Administration of estates - Administration of solvent and in...

Learning Outcomes

This article outlines the administration of solvent and insolvent estates, including:

• identifying executors and administrators as personal representatives, when their authority arises, and their core fiduciary duties.
• applying statutory and common-law powers of personal representatives to collect, manage, invest, and distribute estate assets lawfully.
• distinguishing solvent from insolvent estates and determining whether all funeral, testamentary, administration expenses, and debts can be paid.
• following the statutory order for the incidence of liabilities in solvent estates, including secured debt treatment, exoneration, and abatement.
• analysing when specific gifts, pecuniary legacies, and residue abate and how marshalling reallocates the burden of estate debts.
• applying the insolvency priority rules to rank secured, preferential, unsecured, and deferred creditors in an insolvent estate.
• evaluating the consequences of misapplication of assets, premature distribution, and misadministration for personal representatives and beneficiaries.
• using statutory advertisements, court applications, and practical safeguards to manage creditor claims and minimise personal liability risk.
• integrating these rules to construct structured, statute-based answers to SQE1 problem questions on estate administration.

SQE1 Syllabus

For SQE1, you are required to understand the administration of estates, including the rules applicable to solvent and insolvent estates, with a focus on the following syllabus points:

• duties and powers of personal representatives (executors and administrators), including the duty of care under Trustee Act 2000 and key administrative powers
• order of application of assets for debts and expenses in solvent estates (Administration of Estates Act 1925)
• priority of debts and liabilities in insolvent estates (Insolvency Act 1986 and Administration of Insolvent Estates of Deceased Persons Order 1986)
• secured debts, exoneration, abatement of legacies, and marshalling
• creditor claims and protections for PRs, including statutory advertisements and Benjamin orders
• consequences for beneficiaries where estates are insolvent or misdistributed
• relevant procedural rules and statutes governing estate administration

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the statutory order for applying assets to pay debts and expenses in a solvent estate?
2. What is the effect on beneficiaries if an estate is insolvent?
3. Who is responsible for administering an estate and what are their primary duties?
4. How are secured, preferential, and unsecured creditors treated in an insolvent estate?

Introduction

When a person dies, their property and liabilities must be managed and distributed according to law. The process of administering an estate is governed by statutory rules and the duties of personal representatives. It is essential to understand the differences between solvent and insolvent estates, the correct order for payment of expenses and debts, and the consequences for beneficiaries and creditors.

Key Term: personal representative
A person (executor or administrator) responsible for collecting, managing, and distributing the deceased’s estate in accordance with the law.

Duties and Powers of Personal Representatives

The administration of an estate is carried out by personal representatives (PRs)—either executors (appointed by will) or administrators (appointed by the court if there is no will or no executor able to act). Executors derive their authority from the will; administrators obtain authority only on grant of letters of administration. In practice, institutions will require production of an office copy grant to release or transfer assets.

PRs act in a fiduciary capacity and must act honestly, diligently, and in the best interests of the estate. The Trustee Act 2000 imposes a duty of reasonable care and skill (taking account of any specialist knowledge and whether PRs act in a professional capacity). Within a reasonable time (commonly referred to as the executor’s year), PRs should collect assets, pay funeral, testamentary, and administration expenses and debts, and then distribute legacies and residue.

Key Term: executor’s year
The conventional period of 12 months from death within which PRs are expected to collect, administer, and be ready to distribute the estate.

PRs have wide administrative powers, including:

• power to sell, mortgage, or lease estate assets
• power to appropriate assets in satisfaction of gifts, provided interests are not prejudiced
• power to invest estate funds in accordance with the standard investment criteria (suitability and diversification)
• power to run the deceased’s business for limited purposes
• powers to maintain minors out of income (Trustee Act 1925, s31) and to advance capital (Trustee Act 1925, s32)
• power to insure and to delegate investment functions under Trustee Act 2000

Joint PRs have joint and several authority, but all must join to transfer land and most shares. PRs are personally liable for loss caused by breach of duty; the court may excuse them if they acted honestly and reasonably and ought fairly to be excused.

Key Term: statutory order of payment
The legally prescribed rules determining the sequence and source from which estate liabilities are paid; in solvent estates this governs which assets are used first.

