Am I right - or the solicitor...

DippySkippy

Odd situation which seems a no brainer to me:

Estate has large IHT bill to pay (£300k) and not enough time so to avoid late payment penalties (ouch!) the strategy is to pay the IHT before probate using the Direct Payment Scheme from liquid assets. IHT will be an estimate using the information currently available. Not worried about overpayment as can reclaim and it even earns interest. So have got all the account details and am proposing to pay the IHT from those paying least interest. Unfortunately there are 2 executors and the other executor X is refusing to pay from the identified account.

Their rationale is that the Will sets up a life interest trust for X using “…an amount equal to the proceeds of sale of the last Dwelling…”  and they think because the sale proceeds (3 yrs ago) were paid into account 'House' then this account should somehow be ringfenced and not used for the IHT payment. She also claims that her solicitor has given her this advice. (The solicitor is personally engaged by her and not for estate admin).

My understanding is that estate assets are in effect pooled (typically into a solicitor or executor account) and disbursed after probate. There is no concept of a specific account 'reserved' for a specific purpose unless specifically nominated in the Will?

It seems pretty obvious to me - so I cant understand why the solicitor would advise her so? Am I being stupid?

Thanks

Savvy_Sue

I don't think you're being stupid, but IANAL. You could try one more time: Dear X, I understand that the will states that you are to receive an amount equal to the proceeds of sale of the last Dwelling, and I am perfectly content that this will happen. I know that these proceeds of sale were paid into the account 'House', but I do not understand why it matters if money is taken from that account to pay the IHT bill. You will still receive your full entitlement, because we have sufficient assets in Account(s) 'Not House' to ensure that this happens. 

HOWEVER, I'm just wondering if the interest situation matters that much: I think we found that accounts stopped paying interest on death, so possibly there's an aberration if that hasn't happened for you - but this is a few years ago. 

mattojgb

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem6045#:~:

doodling

Hi,

mattojgb said:

https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem6045#:~:

I don't think that helps as it appears that the executors / trustees cannot agree whether the trust has come into being, it appears that one believes it has whilst the other doesn't.

My view is that the trust doesn't yet exist, that the estate is still being administered and the monies for the trust have yet to be apportionned.

It appears from the what the OP wrote which might be a quote from the will ("a sum of money equal to ...") that the will didn't intend that particular account to consitiute the assets of the trust which also points to the trust not yet existing.

Ultimately, it doesn't matter who is right or wrong as the OPs actions are limited to whatever they can agree with the other exexutor.

DippySkippy

Useful thanks 
Difference in interest earned likely to be circa £12k pa and this contentious process could drag on for years. The various accts do carry on paying interest and ISA status is kept for 3yrs

The ref was useful - though I'd like to know what is definition of 'specific legacy'. I am guessing that would be something like: my shares in X, my coin collection or bank account Y. In this case the trust property is net value of proceeds from sale of dwelling (net of tax). I don't see how this can be disbursed to trust account until after estate is settled and probate granted

mattojgb

I don't think it is obvious one way or the other. Arguable that the trust began once the proceeds of sale were received. The trust is not of the residuary type where the total funds available for the trust are not known until the estate is finalized.

DippySkippy

I think it hangs on definition of specific legacy. The will Trust was life interest in dwelling with a clause that if already sold (it was) then trust would be net proceeds of sale.  As it happens the proceeds were paid into 2 accounts - no idea if any moved since. Since notifying the bank they (without asking) consolidated accounts anyway. I can't see how this is a specific legacy - and if so would that mean the trust amount should include capital/interest since house sale - seems mad.

DippySkippy

mattojgb said:

I don't think it is obvious one way or the other. Arguable that the trust began once the proceeds of sale were received. The trust is not of the residuary type where the total funds available for the trust are not known until the estate is finalized.

Thanks - the house was sold 3yrs before death - there was no trust established at that point.
Also - fees and tax could eat up so much that there is less than house sale proceeds left

Grumpy_chap

IANAL but in considering this, all money is fungible.

There is an Estate with some liquid assets arising from the sale or a prior house sale.  That is designated to go to Beneficiary 1.  The funds are currently in an interest bearing account.

There are illiquid assets in the Estate which cannot be realised until probate.

There is an IHT tax due.  That needs paying before probate.  If it is not paid there are penalties and interest accruing.

The Executors have some options:

• Not pay the IHT and suffer the penalties and interest (will reduce the eventual value of the Estate to distribute)
• Pay from their own funds and recover the debt from the Estate prior to distributing the Estate.
• Pay from the available liquid assets in the Estate and then replenish this designated fund from the illiquid assets once value is released.
• Any other options???

Lost interest on the liquid assets might be moot if the alternative is to diminish the Estate value through IHT penalties and interest.

It may be worth reviewing the specific wording of the Will.  It seems the Beneficiary of the account arising from the sale of the house thinks that account is ringfenced and has no portion of the IHT attached and also thinks the interest accrued in that account goes with the "sale of the house".
The OP has said that the Beneficiary 1 inherits  “…an amount equal to the proceeds of sale of the last Dwelling…” - that is not the same as saying "the value of the house plus any interest accrued since sale".  The interest over the past three years might be part of the Residual Estate.
I would also consider that the total IHT liability results and should be applied equally to all assets of the Estate, so every part of the Estate is reduced by the proportion that the IHT is of the total Estate value.  Does the Will give any guidance in this regard?

If the Executors cannot agree, and given this must be an Estate of reasonable size given the £300k IHT liability, it may be worth the Estate engaging a Solicitor to advise on specific points.
If there remains ongoing contention, then both Executors could relinquish and appoint a Solicitor to fulfil the role of Executor.

DippySkippy

Yep - won't die in a ditch over which account to pay IHt as penalty far exceeds a bit of interest

Will states Trust is net of tax - so I believe fixed amount that is net proceeds at time of sale and iht etc paid from rest of estate

Grumpy_chap

DippySkippy said:

Their rationale is that the Will sets up a life interest trust for X using “…an amount equal to the proceeds of sale of the last Dwelling…”  

DippySkippy said:

Will states Trust is net of tax - so I believe fixed amount that is net proceeds at time of sale and iht etc paid from rest of estate

IANAL, but I think the opposite.

The amount of money arising from the sale of the house (but not, necessarily or obviously, any interest those funds accrued between sale and death).  That value at death may be (is) subject to taxes and the net amount after the taxes are paid go to form the life interest trust.

I have two comparisons that give a reason why this would have to be so:

1. - At the extreme, by the time of death it was possible that the only funds remaining were the sale proceeds from the house.  If there was then an IHT liability, that IHT liability would have to be settled from those funds and the amount remaining "net of tax" is what creates the trust.

2. - When I get advised a salary, I am advised the gross salary, say £25k.  Income tax and NI are then deducted.  Whatever is left is paid to be "net of taxes"  (net pay vs gross pay).  An employee does not receive £25k and the employer pays the individual's personal taxes on top.  In my thinking the value of the house sale is the equivalent of gross salary and the appropriate taxes are then deducted and the trust receives the balance "net of taxes".

Given this is a complex Will and the Executors are not in agreement, it may be that the Estate will need to engage professional legal advice to move forwards.  That expense will be funded by the Estate, and should impose a penalty on all Beneficiaries equally.  It might be that suggesting this to the other Executor prompts them to take a more conciliatory tone.
If a Solicitor is engaged, I would suggest it should not be the one that has already advised one Executor in isolation.