Administration of estates - Finalizing the estate accounts

Learning Outcomes

This article outlines the finalization of estate accounts by personal representatives, including:

• Duties and standards governing personal representatives (PRs) at finalization, including the statutory duty of reasonable care and skill and avoidance of devastavit
• Order of liability for debts and expenses in solvent estates and priority between creditors in insolvent estates, and application of s34(3) and s35 Administration of Estates Act 1925
• Abatement of legacies, the doctrine of marshalling, and accounting for assets bearing secured debts or directed to be given “free of mortgage”
• Preparation of comprehensive estate accounts (income, capital, distribution), application of the estate rate for tax apportionment, and corrective accounting for HMRC when initial inheritance tax is inaccurate
• Beneficiary communication and transparency, approvals and discharges (including where minors or protected parties are involved), and court directions where needed
• Protective measures for PRs, including statutory creditor notices and timing of distribution relative to potential family provision claims

SQE1 Syllabus

For SQE1, you are required to understand the finalization of estate accounts within the administration of estates, with a focus on the following syllabus points:

• PRs’ standards of care and skill (Trustee Act 2000 s1), fiduciary duties, and liability for devastavit.
• Solvent estates: application of assets to debts and expenses under AEA 1925 s34(3) and Part II of Schedule 1; secured debts under s35.
• Insolvent estates: priority between creditors (funeral/administration expenses, preferred debts, ordinary debts, interest, deferred debts) and the effect of security.
• Abatement of legacies, marshalling between beneficiaries, and their impact on final figures.
• Preparation and approval of estate accounts; income/capital/distribution accounts; the estate rate and apportionment issues.
• HMRC inheritance tax procedures, corrective accounts, and interaction with the grant and funding tax before distribution.
• Beneficiary communication, approvals where minors or protected parties are involved, and court directions where necessary.
• Protective steps: statutory creditor notices and the six‑month period for claims under the Inheritance (Provision for Family and Dependants) Act 1975.
• Final distribution, assents of land, appropriations in satisfaction of shares, and obtaining discharges.

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 paying debts and liabilities before distributing an estate?
2. What are the key duties of personal representatives when preparing final estate accounts?
3. Who must approve the estate accounts before the final distribution to beneficiaries?
4. What are the potential consequences for PRs who distribute assets before all debts and taxes are settled?

Introduction

Finalizing estate accounts is the last major step in the administration of an estate. Personal representatives (PRs) must ensure that all assets have been collected, debts and taxes paid, and the remaining estate is distributed to the correct beneficiaries. This process is governed by statutory duties, fiduciary obligations, and best practice requirements for transparency and accuracy. PRs are expected to administer and distribute efficiently (the “executor’s year” is the common expectation), while meeting the duty of reasonable care and skill under Trustee Act 2000 s1, including any higher standard reasonably expected of professional PRs.

PRs should also understand which property passes outside the estate (for example, assets held by survivorship or life insurance written into trust) and does not vest in the PRs. That distinction informs both accounting and distribution, although information on such items is often recorded for context and tax purposes.

Key Term: personal representative (PR)
A person appointed to administer a deceased’s estate, either as an executor (named in the will) or as an administrator (appointed under intestacy rules).

Duties of Personal Representatives in Finalizing Estate Accounts

PRs are legally responsible for the proper administration of the estate. Their main duties at the finalization stage include:

• Collecting and realizing all estate assets and preserving value pending distribution, using trustee‑style investment and management powers, and exercising reasonable care and skill.
• Settling all debts, funeral and administration expenses, and taxes in the correct order; distinguishing between orders in solvent and insolvent estates, and ensuring secured debts are addressed appropriately.
• Preparing a clear and accurate set of estate accounts capturing capital and income movements, taxes paid or reserved, and the basis of the final distribution.
• Communicating with beneficiaries and obtaining their approval before final distribution; where beneficiaries are minors or lack capacity, ensuring lawful approval via a parent/guardian, deputy, attorney, or court if needed.
• Taking protective steps, such as publishing statutory creditor notices and managing timing of distribution to mitigate exposure to later claims.

Key Term: administration expenses
Costs incurred in collecting, managing, and distributing the estate, including legal fees, valuation costs, and PRs’ reasonable expenses.

PRs should avoid “devastavit” (waste or maladministration causing loss) and may seek court relief from liability if they acted honestly and reasonably and ought fairly to be excused, but they should not rely on this where prudent steps were available.

Statutory Order for Payment of Debts and Liabilities

PRs must pay debts and liabilities in a strict statutory order before distributing assets. The correct order is:

1. Funeral expenses (if reasonable)
2. Testamentary and administration expenses (including legal and valuation fees)
3. Secured debts (e.g., mortgages)
4. Unsecured debts (e.g., credit cards, personal loans)
5. Legacies and distributions to beneficiaries

This list reflects the rank between creditors and outcomes of insolvency principles. In a solvent estate, an additional statutory structure governs which assets are applied to meet liabilities: under AEA 1925 s34(3) and Part II of Schedule 1, assets are applied in a prescribed order as between the estate components and beneficiaries (for example, undisposed property, residuary personalty, residuary realty, property charged with debts, and specifically devised/bequeathed property, rateably by value). Understanding both frameworks prevents misapplication and subsequent beneficiary disputes.

