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The Seminar 2006

Executors' Duties

Frances Mayne

Although the subject heading of my talk is executors' duties, these duties equally apply to administrators of estates as well. In the circumstances, before discussing in detail duties, I will be looking at the appointment of executors and administrators and outlining whether there is in fact a difference between the two. After discussing executors duties, I will consider what remedies there are if there has been a breach of duty by an executor or administrator. To conclude I will look at the powers available to executors.

Executors and Administrators

So is there a difference between an executor or an administrator? Well, there are a number of subtle differences. The first relates to their appointment. An executor can be appointed in the following manner.

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By an express appointment (i.e. I appoint Harry Potter to be my executor) or by an implied appointment according to the tenor of the Will (I direct Dumbledore to pay all of my just debts).

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An appointment can be made under a power conferred by the testator in his Will or

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The Court, in certain circumstances, has power to appoint an executor (i.e. they could appoint a substitutional executor)

An executor can accept his office in a number of ways. Firstly, he could take out a grant of probate or he could also do some act, before applying for a grant, which would make him an executor de son tort. This is sometimes referred to as intermeddling in an estate and it has been held that payment of debts on behalf of an estate is classed as intermeddling and can make a person an executor de son tort. However, an act of humanity such as arranging a funeral is not classed as

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intermeddling. An executor de son tort may find he is personally liable for his actions even if he acted innocently and will be liable to the extent of the assets of the estate received by him.

Just because a person has been appointed an executor in a Will does not mean to say that he has to act. An executor can renounce probate so long as he has not intermeddled in the estate.

Turning now to administrators, an administrator is appointed where the deceased died intestate, without a Will, or where a Will has been left but no executor is applying for the grant, for example the executor has died. A grant of letters of administration with Will annexed will be granted where there is a Will. If the deceased died intestate a grant of Letters of Administration will issue. The Non Contentious Probate Rules 1987 govern the order of priority to apply for grants of Letters of Administration with Will annexed or Letters of Administration. However, I will not go into these in any detail today.

The second subtle difference between executors and administrators is that by virtue of s1(1) of the Administration of Estates Act 1925 property of the deceased vests in the executors on death and this applies to both real and personal property. This means that the executor's authority comes from the Will and so has authority to act from death. The grant of Probate merely confirms the executor's authority.

So far as administrators are concerned until such time as a grant of letters of Administration has issued, the estate vests in the Public Trustee. So the administrator's authority comes from the grant itself. So before a grant has issued the proposed administrator has limited authority. However, the doctrine of relation back applies once a grant has issued which will protect the lawful acts of the administrator. However, this only applies to actions taken to protect the estate and not to issue proceedings.

The similarities between executors and administrators are that there can be any number of executors or administrators up to a maximum of 4 in total. However, if there is a minority or a life interest under a grant of Letters of Administration with Will annexed or Letters of Administration then at least 2 administrators or a trust corporation are required. A sole executor can act even if there is a minority or life interest.

It is important to point out also that there are many other types of grant other than grants of Probate and Letters of Administration. Executors and Administrators are appointed in a variety of grants such as an application where the appointment of an executor is limited in some way, for example limited to a literary estate or a grant of double probate where an executor has power reserved and wishes to apply for a grant himself. Probably the most commonly used "other" grant is a grant ad

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colligenda bona. This is limited to the preservation of the estate and deals only with the collection and preservation of assets but not the distribution of the estate. This type of grant can be very useful especially for dealing with a sale of a property before an executor or administrator is in a position to apply for a full grant or if there is a large stock and share portfolio and stockbrokers advice is to sell as quickly as possible in downward turning market.

Executors' Duties

I will now move on to look at the duties of executors and administrators. These duties apply equally to executors and administrators and unless the distinction is important I will merely refer to executors.

The executors duties are set out in statute in the Administration of Estates Act 1925 as amended and also the Trustee Act 2000. The general duties of an executor are:

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To collect and safeguard the assets To pay the debts of the deceased and To distribute the estate to the beneficiaries correctly entitled.

s25(1) Administration of Estate Acts 1925 provides that an executor has a duty to "collect and get in the real and personal estate of the deceased and administer it according to law" For those of you who are familiar with executors' oaths, in the formal application to the Probate Registry for a Grant, the executors give an undertaking to this effect.

