Being the executor of a Will can be a difficult task, and not just because of warring beneficiaries; basic tasks, such as identifying all the assets in an estate and paying any outstanding debts, can also occasionally prove troublesome. After all, you need to know that an asset exists or a debt has been incurred before you can take action in relation to it.
If, having distributed all the assets in an estate, the executors find that an unexpected creditor claims against it, they could find themselves liable to settle the debt but without any assets to do so. If they are fortunate, the beneficiaries might pay their share of the unpaid debt, or, if the executors instructed professionals to act for them in the administration of the estate and the professionals were negligent, the executors might be able to claim against them. If they did not employ professionals, however, and the beneficiaries will not reimburse them, the executors can find themselves paying the debt from their own pockets.
The danger of distributing the assets in an estate when there are unpaid debts is shown by a case heard by the First Tier Tax Tribunal (FTT) recently. Terence Guy died in 2012 and his executors decided to wind up his estate themselves. As part of this process, they completed his income tax return to the date of his death and inadvertently under declared Mr Guy’s income. They then paid the tax they thought was due and distributed the estate. In September 2014, HMRC wrote to the executors to query the accuracy of the tax return and claimed income tax and interest of £14,457.67 and a penalty of £5060.18 for failure to disclose the income. Mr Guy’s executors retained no assets to pay the tax due and appealed against the assessment, especially the penalty.
The FTT reduced the penalty to nil taking into account the fact that the executors did not think they could get the money back from the beneficiaries, and because the situation might not have arisen if HMRC had not delayed challenging the tax return. The executors were still liable, however, to pay the tax and interest claimed with no funds from which to do so.
Could the executors have avoided the unenviable predicament in which they found themselves? The answer is quite straightforward: if they had placed notices in the London Gazette and Mr Guy’s local newspaper advertising for any unknown creditors, and waited two months after placing the ads before distributing the estate, HMRC could not have claimed against the executors, unless they could show that the executors knew about the debt before distribution. HMRC could pursue the beneficiaries for the unpaid tax, but at least they would have assets from the estate out of which to pay the amount demanded.
So, unless you are both the executor and the sole beneficiary of the estate, it is always safest to consider advertising for creditors, and avoid the otherwise potentially unwelcome consequences.