Administration of estates - Timing for distribution of legacies

Learning Outcomes

After reading this article, you will be able to identify when personal representatives (PRs) may lawfully distribute legacies during estate administration, explain the statutory order of payments, and apply the main tax and practical considerations affecting the timing of distributions. You will also understand the risks of early distribution and the consequences for PRs and beneficiaries.

SQE1 Syllabus

For SQE1, you are required to understand the legal and practical rules governing the timing of legacy distributions in estate administration. In your revision, focus on:

• the statutory order for payment of debts, legacies, and residue
• the duties and potential liabilities of personal representatives when distributing legacies
• the impact of inheritance tax, capital gains tax, and income tax on the timing of distributions
• the risks of early distribution and the protections available to PRs
• the effect of partial intestacy or failed gifts on distribution timing

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 key aspect of estate administration. Personal representatives (PRs) must follow statutory rules and exercise caution to avoid personal liability. The law sets out a strict order for paying debts, legacies, and residue, and imposes duties on PRs to ensure all liabilities are settled before distributing assets to beneficiaries. Tax considerations and practical risks also affect when legacies can be paid.

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.

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

The usual order is:

1. Funeral, testamentary, and administration expenses
2. Debts and liabilities (including taxes)
3. Pecuniary legacies (unless charged on specific assets)
4. Specific and demonstrative legacies
5. 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 to be paid from a specified fund or asset.

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. This is because PRs are personally liable if they distribute assets and later discover unpaid debts or tax.

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. However, this is not a strict deadline, and PRs are not obliged to distribute before the year has expired.

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.

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.

Payment of Specific and Demonstrative Legacies

Specific and demonstrative legacies may be transferred once the PRs are satisfied that the estate is solvent and the asset is not needed to pay debts or taxes.

Payment of Residue

The residuary estate is distributed last, after all other payments have been made.

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.

Tax Considerations Affecting Timing

Inheritance Tax (IHT)

IHT must be paid before a grant of representation is issued. PRs should not distribute legacies until HMRC has confirmed IHT is paid or provisioned. If IHT is payable by instalments (e.g., on land or business assets), PRs must ensure future instalments can be paid before distributing.

Capital Gains Tax (CGT)

PRs may have to sell assets to pay debts or legacies. If assets are sold within the administration period, CGT may be due. PRs should consider the timing of sales and distributions to minimise tax exposure.

Income Tax

PRs are responsible for income tax on estate income during administration. Distributions to beneficiaries may have income tax consequences, especially for residuary beneficiaries.

Worked Example 1.2

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.

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.

Protection for PRs

PRs can protect themselves by:

• Waiting until the executor’s year has expired and all liabilities are known
• Advertising for creditors under the Trustee Act 1925, s.27
• Retaining sufficient funds to cover potential claims
• Obtaining indemnities from beneficiaries (though these may not be effective if the beneficiary is insolvent)

Key Term: Trustee Act notice A statutory advertisement by PRs for unknown creditors, providing protection from personal liability if claims arise after distribution.

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.

Worked Example 1.3

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.

Partial Intestacy and Failed Gifts

If a will does not dispose of the whole estate, or if gifts fail (e.g., due to lapse or disclaimer), the undisposed assets are distributed according to the intestacy rules. PRs must ensure all debts and taxes are paid before distributing under intestacy.

Insolvent Estates

If the estate is insolvent (liabilities exceed assets), PRs must follow the statutory order for payment of debts. No legacies or residue can be distributed until all creditors of higher priority are paid in full.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• PRs must pay debts, expenses, and taxes before distributing legacies or residue.
• Pecuniary legacies should not be paid until all liabilities are settled or provisioned.
• The executor’s year gives PRs time to complete administration before beneficiaries can demand payment.
• PRs risk personal liability if they distribute assets too early.
• Beneficiaries may be entitled to interest on pecuniary legacies paid late.
• Tax liabilities (IHT, CGT, income tax) must be considered before distribution.
• PRs can protect themselves by advertising for creditors and retaining funds.
• Partial intestacy or failed gifts must be distributed only after liabilities are paid.
• In insolvent estates, the statutory order for payment of debts must be followed.

Key Terms and Concepts

• solvent estate
• pecuniary legacy
• specific legacy
• demonstrative legacy
• executor’s year
• Trustee Act notice