So what is classed as an asset of the deceased for which the executors are responsible? Well, it is probably easier to outline property which does not devolve on an executor at the time of death, which is: o o o Property held as joint tenants Property enjoyed as a life tenant Property subject to a donatio mortis causa that is a gift made in contemplation and conditional on death o o Policies written in trust under the Married Woman's Property Act 1882 and lump sums payable under pension schemes or death in service schemes.

The statutory power to collect in the assets of the deceased includes recovering assets by legal action if necessary. But how far can a beneficiary insist that an executor litigates on his behalf?

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This issue was considered by the Courts in CloughTaylor, Coutts & Co v Banks (2003). In this particular case an asset that had been specifically given by the Will had been taken by a third party who alleged that the deceased had given it to him during his lifetime. The Court held that the executor had no duty to take anything other than normal or routine steps to collect in the assets of the deceased. The cost of litigation to recover the asset was held to be the liability of the specific legatee and not the estate.

If the executors' delay in collecting an asset results in a loss to the estate, the executor may find he is personally liable for any loss that is incurred for his failure to act. It was held in Carney v. Bond (1843) that the executors should have acted quicker to call in the whole of an outstanding debt.

An executor has a duty to take reasonable care in preserving the estate (Job v Job 1877). So, if he took reasonable care and the testator's house, for example, was accidentally burnt down in a fire he will not be liable for the loss. There is a duty to sell an investment if it is not appropriate for the executor to retain it, within a reasonable period of time. For example if the deceased owned shares in a company with unlimited liability, as in the case of Grayburn v Clarkson (1868). In this case the court held that the executor was entitled to show a reasonable discretion as to when the shares were sold but as he had failed to give a good reason as to why he had not sold the shares within the executor's year, he was held liable for the loss to the estate because of his failure to act.

So whilst there is no general rule as to what is a reasonable period of time for collection of assets, it would seem that realisation of assets within the executor's year is a reasonable expectation and if an executor has not acted reasonably he may be liable for the loss from his failure to act.

Once the executor has collected in the assets of the estate he must pay the funeral expenses, administrative expenses together with the debts and liabilities of the deceased. s32(1) Administration of Estates Act 1925 sets out the assets available to meet liabilities. These include property in which the deceased had a beneficial interest, property subject to a general power of appointment, and income arising after death. The executor cannot use property which does not pass into his hands, such as trust property or foreign property. The executor is also responsible for the payment of any inheritance tax which is attributable to the value of the estate. If he does not pay the inheritance tax it was established in IRC v Stannard (1984) that he will be personally liable for the inheritance tax. In addition a prudent executor should also make provision for the payment of any inheritance tax on lifetime gifts. Although this is the responsibility of the recipient of the gift, if the recipient does not pay the tax within 12 months of death then the Inland Revenue can pursue the executor for payment.

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It is also important that an executor pays debts and liabilities promptly. It was established in Re Takner (1942) that an executor could be personally liable for any costs incurred by the estate for failure to pay liabilities with a reasonable period of time. So as a general rule liabilities that attract interest should be paid first.

An executor, under s15 Trustee Act 1925 has the power to give a debtor a period of time for the payment of the debt and to compromise or abandon any debt. This is a very wide power but provided the executor has acted reasonably and discharged his duty of care, more about the duty of care later, then he will not be accountable for any loss incurred.

The executor also has a duty to ascertain the debts of the deceased and must take reasonable steps in this regard. If he does not do so then he can be personally liable for any debts of the deceased that come to light once the estate has been distributed. However, he can protect himself by advertising for creditors in the London Gazette, a paper covering the area in which the deceased lived and such other advertisements as are appropriate. (s27 Trustee Act 1925). However, it is important to remember that even if an executor has advertised for creditors it does not stop a creditor from pursuing the beneficiaries of the estate for payment of that liability (s27 (2) Trustee Act 1925).

