Would you risk your house to help deal with a deceased relative’s assets? What if you were potentially put in that position without even agreeing to it?
Personal representatives – including both executors, who are named in a will, and administrators, who are not – are most often relatives or close friends, who may have no legal training or prior experience.
They may have agreed to act as an executor many years or even decades before, probably for free, and it may not have crossed their mind that they could find themselves with huge personal liabilities as a result. They may not even have agreed to act at all, and might have been named in a will without their knowledge.
Increasingly, the complex nature of modern estates is leaving personal representatives to untangle complicated financial instruments or insurance contracts, or to resolve existing or threatened litigation.
This can take years, but the beneficiaries of the estate will be pressing for distributions immediately. A wrong move can leave the personal representative personally liable to make payments, while the money in the estate is gone.
This article explains:
- The general rule that all debts are paid only from assets in the estate;
- The exception by which personal representatives can be personally liable;
- The issue this creates; and
- The main potential solutions.
The general rule: all debts and legacies are paid from the assets in the estate
The starting point is that any debts of the deceased will be paid only from assets in the estate and never from the personal representative’s own assets.
If Alice dies with £100 to her name, that is all her creditors can recover, no matter how wealthy her personal representative might be. They are said to 'step into the deceased’s shoes'.
If a creditor brings a claim, but there are not sufficient assets in the estate to meet it, the personal representative will raise a technical defence. As with many terms in estate litigation, this is still known by its Latin term – in this case 'plene administravit', or 'administration completed'. If the administration is still in progress but the remaining assets are not sufficient to meet the claim, the defence is instead 'plene administravit praeter', or 'administration partly completed'.
Once the personal representative has raised one of these defences, the creditor has a choice. They can accept the defence, in which case they will receive a judgment in their favour, but limited to the assets in the estate. Alternatively, the creditor can argue that the lack of assets in the estate is because of a breach of duty by the personal representative, called a 'devastavit' – that is where the personal representative might have some vulnerability.
The exception: personal representatives can be liable personally if they have breached their duty
If the personal representatives have reduced the assets in the estate by breaching their duties, they will be personally liable for any debts that go unpaid. That liability is unlimited, and so a personal representative who breaches their duty and causes a loss of £1mn can be liable for that full £1mn, even if the estate was very small. The creditor must prove the breach of duty to be successful.
The duty that is most easily and frequently breached is the duty to make payments from the estate only according to the order of priorities. This requires all debts to be paid before any legacies are paid to the beneficiaries.
Other important duties include the need to collect in all the deceased’s property and then to safeguard the assets of the estate.
The issue: uncertain future liabilities
The main issue for personal representatives arises when the deceased leaves behind a liability that cannot be quantified for many years. The traditional example was a Lloyd’s 'name', who had personally underwritten insurance policies. It could take years to confirm whether there would be a call on those policies.
Other examples that are increasingly seen include complicated financial instruments that may be in or out of the money, or threatened litigation that may or may not ever be started.
The problem for personal representatives is that there is no way to be certain whether these liabilities will arise. As a result, the personal representative can come under enormous pressure from beneficiaries to begin to make distributions without delay.
However, if they start to make distributions and the liability does later arise, they will have been in breach of duty by making distributions before all known liabilities, including potential future liabilities, had been paid.
The personal representative may then be liable personally to the creditor for the entire amount of the liability, which can be very significant. In an extreme case the personal representative may face bankruptcy. In theory the personal representative might be able to claw back distributions made to beneficiaries, but that is likely to be easier said than done.
The solutions: retention, indemnities or court approval
What, then, is a personal representative in this situation to do? The solution depends on the nature of the potential liabilities.
If the potential liabilities make up only a portion of the total estate, one option is to retain that portion and distribute the remainder. The retained funds can be used to pay the liability if it arises, or paid out to the beneficiaries later if it does not. This allows most of the funds to move without leaving the personal representative at any personal risk.
If the potential liabilities are larger, it may be necessary to secure indemnities to protect the personal representatives if they make any distributions. In some cases these can come from the beneficiaries, although that is only appropriate if the personal representatives are sure the beneficiaries will have enough assets to pay out on the indemnities if necessary. In other cases it may be possible to obtain insurance, especially for the more common types of contingent liability, such as potential tax charges.
If the potential liabilities are too large or uncertain for these courses to be appropriate, the only remaining answer may be for the personal representative to set all the facts out to the High Court and ask the court to give directions as to what they should do. This is a very pragmatic process, and the court will look for a practical solution, not a legal nicety.
One recent example is a case in which creditors in Eastern Europe had not come forward, and the court directed the executors to set up a website and advertise in the Eastern European press; if nobody came forward, they were then permitted to distribute the estate to the beneficiaries.
Another increasingly common case is an estate faced with threats of litigation that have not so far been started. In those circumstances the court may order that the potential claimant has a short period to start their claim, failing which the personal representative can get on with distributing the estate – a 'put up or shut up' order.
Provided the personal representatives have given all relevant information to the court and then administer the estate following the court’s directions, they will be relieved of any possible personal liability.
So what is the key point to take away? That executors can face very significant liabilities and they need to be careful before they distribute the estate, but the court is available to assist them if the situation is very difficult.
Jonathan Arr is a partner and Jacob Ward is a senior associate in the private client disputes team at Macfarlanes
