Inheritance - divvying up the estate of Mr Dog

John_Pierpoint

Back in the autumn of 2008 I became the executor of the late "Mr Dog", appointed by his partially intestate will:

http://forums.moneysavingexpert.com/showthread.html?p=27964855#post27964855

As his estate turned out to be about twice as large as anyone had expected, there was some InHeritance Tax (IHT) to pay. The will made some specific bequests and then listed sums to be given to each beneficiary, finally it said the residuary was to be distributed in the same unequal proportion as the list of financial legacies; but two of the beneficiaries has died in the meantime. As no instructions were given for this possibility, a chunk of the estate fell to be distributed by the laws of intestacy.
The will made almost no mention of tax (surprise surprise) payable to Alistair Darling, who got the first cut and was well up in the top ten of beneficiaries.
My initial thought was that I could take the tax off, then pay the specific monetary bequests, and the value of specific items in the will (actually only a sentimental value of zero GBP). Take off the debts (eg unpaid income tax) and expenses (eg funeral costs), then work out the proportion each beneficiary gets. Then see what is left of the valuation for IHT and later sales; then say to the people who asked for something of value in place of money (eg "you asked for the 500 GBP car and you asked for 700 GBP of antiques") that they had already received a proportion of what was left and here is the residue of the money in the same bequested and intestated proportion.

I now realise it is not quite that simple, even though the de facto free of tax bequests are in the nil rate band, they have created more tax to be paid by the rest of the beneficiaries. So I have to consider the gross value of the estate and apportion tax to the specific bequests of things by a process of iteration to establish the average rate of tax paid by the whole estate (I've been here before when an elderly aunt died leaving her, considerably run down & inflation devalued, nest egg :mad: to her favourite niece; while the rest of us got a more valuable share of the house:D, the last straw was that the way the will was structured meant that the nest egg had to pay its own share of the tax:eek: ). Tax don't you love it. :rolleyes:.

Here is my question:
Am I right in thinking there is a hierarchy for paying the debts and expenses but not the tax: All the debts & expenses before and after death come out of the intestate chunk of the estate and if this is not enough only then out of the residuary?, (and if that is still not enough only then off the specific bequests?)

John

lincroft1710

I think the hierarchy is IHT, any other taxes owed, money owed to energy/water suppliers, funeral expenses, any other creditors who have made themselves known to executors, named beneficiaries, distribution of any monies left. The debts of the deceased and their estate take precedence over bequests.

But if there is not enough money left to pay monetary bequests I am not certain if each beneficiary has to accept lower amount (more logical) or those at bottom of list get nothing.

dzug1

I'm not 100% convinced that there is an intestacy issue - I would have thought it just increased the residuary estate.

But ICBW. (I haven't reread the original thread - maybe it was answered authoritatively then?)

John_Pierpoint

Hi dzug,
That is what I thought BUT the effect of the intestacy rules were to leave money to the sisters of my deceased uncle,. however as they were both dead it then flowed to their children: me, my sister and my other two female cousins. So far so good but the other 6 beneficiaries are left looking on and wondering if that is fair (tuff it is the law)..

I am now proposing that the intestate part of the estate works as a sort of super residuary liable to pay the external creditors: Income tax man, crematorium, milk bill etc etc.

System

This article may clear it up. But as has been said, all debts be they tax, outstanding bills or whatever must be paid out of the estate before it is divvied up

John_Pierpoint

!!!!!! wrote: »

This article may clear it up. But as has been said, all debts be they tax, outstanding bills or whatever must be paid out of the estate before it is divvied up

I think this link is selling standard format wills?
So they very sensibly structure the will as follows:
If you leave a gift to a residuary beneficiary who dies before you, the gift will be re-directed by your Will as follows:

• To any children the beneficiary has, in equal shares
• etc.
• etc.
• Give it to charity
  

In the case of "uncle Dog's" will the intestacy rules do the same thing for his two dead sisters, so I don't have a problem there.