Once the executor has collected in the assets and paid the liabilities, the next step is for him to distribute the estate. s44 Administration of Estates Act 1925 provides that there is no duty for an executor to distribute an estate before the end of the executor's year. The executor's year, being the year following death. The executor must correctly identify and trace those entitled to the estate as well as ascertaining the extent of a beneficiary's entitlement. In order to protect himself from "unknown beneficiaries", in particular in the case of an intestacy, executors and administrators can protect themselves by advertising for beneficiaries in the same way as they advertise for creditors. However, such a notice will not protect an administrator or executor if he is unable to trace a beneficiary whom he knows is in existence. In this situation an executor can protect himself by applying for a "Benjamin" Order. In the case of Re Gess (1942) the executor did just that and the Court held that the estate could be distributed provided a retention of sufficient funds, to meet a potential claim was made. If a Benjamin Order is granted the executor is protected from personal liability.

However in some cases, especially where the estate is very small, an application to Court for a Benjamin Order can be expensive. In the circumstances an executor has two alternatives. Firstly, he could take out an insurance policy to cover the interest of the untraceable beneficiary. However, it is important to make sure that the policy also covers accruing interest. The other alternative is for the executor to obtain indemnities from each of the beneficiaries to reimburse the estate if the

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missing beneficiary should appear. However, this is the least favourable option for an executor in case any of the beneficiaries is made bankrupt, divorced or died.

There is also a duty to prepare an account of the estate. By virtue of s25 Administration of Estates Act 1925 the executors owe a duty to provide, when requested by the Court, an inventory and account of the estate. Again, as with the duty to collect in the estate, an executor gives a statement to this effect in his Oath.

Duty of Care

In carrying out the general duties an executor owes a duty of care to the estate and the beneficiaries. When performing the duties of an executor he must "exercise such care and skill as reasonable in the circumstances". This is a statutory duty of care set out in s1 Trustee Act 2000. The duty of care is a general duty of care and takes into account any specialist knowledge the executor has or purports to have. If an executor acts in the course of a business or profession, any specialist knowledge or experience it is reasonable to expect such a person to have, will be taken into account. This builds on earlier case law and in particular the case of Bartlett v. Barclays Bank Trust Company Limited (1980) where it was held that professional trustees owed a higher duty of care than lay trustees. Although this case related to a trusteeship its principals can be applied to executors and the administration of an estate.

So what are the rights of beneficiaries pending the distribution of an estate? It was established in Commissioner for Stamp Duties (Queensland) v. Livingstone (1965) that prior to a distribution taking place an executor holds assets on a limited trust. The beneficiaries have what is known as a chose in action to ensure that the estate is dealt with properly (Re Leighs Will Trust 1970)

Devastavit

So what can the beneficiaries do if the executor has breached his duties? A breach of duty by an executor is called devastavit. The categories of devastavit are misappropriation and maladministration. I will concentrate on maladministration. Maladministration can occur in a number of ways, for example where funds have been misapplied for example distributing assets to persons not entitled (Hilliard v. Fulford (1876), paying unjustified expenses, i.e. a large funeral account. Wasting assets as in the case of Thompson v. Thompson (1821) where the executors surrendered a lease without considering selling it at a premium, failure to pay debts on time so that a creditor sues and also failing to collect in estate assets with reasonable diligence (Hayward v.

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Kinsey (1701). If devastavit is proved then an executor is personally liable for any loss. However, there are a number of defences available to an executor such as an exoneration clause in a Will restricting the liability of an executor and a beneficiary having full knowledge of the act and agreeing to the course of action. Beneficiaries can bring an action within 12 years from the date they became entitled (s22 Limitation Act 1980). However the above does not apply if fraud is involved.

Where there is more than one executor each is liable for his own breach of duty but not any breach of duty by his coexecutor. However, this is not the case if the executor allowed a breach of duty by another executor. This is because he will have failed to perform his own duty of care.

In the majority of cases a claim for devastavit, is made after a grant has issued but what if a loss occurs for a delay incurred before the Will is proved? It was held in Chappell v Somers and Blake (2003) that an executor under a Will cannot be held liable for losses that accrued to the estate as a result of a prolonged delay before obtaining a grant of Probate. It was explained that an executor is not under a duty to accept his appointment and in the circumstances may be unaware of the appointment until some time after the testator has died.

