Navigating complex estates

On Wednesday 19^th April, members of VWV’s Contentious Trusts and Probate and Legacy Protection teams joined Cancer Research UK to deliver four separate but linked talks under the heading 'Navigating complex estates … from choppy waters to calm seas', for our most recent online CPD event for Legal Professionals Here they share some of their top tips and headlines from this event.

Charities as Executors or Residuary Beneficiaries

Charities can play a vital role in estate administration, either as executors or as residuary beneficiaries. However, there are certain considerations to keep in mind to ensure a smooth administration process.

Interpreting the legacy properly is essential. When a charity is named as a beneficiary it is important to confirm precisely what they’re entitled to under the will. Charities are often appointed as residuary beneficiaries, but they could also be left specific gifts. So, it’s crucial that a solicitor understands the bequest’s nature and scope.

Charities also have the right to ask for information about the estate, where they are named as beneficiaries, including its assets and liabilities. The extent of that right will vary, depending on whether the charity is entitled to a pecuniary, specific, or residuary entitlement. The best practice here, is for executors to respond promptly and accurately to these requests. It’s also important to remember that charities must follow specific legal and regulatory requirements when appointed as executors. So, it is crucial that the charity understands their obligations and has the necessary expertise to handle the estate administration.

Another key area of consideration is the Inheritance Tax position: where a charitable legacy is included in a will, the estate may be entitled to a reduction in the Inheritance Tax liability. In addition, if the legacies to charities total 10% or more of the net estate, there may be an overall reduction in the Inheritance Tax rate down to 35%. Executors should ensure that they identify and claim all exemptions and reductions arising from charitable legacies, to mitigate against an Inheritance Tax liability and maximise the value of the estate.

Similarly, executors should also be aware of Capital Gains Tax and appropriation. If the estate includes assets that have increased in value since the date of death, there may be Capital Gains Tax to pay when those assets are sold. Executors can appropriate assets to a charity, prior to sale, to mitigate against an anticipated Capital Gains Tax liability. Executors should therefore consider appropriation and enter dialogue with the charities about it, at the earliest opportunity.

Dealing with contentious estates

Unfortunately, where charities are named as executors or beneficiaries, dispute can sometimes arise.

Importantly, in these instances, it is essential to consider the reputation of the charity involved. The approach the charity takes will be critical in managing any negative perceptions that may arise. It may also be appropriate to make an ex-gratia payment to help resolve any disputes and maintain the charity's reputation.

If a dispute is to be settled, the tax position of any settlement should be carefully considered. The charity's ability to dispose of property and any practical considerations, such as the need for trustee approval, should also be taken into account.

Additionally, the execution of any settlement agreement and the need for confidentiality should be addressed. Engaging professional advisers, such as solicitors, accountants, and tax advisers, can help ensure that the charity is taking the appropriate steps in these situations. It is also essential to seek specialist legal advice to ensure the charity’s duties as executor and fiduciary are properly discharged.

Tricky beneficiaries

Dealing with tricky beneficiaries can be a challenge for executors. Clear communication and setting out the rules of engagement early on in proceedings not only helps to manage expectations but avoids misunderstandings later.

Key to successful resolution, is clear communication and a paper trail detailing this; using a monthly report to keep beneficiaries updated is a great example of something that helps create a paper trail of good communication and reduces the temptation to respond to every query.  

It’s important to inform residuary beneficiaries of cost estimates and provide copies of invoices regularly, as this provides transparency and protection against future challenges. Recording your time accurately and thinking about how much extra time you may spend on a particular beneficiary is also an important element of managing expectations and will help to defend against challenges to estate administration costs. Additionally, keeping a clear note of all communication with beneficiaries will save time in the future if you need to explain why your costs are high.

It’s important to note that even with the best practices in place, there is always a risk of challenges to estate administration costs. The case of Kenig v Thomson Snell and Passmore is a recent example of this. The case may lead to a rise in challenges to estate administration costs, even for estates that have long since concluded.

Trustees

Where a solicitor is acting for an applicant seeking removal as a trustee, it is important to be clear in all correspondence - it's useful to list out the points you wish the offending executors to address and the actions you want them to perform as a remedy, with a timeline for completion. This way, if they fail to comply, you have specific breaches of duty to refer to in your subsequent application.

In some cases, it may be appropriate to invite the executors to agree to their own removal and replacement. This gives them an exit route without any personal cost risks.

It’s also important to consider the stage of administration when preparing a case. If the administration is nearly complete, the court may consider that removal is not merited. But, where removal seems justified, gather as much evidence as possible to show that the principles set down in the cases of Letterstedt and Carvel are being breached.

Where a solicitor is acting for a personal representative, who is faced with defending an application and you consider there is a real risk of removal, offer to step down or accept any invitation to do so to save cost risks. If there are grounds to actively defend a claim, it’s crucial to ensure that your witness evidences why the testator chose those particular executors, where possible. It is also important to provide a checklist of things done and remaining, to show how quickly they can be achieved to illustrate how progress is being made. Even where there is friction or hostility, it is still possible to administer the estate effectively, even if the costs have increased a little.

It’s important to note that applications to remove after a Grant has been issued must be brought under s50 AJA and that you must propose a replacement if you are removing all executors so that someone is left in post.