any substantial gifts given by the deceased person during their lifetime, it is a good idea to seek legal advice as soon as possible. Incorrectly accounting to HMRC for inheritance tax carries a range of penalties including fines and possible criminal prosecution. It is your responsibility to ensure that the correct amount of tax is paid.