Administration of estates - Timing for distribution of legac...

Learning Outcomes

This article outlines lawful timing for the distribution of legacies in estate administration, including:

• understanding and applying the statutory order of payment, the incidence of liabilities between different classes of property, and how these rules operate in problem-style SQE1 questions
• analysing how funeral expenses, administration costs, debts, and taxes affect when legacies and residue can be paid, and identifying when reserves must be retained
• explaining the executor’s year, calculating interest on overdue pecuniary legacies, and recognising when delay becomes unreasonable for PRs
• distinguishing between specific, demonstrative, and general legacies, applying abatement rules where funds are insufficient, and dealing with partial intestacy or failed gifts
• evaluating the impact of Inheritance Tax, Capital Gains Tax, and income tax during the administration period on the timing and method of distribution
• assessing risks of early distribution, including creditor, insolvency, and family provision claims, and advising PRs on prudent timing
• identifying and using key PR protections—such as Trustee Act advertisements, reserves, indemnities, bankruptcy searches, and Benjamin orders—to limit personal liability
• applying appropriation and assent strategically to satisfy legacies, manage tax exposure, and document distributions clearly in estate accounts

SQE1 Syllabus

For SQE1, you are required to understand the timing rules for the distribution of legacies in estate administration, with a focus on the following syllabus points:

• the statutory order for payment of funeral, testamentary and administration expenses, debts, legacies, and residue (First Schedule, Part II AEA 1925)
• incidence of liabilities and priority between specific, general, demonstrative legacies and residue, including abatement rules and contrary intention
• duties and potential liabilities of PRs, including duty of care and personal liability for devastavit
• timing rules: executor’s year; interest on pecuniary legacies; assent and appropriation
• tax timing and burden: IHT payment (including instalments), CGT during administration, and income tax on estate income
• risks of early distribution and PR protections (Trustee Act 1925 s.27 notices, reserves, indemnities, Benjamin orders, bankruptcy searches)
• the effect of partial intestacy, failed gifts (ademption, lapse, disclaimer), and the need to adjust timing
• insolvent estates: priority of creditors and prohibition on legacy distribution until creditors are satisfied

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. When may personal representatives lawfully distribute pecuniary legacies to beneficiaries?
2. What is the statutory order for payment of debts, legacies, and residue in a solvent estate?
3. What risks do PRs face if they distribute legacies before all debts and taxes are paid?
4. How does the timing of inheritance tax payment affect the distribution of legacies?

Introduction

The timing of legacy distributions is a core aspect of estate administration. PRs must comply with statutory rules and exercise reasonable care and skill to avoid personal liability. English law prescribes an order for paying funeral and administration expenses, debts, legacies, and residue, and imposes duties on PRs to ensure liabilities are settled or adequately provided for before distribution. Timing is also shaped by tax requirements (IHT, CGT, and income tax) and practical risks, including unknown creditors and potential family provision claims.

Key Term: solvent estate
An estate with sufficient assets to pay all debts, liabilities, and expenses in full.

Statutory Order for Payment and Distribution

PRs must pay the estate’s liabilities in a set order before distributing legacies or residue. This order is prescribed by statute and must be followed in every solvent estate.

The usual order is:

• Funeral, testamentary, and administration expenses
• Debts and liabilities (including taxes)
• Pecuniary legacies (unless charged on specific assets)
• Specific and demonstrative legacies
• Residuary gifts

Key Term: pecuniary legacy
A gift of a fixed sum of money under a will.

Key Term: specific legacy
A gift of a particular item or asset under a will, identified separately from the rest of the estate.

Key Term: demonstrative legacy
A gift of money directed to be paid from a specified fund or asset, which is treated as specific to the extent that fund exists and otherwise as a general pecuniary legacy.

Key Term: residuary estate
The balance of the estate remaining after payment of expenses, debts, taxes, and all other gifts.