Key Term: abatement
The reduction of legacies when the estate is insufficient to pay all legacies in full after debts, expenses, and taxes. Specific legacies are generally satisfied first; general legacies abate proportionately; demonstrative legacies are treated as specific to the extent the named fund suffices and otherwise as general.

Key Term: marshalling
A doctrine that may compensate a “disappointed” beneficiary when a legacy has been used to pay a debt in circumstances where, as between beneficiaries, that legacy should not have borne the burden. Compensation is usually drawn from residue.

In relation to secured debts, AEA 1925 s35 provides that property specifically given is taken subject to any mortgage or charge unless the will contains a contrary intention (e.g., a gift “free of mortgage”). If a gift is “free of mortgage”, the secured debt is discharged from residue (affecting residuary beneficiaries), and accounts should show the adjustment.

Preparing and Approving Estate Accounts

Before making the final distribution, PRs must prepare a full set of estate accounts. These accounts should include:

• A summary of all assets and their values at the date of death, identifying which pass under the grant and which pass outside the estate, and noting any secured charges.
• Details of all income received during administration (e.g., dividends, rent, bank interest), including apportionment issues and any Allhusen‑style adjustments where residue is left to persons in succession.
• A record of all debts, administration expenses, and taxes paid, including the treatment of secured debts and any reserve for outstanding liabilities.
• The calculation of the final balance available for distribution, showing abatement (if applicable), and any marshalling or adjustments following contrary will directions.
• A schedule showing each beneficiary’s entitlement, any appropriations in satisfaction of shares, and assents of land.

Where inheritance tax was misestimated or values change, PRs should file a corrective account with HMRC, adjust the tax position, and reflect this in the estate accounts. If part of the estate comprised trust property taxed on death (e.g., an immediate post‑death interest), PRs must co‑ordinate with trustees and apply the estate rate to apportion tax across components, reflecting liability and burden appropriately.

Key Term: estate accounts
The formal record of all receipts, payments, and distributions made during the administration of an estate, typically comprising income, capital, and distribution accounts with explanatory commentary.

Key Term: estate rate
The average rate of tax across the taxable estate used to apportion the inheritance tax burden proportionately between assets or components when required (e.g., where tax is payable in instalments for land or borne by different parties).

Beneficiaries are entitled to inspect the accounts and may request clarification or supporting documents. PRs should not make the final distribution until the accounts have been approved by all adult beneficiaries whose entitlements are affected.

Communication and Transparency with Beneficiaries

PRs must keep beneficiaries informed throughout the administration. Before finalizing the accounts, PRs should:

• Provide beneficiaries with draft estate accounts for review, including explanations of abatement, marshalling, secured debt treatment, and appropriations.
• Answer any reasonable queries or requests for clarification and supply supporting valuations or calculations.
• Obtain written approval (or at least no objection) from all adult beneficiaries. Where a beneficiary is a minor or lacks capacity, secure approval from an appropriate adult (parent/guardian), deputy, or attorney, and take court directions if in doubt.

Key Term: discharge
A formal release given by a beneficiary to PRs, confirming receipt of their share and releasing the PRs from further liability, often combined with an indemnity against later claims.

Worked Example 1.1

The estate of Mr. Patel includes a house, investments, and several bank accounts. After collecting the assets, the PRs pay the funeral bill, legal fees, and a mortgage secured on the house. There are also several credit card debts. Before distributing the residue, the PRs prepare estate accounts and send them to the two adult children (the beneficiaries) for approval. One child queries the valuation of the house. The PRs provide the valuation report and clarify the calculation. Both children approve the accounts, and the PRs distribute the balance equally.

Answer:
The PRs have complied with their duties by paying debts in the correct order, preparing transparent accounts, and obtaining beneficiary approval before distribution.

Dealing with Common Challenges

Insolvent Estates

If the estate is insolvent (liabilities exceed assets), PRs must not distribute any assets to beneficiaries until all creditors have been paid in accordance with insolvency rules. Secured creditors enjoy priority to the value of their security. The main unsecured order is:

• Reasonable funeral and administration expenses
• Preferred debts (e.g., certain employee wages within limits)
• Ordinary debts (including sums due to HMRC)
• Interest on preferred and ordinary debts
• Deferred debts (e.g., loans from the deceased’s spouse)

Each creditor shares rateably within its category. Failure to follow this order may result in personal liability for PRs if preference or misapplication occurs.

Key Term: insolvent estate
An estate where assets are insufficient to pay all expenses, debts, and liabilities in full; beneficiaries will receive nothing and creditors are paid by statutory priority, with secured creditors satisfied from their security.