Worked Example 1.1

Sarah dies leaving a will appointing her brother as executor. Her estate includes a house, savings, and some debts. What are her brother’s main duties as executor?

Answer:
He must collect and value all assets, pay funeral expenses and debts, settle any taxes due, and distribute the remaining estate to the beneficiaries named in the will.

Administration of Solvent Estates

A solvent estate is one where the assets are sufficient to pay all funeral, testamentary, and administration expenses, debts, and other liabilities in full.

Key Term: solvent estate
An estate where the total value of assets exceeds all liabilities and expenses.

Two distinct issues arise in the administration of solvent estates:

• which payments have to be made (and in what general order)
• from which assets those payments must be met (the statutory incidence of liabilities)

Funeral, testamentary, and administration expenses are first in line and must be met before legacies and residue are distributed. Administration expenses include the costs of obtaining the grant, collecting and preserving assets, reasonable professional fees, and inheritance tax payable on UK property vested in the PRs.

Secured debts, such as a legal mortgage, are ordinarily discharged from the asset over which the security is granted, because the beneficiary of that asset takes it subject to the charge unless the will shows a contrary intention.

Key Term: exoneration
A will provision that directs a secured debt on a particular asset be paid from another part of the estate (commonly residue), so the asset passes “free of mortgage”.

Unsecured debts are paid from general estate assets. As between beneficiaries, the Administration of Estates Act 1925 sets out the statutory order in which assets are applied to liabilities (the “incidence of liabilities”):

• property undisposed of by the will, subject to retaining a fund to meet pecuniary legacies
• residue, subject to retaining a fund to meet pecuniary legacies not otherwise provided for
• property specifically given for payment of debts, if any
• property charged with payment of debts (i.e. directed to pay debts with any surplus going to a named beneficiary)
• the fund retained to meet pecuniary legacies
• property specifically devised or bequeathed, rateably according to value
• property appointed under a general power, rateably according to value

Unless varied by the will, pecuniary legacies may abate proportionately if sufficient funds are not available after paying expenses and debts. A disappointed beneficiary may invoke marshalling to ensure the correct burden of debts falls on assets liable in priority and to obtain compensation from residue where PRs paid using the wrong class of asset.

Key Term: marshalling
An equitable remedy that rearranges the application of assets so the proper class bears the debt, compensating beneficiaries when PRs have paid liabilities out of assets not primarily liable.

Worked Example 1.2

An estate has assets of £200,000 and debts of £120,000, including a mortgage, credit card bills, and a loan from a friend. How should the debts be paid?

Answer:
Pay funeral and administration expenses first. The mortgage (secured debt) is paid from the mortgaged property unless the will exonerates it. Unsecured debts (credit card, loan from friend) are paid next from assets following the statutory incidence: undisposed property and residue first, then any assets specifically given or charged for debts, and finally specific gifts rateably if needed. Any remaining assets after all expenses and debts are paid are distributed to beneficiaries.

Worked Example 1.3

A will gives “my cottage to my daughter free of mortgage” and residue to a nephew. The cottage is subject to a £50,000 mortgage. How is the mortgage treated?

Answer:
The “free of mortgage” wording exonerates the gift. The mortgage must be paid from other estate assets (commonly residue), so the daughter takes the cottage unencumbered. If residue is insufficient, assets are applied in the statutory order of incidence.

Key Term: statutory order of payment
In solvent estates this refers to the order of asset application; in insolvent estates it refers to the priority scheme under insolvency rules.

Exam Warning

If personal representatives distribute assets to beneficiaries before all debts and liabilities are paid, they may be personally liable to creditors for any shortfall.

Administration of Insolvent Estates

An insolvent estate is one where the assets are insufficient to pay all debts and liabilities in full.

Key Term: insolvent estate
An estate where the total liabilities and expenses exceed the value of the assets.

Insolvent estates are administered under the Insolvency Act 1986 and the Administration of Insolvent Estates of Deceased Persons Order 1986. The estate is treated broadly as a bankruptcy. Secured creditors generally enforce their security against the charged asset outside the ranking; any shortfall may be claimed in the insolvency as an unsecured debt. The free estate is then applied in the statutory priority:

• funeral, testamentary, and administration expenses
• preferential debts (for example, certain employee wage claims)
• unsecured provable debts (rateably)
• interest on those debts (if applicable)
• deferred debts

Key Term: preferential debt
A debt given priority by statute, such as certain employee wage claims.