For incidence of liabilities, the First Schedule, Part II to the Administration of Estates Act 1925 (AEA 1925) sets the order in which classes of property are applied to pay debts and legacies. In outline:

• property not disposed of by the will (undisposed-of property)
• residue
• property expressly appropriated, or charged, for payment of debts
• the retained fund for pecuniary legacies (general and demonstrative, to the extent not satisfied from the specified fund)
• specific legacies and devises

Two practical consequences follow:

• General pecuniary legacies abate before specific legacies where the retained legacy fund is insufficient, unless the will gives priority to a particular legacy.
• A demonstrative legacy is satisfied from the identified fund if it exists; any shortfall is met from the retained legacy fund like a general legacy.

The statutory order can be varied by a contrary intention in the will. For example, if a will directs that debts be paid from a particular fund “in exoneration of residue”, the specified fund will be used in preference to residue. Similarly, where property is subject to a mortgage, the devisee or legatee takes subject to the charge unless the will clearly expresses that the gift is “free of mortgage”.

Key Term: appropriation
The PRs’ statutory power (AEA 1925, s.41) to allocate particular assets in or towards satisfaction of a beneficiary’s entitlement, including a pecuniary legacy, generally without needing consent where the will removes statutory consents.

When May Legacies Be Distributed?

PRs must not distribute legacies until all known debts, liabilities, and taxes have been paid or sufficient provision has been made. PRs who distribute prematurely risk personal liability if claims later emerge, and may have to recover payments from beneficiaries, which is often difficult.

A careful approach requires:

• verifying and paying funeral, testamentary and administration expenses
• establishing and paying unsecured and secured debts (allowing for interest accruals)
• paying IHT due for the grant (or ensuring funds/reserves exist and instalment arrangements are sustainable)
• settling or providing for CGT on any realised assets and income tax on estate income accrued during the administration period
• addressing potential and contingent liabilities (e.g., guarantees, litigation risk)
• using statutory protections (Trustee Act 1925, s.27) and retaining appropriate reserves

The Executor’s Year

There is a general expectation—known as the “executor’s year”—that PRs should collect in assets, pay debts, and be ready to distribute legacies within 12 months of the date of death. This expectation has statutory basis: PRs are not bound to distribute before one year has elapsed (AEA 1925, s.44). It is not a strict deadline, but beneficiaries cannot usually compel earlier payment, and interest on pecuniary legacies typically runs from the end of that year if not paid earlier.

Key Term: executor’s year
The period of 12 months from the date of death during which PRs are expected to complete administration before beneficiaries can demand payment.

Reasonableness still governs; undue delay beyond the executor’s year without justification may expose PRs to challenge.

Payment of Pecuniary Legacies

Pecuniary legacies should not be paid until all debts, expenses, and taxes have been paid or adequately provided for. If a legacy is not paid within the executor’s year, the beneficiary may be entitled to interest from the end of that year until payment, unless the will provides otherwise. PRs may use appropriation to satisfy a pecuniary legacy with assets (for example, quoted shares) of equivalent value, which can be tax-efficient if timed appropriately.

Key Term: assent
The formal transfer by PRs of estate property (land or personalty) to the beneficiary to vest title, often by written instrument for land and stock transfer for shares.

Payment of Specific and Demonstrative Legacies

Specific and demonstrative legacies may be transferred once the PRs are satisfied that the estate is solvent and that the asset (or identified fund) is not needed to pay debts or taxes. A demonstrative legacy is paid from the named fund first; any shortfall is then treated as a general pecuniary legacy and met in the usual order.

Payment of Residue

The residuary estate is distributed last, after all other payments have been made and adequate provision made for any tax, future instalments (where applicable), and contingent liabilities. Before distributing residue, PRs should ensure estate accounts are complete and income tax for the administration period is settled or reserved.

Worked Example 1.1

A will leaves £10,000 to Alice, “my car” to Ben, and the residue to Carol. The estate includes £20,000 in cash, a car worth £5,000, and debts of £8,000. When can the PRs pay Alice and transfer the car to Ben?

Answer:
The PRs must first pay the £8,000 debts and any funeral or administration expenses. Once these are paid, they may transfer the car to Ben if it is not needed to pay debts. Alice’s legacy should not be paid until the PRs are satisfied that all debts, expenses, and taxes are settled or provisioned. Only then can the residue be distributed to Carol.