My only real problem is the suggestion that the intestate part is liable to pay all the debts and expenses (an appreciable 4 figure sum) rather than spreading this liability over all the assets of the residuary and intestacy.
Either outcome would make sense logically but only one can be right.

localhero

The way I would tackle this issue is as follows:

• Work out the gross value of the estate at the date of death.
• pay the debts (phone bill, income tax, funeral bill etc)
• deduct the value of the debts from the gross estate - leaving the net estate.

Assuming he had no interests in trusts or had made any gifts in the 7 years prior to death, deduct the nil rate band from the net estate and then deduct 40% from what's left over.

The first specific/pecuniary gifts that haven't failed (unless the will says otherwise) get their gifts free of IHT - ie they get exactly what the Will says.

Whatever is left over is divided between the residuary beneficiaries in the shares specified - including those that get the intestate parts. Remember IHT is levied on the estate, and unless we get into a grossing up scenario (ie the specific and pecuniary gifts exceed the nil rate band) the calculation should be relatively straightforward.

System

The intestate part can't be the only part liable for the debts as the debts must be paid BEFORE any part of the will is actioned. Then the specific legacies are actioned followed by the residuary (including intestate) if anything is left


P.S. Apologies but it wasn't intended to be a link to a will service, I just thought that it explained things quite well.

localhero

!!!!!! wrote:

P.S. Apologies but it wasn't intended to be a link to a will service, I just thought that it explained things quite well.

Unfortunately it was inaccurate so far as explaining what happens in an intestacy. It is of course the job of the `professional` drafting the will to avoid intestacies happening in the first place.

Willman_Rodders

John,

John_Pierpoint wrote: »

The will made some specific bequests and then listed sums to be given to each beneficiary, finally it said the residuary was to be distributed in the same unequal proportion as the list of financial legacies; but two of the beneficiaries has died in the meantime. As no instructions were given for this possibility, a chunk of the estate fell to be distributed by the laws of intestacy.

Can you clarify the wording of the residue clause? The reason I ask is I am just wondering if the residue should be distributed in proportion to those beneficiaries who have not died.

An example might explain it better: Lets suppose there are 5 beneficiaries A,B,C,D and E. A and B are each to receive £2,000, while C,D & E are each to receive £1,000.

B and E both die before the testator. Their gifts lapse by virtue of the beneficiary's prior death; the failed gift thus forms part of the residue of the testator's estate.

A, C & D do inherit, £2,000, £1,000 and £1,000 respectively. It is possible that the residue clause is worded in such a way that the whole of the residue of the estate could be then distributed with 50% going to A, 25% to C and 25% to D.

John_Pierpoint

3.
I BEQUEATH the following pecuniary legacies free of all tax payable by reason of my death:
To my sister A aaaaaaa of yyyyyyyy the sum of TEN THOUSAND POUNDS
To my sister B bbbbbbbb of mmmmmm the sum of TEN THOUSAND POUNDS
To my nephew C ccccccc the sum of TWELVE THOUSAND POUNDS.
To my niece D dddddddd the sum of FOUR THOUSAND POUNDS
To my niece E eeeeeeeee the sum of FOUR THOUSAND POUNDS
To F ffffffffffth the sum of FOUR THOUSAND POUNDS
To G ggggggg the sum of FOUR THOUSAND POUNDS
To H hhhhhhh the sum of FOUR THOUSAND POUNDS
To I iiiiiiiiiiiiii the sum of FOUR THOUSAND POUNDS
To J jjjjjjjjjjj the sum of FOUR THOUSAND POUNDS
To K kkkkk the sum of FOUR THOUSAND POUNDS
To L lllllllllllll the sum of FOUR THOUSAND POUNDS

4.
SUBJECT to the payment if my funeral testamentary expenses debts and foregoing legacies bequeathed by this my will I BEQUEATH all the rest residue and remainder of my Estate (hereinafter called "my Residuary Estate") unto my Executor UPON TRUST that he shall divide the same among all the legatees mentioned in clause 3 of this my Will fractionally according to the value of each legacy bequeathed by the appropriate sub-clause thereof.

IN WITNESS ....................

( A & B died before the testator)