No distributions are made to beneficiaries unless all expenses and debts are paid in full. Where the estate is insolvent, beneficiaries commonly receive nothing.

Worked Example 1.4

An estate has assets of £50,000 and debts of £100,000, including a mortgage, unpaid wages to an employee, and several unsecured loans. What is the effect on beneficiaries?

Answer:
The mortgagee will enforce against the mortgaged property first; any unsecured shortfall forms part of the insolvency. The remaining free estate is used to pay funeral/testamentary/administration expenses, then preferential wages, then other unsecured debts proportionally. Beneficiaries receive nothing.

Payment of Debts: Statutory Order

Understanding the statutory order is essential. For solvent estates, the order dictates the source of payment—i.e. which classes of assets bear expenses and debts first as between beneficiaries. For insolvent estates, the order prescribes the priority amongst categories of liabilities.

PRs who misapply assets or distribute prematurely risk personal liability. They can reduce risk by:

• identifying all liabilities and confirming whether any are secured
• applying assets in the correct statutory order
• retaining sufficient funds to meet contingent and future liabilities (e.g. pending litigation)
• delaying distribution for six months from the grant to avoid exposure to financial provision claims

Key Term: Benjamin order
A court order authorising PRs to distribute on the basis of an assumption (e.g. that a missing beneficiary died), protecting the PRs if the assumption later proves wrong.

Worked Example 1.5

PRs pay a large unsecured debt from specific gifts because residue is illiquid, then later discover the will directed debts be paid from residue. Can the specific legatees seek relief?

Answer:
Yes. As between beneficiaries, assets must be applied in the statutory order unless the will varies it. Specific legatees can rely on marshalling to shift the burden and be compensated from residue (or other assets liable in priority). The PRs may be liable if their misapplication caused loss.

Creditor Claims and Beneficiaries

Creditors may claim against the estate for unpaid debts. If PRs have already distributed, creditors can pursue recipients to the extent of what they received. PRs can protect themselves from unknown claims by placing statutory advertisements under Trustee Act 1925, s27 in the London Gazette, a local newspaper, and any appropriate trade press, inviting claims within a stated period (not less than two months). After the notice period, PRs can distribute without personal liability to unknown claimants (though recipients may still be required to account to a claimant later).

For known but missing beneficiaries or creditors, PRs should consider:

• retaining a reserve
• obtaining indemnities from beneficiaries (not always reliable)
• purchasing missing beneficiary insurance
• applying for a Benjamin order after making full enquiries

PRs should also consider delaying distribution for six months from the grant to minimise exposure to claims under the Inheritance (Provision for Family and Dependants) Act 1975.

Key Term: statutory order of payment
The priority scheme applied in insolvent estates and the order of asset application in solvent estates; failure to follow it can result in PR personal liability.

Worked Example 1.6

PRs cannot trace a residuary beneficiary. They have placed statutory advertisements and made extensive enquiries. What options exist to complete administration?

Answer:
The PRs may distribute with an indemnity, take out missing beneficiary insurance, pay the missing share into court, or apply for a Benjamin order authorising distribution on the basis that the beneficiary is presumed dead. A Benjamin order affords the strongest protection to PRs.

Summary Table: Order of Payment

Note: Secured creditors look first to the charged asset; any shortfall ranks in the insolvency as unsecured. Will provisions can vary the incidence of liabilities in a solvent estate (e.g. “free of mortgage” clauses).

Key Point Checklist

This article has covered the following key knowledge points:

• The duties and powers of personal representatives, the standard of care, and when authority arises
• The statutory order governing the incidence of liabilities in solvent estates, including secured debt treatment, exoneration, abatement, and marshalling
• The priority of liabilities in insolvent estates and the position of secured, preferential, and unsecured creditors
• The consequences for beneficiaries and creditors in insolvent and misadministered estates
• PR protections: statutory advertisements and Benjamin orders, and the importance of delaying distribution where appropriate
• The importance of following the statutory order to avoid personal liability

Key Terms and Concepts

• personal representative
• solvent estate
• insolvent estate
• preferential debt
• statutory order of payment
• executor’s year
• exoneration
• marshalling
• Benjamin order