Worked Example 1.2

A will gives “£30,000 from my savings account with X Bank to Diana.” At death, the X Bank account holds £12,000. The estate has ample other liquid assets.

Answer:
The gift is a demonstrative pecuniary legacy. The PRs pay £12,000 from the X Bank account and meet the £18,000 shortfall from the retained legacy fund (other available estate funds). The demonstrative legacy does not fail for want of the full fund.

Tax Considerations Affecting Timing

Inheritance Tax (IHT)

IHT must be paid (or adequately provided for) before a grant of representation is issued. In practice, PRs obtain an IHT reference (Form IHT422) and file IHT400 (or excepted estate forms) with HMRC; HMRC then issues IHT421 (probate summary). Where liquid funds exist, the “Direct Payment Scheme” enables banks/building societies to pay IHT directly to HMRC before grant. If IHT is payable by instalments on certain assets (e.g., land or controlling shareholdings), the PRs must ensure that future instalments and any interest can be met before distributing assets that would otherwise provide that cash flow.

Key Term: instalment option property
Land, certain business interests, and qualifying shareholdings where IHT attributable to that property can be paid over 10 annual instalments; sale accelerates payment of outstanding instalments.

Where instalments are elected:

• the first instalment is due six months after the end of the month of death
• interest is charged on later instalments, except in certain business/agricultural property cases where interest runs only from each instalment’s due date
• if the property is sold, outstanding tax and interest become immediately due

PRs should avoid irreversible distributions until they have a clear plan for meeting instalments, or set aside reserves to cover future payments.

Capital Gains Tax (CGT)

CGT may arise on asset disposals during the administration period. PRs have an annual CGT exemption and should consider both timing and method of disposal. Appropriation can be used to transfer assets to beneficiaries before sale, allowing the beneficiary’s own CGT exemption to be used and rebasing the CGT position according to the beneficiary’s circumstances. Assent of land should be accompanied by appropriate tax analysis and insurance arrangements.

Income Tax

PRs are responsible for income tax on estate income arising during administration (e.g., rent, dividends, interest). Residuary beneficiaries may have income tax reporting consequences depending on the form of estate income distributions. PRs should not distribute residue until income tax liabilities are settled or adequate provision is made, with final estate accounts reflecting tax positions.

Worked Example 1.3

An estate includes a rental property producing income. The PRs pay all debts and taxes but have not yet completed the final income tax return for the administration period. Should they distribute the residue?

Answer:
PRs should not distribute the residue until all income tax liabilities are settled or provisioned. Distributing before this exposes PRs to personal liability if further tax becomes due.

Worked Example 1.4

An estate includes farmland subject to IHT instalments. The PRs propose to distribute cash and transfer the land to the residuary beneficiary six months after grant.

Answer:
Before distributing, the PRs must ensure instalments can be met. If the land is transferred before instalments are fully paid, they must either retain sufficient estate funds to meet the instalments and interest or ensure the beneficiary assumes liability and there are adequate protections for the PRs. A premature transfer without provision risks personal liability if future instalments are unpaid.

Risks of Early Distribution

If PRs pay legacies before all debts and taxes are paid, they risk personal liability. Creditors or HMRC can claim against PRs for unpaid sums, and PRs may have to recover money from beneficiaries—a process that can be difficult or impossible if the funds have been spent.

Other timing risks include:

• unknown creditors surfacing after distribution
• beneficiaries’ bankruptcy, triggering claims by trustees in bankruptcy
• family provision claims under the Inheritance (Provision for Family and Dependants) Act 1975 brought within six months of grant
• contingent liabilities materialising (e.g., personal guarantees or pending litigation)

Protection for PRs

PRs can protect themselves by:

• waiting until the executor’s year has expired and all liabilities are known or provided for
• advertising for creditors under the Trustee Act 1925, s.27
• retaining sufficient funds (reserves) to cover potential claims (including IHT instalments and tax reassessments)
• obtaining indemnities from beneficiaries (recognising limits if the beneficiary is insolvent)
• conducting bankruptcy-only searches against beneficiaries prior to distribution
• seeking court orders, including Benjamin orders where beneficiaries are missing

Key Term: Trustee Act notice
A statutory advertisement by PRs for unknown creditors in the London Gazette and appropriate local/trade newspapers, providing protection from personal liability if claims arise after distribution; PRs still remain liable to known but missing creditors unless additional steps are taken.

