Probate series – part 2: potential issues for executors

By William Moore and Sam Baring

In the second instalment of our probate series, we consider potential issues for executors once they embark on the estate administration process.

The role of the executor is to carry out the terms of the Will, including acting in the best interests of the beneficiaries and avoiding a conflict of interest.

However, a lot can go wrong during this process and it is important that an executor takes the necessary steps to protect themselves, and the estate, from the potential consequences – which can range from significant personal liability to lengthy and costly estate litigation.

Executors failing to protect themselves from personal liability

Executors need to ensure they carry out their duties in accordance with the law. While there are many reasons an executor may be personally liable for a deceased estate, we have set out two common examples we see.

Possible claims against the estate

An eligible person (such as a spouse or child) who believes they did not receive adequate provision for their proper maintenance and support under a Will can make a claim for further provision. Any claim must be made within six months of probate being granted.

Although an executor may think they are doing the right thing when distributing the estate as soon as possible to the beneficiaries (and often have pressure to do so), we see many cases where an estranged child or potential de facto partner unexpectedly makes a claim.

If an executor distributes all of the estate before the six month period expires, and a claim for further provision is made, an executor may be personally liable. Therefore, we always recommend to executors that if there are any concerns about a claim, it is best to wait until the six-month period ends.

Liabilities of the deceased

An executor ‘inherits’ certain liabilities of the deceased. The most common liability an executor inherits is the deceased’s outstanding debts – whether this be gambling debts, outstanding tax liabilities, loan amounts owing to the bank, or outstanding rent. Executors are personally liable for these debts, noting that they are limited to the value of the estate assets and the executor will not be liable beyond the value of the estate and its ability to meet these expenses.

Recent cases have shown us the importance of making sure an executor discharges these debts appropriately. For example, the recent English case Harris v HMRC^[1] saw an administrator of an estate, Mr Harris, personally liable to pay the British tax authorities £341,278 (approximately $600,000).

He had agreed with the sole beneficiary of the estate (the deceased brother, Mr Harewood), that he would distribute the estate to him on the basis that he would pay any outstanding liabilities of the estate – including the inheritance tax liability of £341,278. After receiving his inheritance, Mr Harewood went to Barbados and ceased all contact with Mr Harris, leaving Mr Harris personally liable for the £341,278.

The Court rejected any argument that Mr Harewood was responsible to pay this money back, as it was Mr Harris’ responsibility, as executor, to pay the liability from the estate. In this case, Mr Harris would have avoided this issue if he has set aside the inheritance tax liability in the estate and distributed the balance to Mr Harewood.

Another more common example is debts that come to an executor’s attention after the estate has been administered. Without taking the necessary steps, an executor will again be personally liable for these debts.

In Victoria, we strongly recommend advertising a creditors’ notice in the Herald Sun and the Government Gazette. Anyone who believes they were owed a debt by the deceased will then have sixty days from the date of advertisement to contact the executor regarding that debt. If the executor is not notified within this period of any debts, they are protected from personal liability when distributing the estate if someone later makes a claim that they are owed debts.

Distributing the estate in a tax effective manner

Many executors assume that the best way to administer an estate is to sell all of the assets and distribute the proceeds to the beneficiaries. However, it is important to realise that by doing so, the executor may not be maximising the value of the estate. There are a number of tax concessions that can be achieved depending on how the executor deals with the estate assets. For example:

• if real property is distributed to a beneficiary in accordance with the terms of the Will, there is the ability to apply for an exemption from duty with the State Revenue Office. This could save the estate a significant amount of money; and
• certain assets like shares and real property are generally subject to capital gains tax on the disposal of those assets. However, when those assets are transferred in accordance with the terms of a Will, the capital gain can be ‘rolled over’ (deferred) until another capital gains tax event happens (ie until the beneficiary subsequently disposes of that asset). This can save the estate from significant tax liability.

In other cases, if assets are going to be sold, it may be beneficial to sell the assets in the estate, and even spread the sale over a number of years while the estate is being administered (given the estate has a separate tax profile).

Further, the executor is also required to finalise any tax returns for the deceased, as well as for the estate (if required). The best approach is to seek advice once the assets and liabilities have been determined to ensure any tax liabilities are dealt with before the estate is distributed.

Communications with the beneficiaries

All beneficiaries should be identified and advised of their entitlements under the Will from an early stage in the administration process.

Issues can arise where beneficiaries’ expectations regarding the payment of entitlements are not realistic and they expect immediate payment of their entitlements under the Will.

In most cases, payments of entitlements will not occur until six to 12 months from death. Keeping the beneficiaries informed regarding when they can realistically expect a payment can avoid many issues.

Hall & Wilcox assists clients with estate administration every day. If a client or someone you know needs assistance with the estate administration process, the Private Clients Team at Hall & Wilcox can assist with any questions.

[1] [2018] UKFTT 0204 (TCC)