Disputes and Unapproved Accounts

If a beneficiary refuses to approve the accounts or disputes a calculation, PRs should attempt to resolve the issue through clarification, sharing valuations and legal analysis of the order of application and abatement. If agreement cannot be reached, PRs may apply to the court for directions or approval of the accounts. Orders approving accounts or particular steps (including contentious sales or appropriations) protect PRs from later criticism where they acted prudently and transparently.

Missing Creditors or Beneficiaries; Protective Steps

PRs are personally liable to unpaid creditors or beneficiaries unless they adopt protection measures. Best practice includes:

• Placing statutory notices to creditors in the London Gazette and a local newspaper (and any other appropriate publication) inviting claims. This supports protection under Trustee Act creditor‑notice procedures by limiting PR exposure to unknown claims that arise later.
• Where a known beneficiary cannot be found, considering payment into court, a court order permitting distribution, indemnities from beneficiaries who do receive distribution, and/or missing beneficiary insurance.
• Managing timing of distribution relative to potential claims under the Inheritance (Provision for Family and Dependants) Act 1975. PRs should wait six months from the grant (or retain sufficient reserves) to protect against family provision awards made after early distribution.

Worked Example 1.2

A beneficiary refuses to approve the estate accounts, alleging that the PRs have undervalued a painting. The PRs provide an independent valuation and offer to obtain a second opinion. The beneficiary still objects. The PRs apply to the court for approval of the accounts. The court reviews the evidence and approves the accounts, allowing the PRs to proceed with distribution.

Answer:
PRs acted correctly by seeking court approval when a dispute could not be resolved, protecting themselves from future claims.

Worked Example 1.3

A will leaves “my home free of mortgage” to A and residue to B. At death the property is subject to a £100,000 mortgage. The estate includes £150,000 of other assets; administration expenses total £10,000. How should the PRs account and distribute?

Answer:
The house passes to A “free of mortgage”, so the mortgage is discharged from residue rather than borne by A’s gift. The PRs first pay funeral and administration expenses. The remaining liquid assets must cover the £100,000 mortgage; any shortfall affects B’s residuary share, not A’s gift. Estate accounts should show the secured debt paid from residue and the reduction in B’s entitlement. If marshalling is engaged due to the order of asset application, any necessary compensatory adjustment is made from the residue.

Worked Example 1.4

The will contains a specific legacy of “£5,000 cash in my bedroom safe” to X and a general legacy of £5,000 to Y. After paying debts and administration costs, only £8,000 remains in the estate. How do the legacies abate?

Answer:
Specific legacies are generally satisfied first where the specific property exists, and general legacies abate proportionately thereafter. Here, X receives the £5,000 cash if present; the remaining £3,000 is paid to Y, reflecting abatement of the general legacy.

Final Distribution and Discharge

Once the accounts are approved, PRs may distribute the estate in accordance with the will or intestacy rules. It is best practice to obtain a written receipt or discharge from each beneficiary, confirming that they have received their entitlement and have no further claims against the PRs.

Where distribution involves transferring assets rather than cash, PRs should document appropriations and assents properly.

Key Term: appropriation
Allocation of a specific asset to a beneficiary in satisfaction of their share or legacy. Appropriation must be consistent with the will or intestacy rules and recorded in the accounts.

Key Term: assent
The instrument or act by which PRs transfer estate property (particularly land) to a beneficiary. An assent of land must be in writing, signed by the PRs, and names the person in whose favour it is given; it relates back to the date of death.

PRs should confirm whether any post‑death changes (e.g., disclaimers, valid variations within two years for tax purposes) affect entitlements before finalizing accounts. Where land is involved, complete and record assents to ensure title vests correctly. If tax on land is payable by instalments, accounts should note the instalment plan and apply the estate rate appropriately.

Key Point Checklist

This article has covered the following key knowledge points:

• PRs’ duties and standards at finalization, including the duty of reasonable care and skill, transparency, and avoidance of devastavit.
• The distinction between the order of liability among creditors (including secured creditors) and the statutory order of applying estate assets in solvent estates.
• Treatment of secured debts (s35 AEA 1925) and gifts “free of mortgage”.
• Abatement of legacies, marshalling between beneficiaries, and how to reflect them accurately in accounts.
• Preparation of income, capital, and distribution accounts, use of the estate rate, and corrective accounting for HMRC.
• Beneficiary engagement, approvals, and discharges; approvals via guardians/deputies/attorneys where needed; court directions where disputes persist.
• Insolvent estates: creditor priorities, secured creditor treatment, and prohibition on beneficiary distributions.
• Protective measures, including statutory creditor notices and prudent timing of distribution relative to potential family provision claims.
• Final steps: documenting appropriations and assents, securing written discharges, and closing the administration.

Key Terms and Concepts

• personal representative (PR)
• administration expenses
• estate accounts
• discharge
• abatement
• marshalling
• appropriation
• assent
• estate rate
• insolvent estate