Executorship
Probate is obtained by the personal representatives of the person who has died. These are either the “Executors”, appointed in the Will, or the family members of the deceased if there is no Will. We will refer to them as Executors from now on as the same rules apply to both.
Many people appoint their children as their Executors. Being Executor can be a stressful, time-consuming and thankless job that carries substantial legal and financial responsibility which frequently makes them unpopular with the beneficiaries. This can cause family dissension where family members are the Executors. It can also cause great distress, and sometimes catastrophic financial consequences, to those family members expected to perform the task. We always advise our clients to have a professional executor.
Before Probate can be obtained, the Executors must work out how much Inheritance Tax is due, pay this, and receive acknowledgement from HM Revenue & Customs (HMRC) that it has been paid.
After they have obtained Probate, the Executors have to distribute the Estate in accordance with the wishes of the deceased (or in accordance with the Rules of Intestacy if there is not a valid Will).
It is the responsibility of the Executors to determine exactly what the assets and liabilities of the Estate are, who exactly are the beneficiaries, and exactly how much each beneficiary should receive. This is generally a complex and onerous task even in the most modest estates.
Firstly, determining the assets and liabilities of the deceased is not as simple as it might sound. Sometimes it can be very difficult to account for all the assets, and this may take a lot of work and skill. There may also be hidden creditors who do not come to light until late in the day, or even known creditors who are actually owed something very different from what the Executors initially believe. This can particularly be the case with the Inheritance Tax debt.
If it turns out that the Estate is insolvent (in other words, the liabilities are greater than the assets), the Executors are responsible for ensuring the debts are settled in the correct order, so that all the priority debts are paid before non-priority debts, and that any remaining debtors are paid the right percentages of their debts.
The Executors have to work out exactly what taxes have to be paid, not just the Inheritance Tax, but also Income Tax and Capital Gains Tax. The latter taxes will probably continue to increase while the Executors are doing their work, as it is not just the tax liabilities of the deceased that are concerned here, but also the taxes that arise from income and gains in the estate after the death.
Determining who the beneficiaries are can also be more complex than it sounds. The Will may not be as clear on this as it first appears. Or it may mention a beneficiary quite clearly but the Executors have no idea who this is or how to contact them. Adding to this complication, there may be people who are not named in the Will but who believe they have a legal right to some of the Estate. Usually the wishes of the deceased as stated in the Will take priority, but there are some instances where this is not necessarily the case.
It is also the responsibility of the Executors to protect the assets of the Estate. This includes ensuring everything is properly secured, as well as fully insured.
If the Executors get any of this wrong they can be held personally liable even if they acted in good faith.
In one real case an Executor made a mistake in the estate planning calculations before distributing the estate. He thought he had paid the correct amount of Inheritance Tax, but had not. He paid HM Revenue & Customs (HMRC) £1.15 Million and then, believing he had settled the Inheritance Tax bill in full he distributed the remaining estate to the Beneficiaries.
A year later HMRC contacted him and asked him to pay the “next” £1.15 million. He realised to his horror that the Inheritance Tax bill was not £1.15 million, but £11.5 million to be paid in 10 annual instalments.
At first the Executor contacted all the Beneficiaries, explained the error, and asked them to refund some of the money he had distributed to them. They refused.
He then explained to HMRC what had happened, and told them there was no money left in the Estate and therefore he could not make the payment this year or the following 8 years.
The response from HMRC was that this was not their problem. He was the Executor and was legally responsible for paying the full remaining debt of £10.35 million plus interest over the next 8 years.
That Executor did not have the millions required, so he lost all his money and other assets and went bankrupt.
We meet people all the time who wish they had never taken on the responsibility of being an Executor for a deceased friend or relative. It is a thankless and stressful task that should be delegated to a professional and experienced Executor who can “untangle” the estate and distribute it to the correct beneficiaries quicker and more efficiently than an amateur but well-meaning friend or relative. A good Executor can work for a pre-agreed fixed fee and will often save the family far more than that fee simply from the way they handle the estate.