Key Term: Benjamin Order
A court order permitting PRs to distribute on the assumption (e.g., that a missing beneficiary has predeceased) after full enquiries, protecting PRs from personal liability if the assumption later proves wrong; the claimant retains a right to trace assets into beneficiaries’ hands.

Worked Example 1.5

PRs place s.27 notices in the London Gazette and a local paper, giving two months for claims. After the deadline they distribute. A previously unknown creditor later demands payment.

Answer:
PRs are protected against personal liability for claims of creditors of whom they had no actual knowledge at distribution if they advertised appropriately under s.27. The creditor may pursue the beneficiaries who received assets, but the PRs are not personally liable.

Worked Example 1.6

A known residuary beneficiary cannot be found despite extensive enquiries. Other beneficiaries want distribution.

Answer:
The PRs may seek a Benjamin order to distribute on the assumption the missing beneficiary predeceased, or consider reserving funds or obtaining indemnities and insurance. A Benjamin order gives the PRs full protection; indemnities and insurance reduce risk but may not provide complete protection.

Interest on Late Payment of Legacies

If a pecuniary legacy is not paid within the executor’s year, the beneficiary is entitled to interest from the end of that year until payment, unless the will provides otherwise. The will can set a different start date or rate, or postpone payment lawfully. PRs should calculate and pay interest fairly once the executor’s year has elapsed.

Worked Example 1.7

A will leaves £5,000 to David. The PRs pay the legacy 18 months after death. Is David entitled to interest?

Answer:
Yes. David is entitled to interest on the £5,000 from the end of the executor’s year (12 months after death) until the date of payment, unless the will specifies otherwise.

Partial Intestacy and Failed Gifts

If a will does not dispose of the whole estate, or if gifts fail (for example, due to ademption, lapse, or disclaimer), the undisposed assets pass under the intestacy rules. The PRs must ensure all debts and taxes are paid before distributing under intestacy. Timing may be affected because:

• a specific legacy subject to ademption will not delay payment to others if the item is no longer in the estate
• general pecuniary legacies abate proportionately if the retained fund is insufficient
• a demonstrative legacy remains payable from other funds if the identified fund is insufficient

PRs should take care to identify failed gifts early, adjust the estate accounts accordingly, and ensure that any shift of assets into residue or intestacy is reflected in tax calculations and timing.

Insolvent Estates

If the estate is insolvent (liabilities exceed assets), PRs must follow the statutory order for payment of debts and administer in alignment with insolvency rules. No legacies or residue can be distributed until creditors of higher priority are paid. PRs may need to consider disclaiming onerous property and should not appropriate or assent assets to beneficiaries in an insolvent administration.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• PRs must pay funeral, administration expenses, debts, and taxes before distributing legacies or residue.
• The statutory incidence of liabilities governs which classes of property are applied first; general legacies abate before specific legacies.
• The executor’s year gives PRs time to complete administration; pecuniary legacies not paid by then attract interest unless the will provides otherwise.
• PRs risk personal liability if they distribute assets too early; recoveries from beneficiaries may be difficult.
• Tax liabilities (IHT, CGT, income tax) must be considered and provisioned before distribution; IHT instalments require prudent reserves.
• PRs can protect themselves by advertising for creditors (Trustee Act s.27), retaining funds, conducting bankruptcy searches, and seeking Benjamin orders for missing beneficiaries.
• Appropriation and assent are practical tools for satisfying legacies and transferring title; timing affects CGT and income tax.
• Partial intestacy or failed gifts alter distribution timing but not the duty to settle liabilities first.
• In insolvent estates, creditors are paid in statutory priority and no legacies/residue are distributed.

Key Terms and Concepts

• solvent estate
• pecuniary legacy
• specific legacy
• demonstrative legacy
• executor’s year
• Trustee Act notice
• residuary estate
• appropriation
• assent
• Benjamin Order
• instalment option property