Assuming that the beneficiary is aware of their entitlement there are a number of remedies available to them in a situation where they believe the executor is delaying applying for a grant. The first is to apply to the Probate Registry for an issue of a citation for an executor to accept or refuse a grant. However, this is not without danger as you may find that an executor who is dragging his heels in applying for the grant decides to accept the grant. The second remedy is to make an application under s116 Supreme Court Act 1981 to pass over the executor.

Executors' Powers

I am going to conclude my discussion by looking at executors' powers. Where there is a Will it is normal for executors' powers to be extended by it but in addition to these statutory powers also apply. The Trustee Act 2000 made substantial changes to the powers and duties of executors. However, statutory powers contained in the Administration of Estates Act 1925 and the Trustee Act 1925 still apply.

I will start by looking at the executors' powers under the Administration of Estates Act 1925. Firstly, under s39 of this Act the executors have power to sell, mortgage or charge property. Probably the most commonly used and known power is the power of appropriation under s41. This enables executors to "appropriate" an asset either in full or in part satisfaction of a legacy or entitlement. It is important to remember that an asset is valued, for distribution purposes, at the

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value at the date of appropriation not the value at the date of death unless a Will specifically authorises this. The power of appropriation is not available if the value of the asset exceeds the value of the legacy or entitlement (Re Phelps 1980) s41 (4) provides that executors should take into account the needs of all of the beneficiaries when exercising the power of appropriation.

There is one important point to make in relation to the power of appropriation. It was established in Kane v. RadleyKane (1998) that a sole executor cannot appropriate an asset in favour of himself without the consent of the other beneficiaries.

S42 Administration of Estates Act 1925 enables an executor to appoint a trust corporation or two persons as trustees of an infants property. I have already mentioned earlier that s44 provides that an executor is not required to distribute the assets of the estate before the executors' year is out.

The Trustee Act 1925 contains two very important powers where the estate has minor beneficiaries. These are the powers contained in ss31 and 32, the powers of maintenance and advancement. S31 provides that income can be applied for their maintenance, education and benefit of a minor beneficiary. Any income not so applied must be accumulated. S32 deals with the power of advancement and provides that an executor can advance up to one half of the capital for the advancement or benefit of a beneficiary who has vested or contingent interest in the capital.

The Trustee Act 2000 made some major changes to executors' powers and, as mentioned earlier, also set out a statutory duty of care. S3 of the Act gives an executor authority to make any kind of investment which could be made if he were absolutely entitled to the property. But this is subject to the duty of care so that an executor, when considering any investments, must exercise "such care and skill as is reasonable in all of the circumstances". As already mentioned a professional executor owes a greater duty of care than a lay executor. When considering investments executors must have regard to the standard investment criteria set out in s4 of the Act which deals with the suitability of the investment and the need for diversification.

The Trustee Act 2000 also gives an executor power to delegate certain powers to, for example, a solicitor or stockbroker. However, this is again subject to the duty of care and the executor must keep the position under review, otherwise he can be personally liable for the acts of his agent. The final power under the Trustee Act 2000 which I am going to talk about relates to insurance. S34 gives the same power to insure to an executor as that of a beneficial owner. Prior to this act, property could only be insured for fire cover for up to two thirds of the value of the property. Again, this power is subject to the duty of care.

The final power I am going to mention is not contained within statute but from case law and relates

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to the power to carry on a business of the deceased. If no power is contained in a Will then, as in the case of an intestacy, the executor and administrator have the power to continue the business only with a view to a sale as established in Re Crowther (1895). The sale should take place within the executors' year. However, where a business is comprised within a trust for sale contained in a Will, power to postpone the sale is implied so this could be used to postpone the sale indefinitely but only if it is in the interests of the beneficiaries to do so.

Frances Mayne Wilsons, Salisbury (01722) 412412 [email protected]nslaw.com March 2006

The contents of this information pack are intended as guidance only. There can be no substitute for considered legal advice on specific problems. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law.

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