For NatWest bank it must have been a terrible shock to learn, a year after the death of their celebrity client for whose estate they were acting as executors, and just as they were about to distribute funds to his legatees and his personal charitable foundation, that Jimmy Savile had been a sexual predator.
The morning after the ITV programme that broke the news, was there an emergency meeting of the trust company executives? If so, once they had dealt with the damage to their reputation by association, they no doubt worked through an agenda along the following lines:
* Have we made any distribution yet? (If not, don’t.)
* Are there likely to be any claims arising against the estate? (Yes.)
* Are they likely to exceed the value of the estate? (Probably not: they were probably isolated incidents and difficult to prove.)
* Have we advertised for creditors? (Yes, of course. But it doesn’t protect us.)
* What do we do now?
Liability
This is clearly an extreme example and a high-profile case, but it is frequently the case that personal representatives, particularly lay executors, distribute funds to the wrong people and can find themselves personally liable as a result.
The PRs may have misunderstood (or ignored) the rules – for example on intestacy – or not met claims of which they were aware.
Or it could be that they did not protect themselves against the possibility of claims of which they did not have notice or failed to make sufficient reserve to pay outstanding tax.
And, as with Savile, there may be claims, not of creditors, but relating to personal injury. How can the PRs protect themselves if they have no idea of what is in store?
The old saying that ‘ignorance of the law is no defence’ applies, and even where PRs wish to deal with the administration of the estate themselves, they ought to be encouraged to have a probate specialist look at the will and accounts before distribution, as they can be personally liable even if they have received no benefit under the estate and acted honestly throughout.
Claims
Failing to meet claims of which PRs have notice is difficult to excuse, but one can sympathise with PRs wanting to distribute when they think all claims have been paid. And there is a procedure under the Trustee Act by which the PRs can advertise for creditors setting a time limit for claims to be made. But it is important to be clear what this does and does not cover:
* It covers creditors who do not claim within the timescale, but not property or trust disputes, or, for example, unascertained or contingent claims.
* It does not cover claims which have yet to arise, for example against Lloyds Names, or in respect of leases.
* If the same person is both the only beneficiary and the only PR, there is no point in advertising, as creditors could still claim against the PR as beneficiary.
Unascertained or contingent claims are the real problem.
The following procedures have been developed to protect PRs:
* Yorke orders. These were developed in the late 1990s to enable PRs to distribute funds from the estate of Lloyds names when there was concern that Equitas might be insufficient to meet all run-off debts in the Lloyds insurance market.
* Benjamin orders for directions as to distribution where there is a missing beneficiary.
* The procedures for insolvent estates provided for in regulations made under the Insolvency Act 1986.
But some claims can creep up on the PRs and be difficult to resolve or protect against.
Contested property claims; claims under trusts; claims under leases (where the deceased was the original lessee and therefore for a subsequent lessee’s default) or under partnerships for claims made after the death of a party but relating to the period of the partnership can all emerge after the distribution has taken place. And it is the professional executor, with tempting insurance cover, who may well be the one against whom claims are made.
As a starting point, if there is any possibility at all of unknown liabilities, it is at the very least worth making it clear to the beneficiaries on distribution (in the receipt they sign, for example) that the distribution is subject to any future claims arising.
It may be worth considering keeping a reserve to cover possible claims (although this will often be exactly what the trustees want to avoid), or taking out, for example, missing beneficiary insurance.
Where, as in the Savile administration, the claims are as yet unquantified and will take a long time to deal with, it is certainly worth applying to the court for directions.
Yes, it will cost the estate for the PRs to do so, but the alternative is to leave open the possibility of the PRs being personally liable by distributing too much, too soon.
Tax
The other area of potential personal claims against PRs is tax arising during the administration period on income or disposals, and IHT on instalment option property. Because of the time lag for administration tax returns, it is easy, particularly for lay PRs, to overlook or underestimate the reserve needed.
And transferring instalment option property to a beneficiary will always carry risks, since it is the PRs who are responsible for the tax. Keeping a reserve for the tax which remains to be paid or taking a charge over the property (if HMRC has not already done so) is a wise precaution.
Provided they act in good faith, PRs can protect themselves to an extent. It is harder to protect the funds in the hands of the beneficiaries, but at least they have received the funds, and at no cost to themselves, and they will never be liable for more than the benefit they have received.
Susan Midha is a partner at London law firm Adams & Remers
Key points
* The Jimmy Savile case is an example of how personal representatives of an estate can be liable if the estate is distributed to the wrong people.
* Remember that issue of a beneficiary who has pre-deceased the intestate are entitled to a share of his estate.
* In some cases, it is certainly worth applying to the court for directions.
