How to Deal with Probate Liabilities
13 June 2018
Before we explain how to deal with Probate liabilities it's important to understand what they are.
Probate liabilities are any payments which need to be made from the Estate. When the Estate is being valued to apply for Probate, the values of any liabilities are deducted from the total value of the assets. Often, these liabilities come from any debts which are still owed by someone at the date of their death, but they also include certain funeral costs.
It is also possible for further liabilities to come to light after the date of someone's death. This can include interest on any outstanding mortgages, service charges on buildings where the deceased was a tenant, utility bills and administration expenses. All of these liabilities are deducted from the value of the Estate, and are paid by the Personal Representative before the Estate is distributed to Beneficiaries.
It is also important to note that any state pensions or benefits which have been paid after the date of death are a liability, and will need to be returned.
How to Deal with Probate Liabilities
The first issue to deal with is establishing the extent of the deceased person's debts. This can usually be managed by creating a list of the deceased's liabilities from their personal papers and bank statements. Common examples are mortgages, utility bills, credit cards and personal loans.
If the deceased has any outstanding creditors it is important to inform them of the date of death and to agree a repayment figure. The Personal Representative should remain in contact with the creditors thought the Probate process and agree an expected payment date. If it is not known whether there are any creditors, the Personal Representative can advertise for them. See Statutory Advertisements - Protection for Personal Representatives below.
Once the Personal Representative has access to the money in the Estate they should start paying any outstanding liabilities. It is important that this occurs before any funds are distributed to the Beneficiaries. As interest will continue to accumulate on any loans, it is crucial that any interest-bearing liabilities are paid as quickly as possible in order to protect the remainder of the Estate.
Is the Estate Insolvent?
Before paying any liabilities, the Personal Representative will need work out whether the Estate is solvent. If there is a possibility that the liabilities outweigh the assets, the Personal Representative should not make immediate payments to settle the debts. They will need to ensure that the liabilities are settled according to a set order of priority. It is imperative that this order is followed by the Personal Representative, as they may be personally liable if the Estate is insolvent.
The order of priority is as follows:
- Secured creditors i.e. mortgage lenders, who are allowed to recover what they are owed from the asset which secures the debt
- Funeral expenses – these must be reasonable, see Funeral Costs below
- Testamentary expenses – the expenses incurred in the administration of the Estate, see Administration Expenses below
- Preferred debts – a rare class of debts that will not usually apply. Typically this refers to wages due to employees
- Unsecured creditors – i.e. bank loans or credit card debts
- Interest on unsecured loans
- Deferred debts – such as an informal loan between family members
Personal Representatives are strictly required to pay any outstanding debts in the order listed above or risk personal liability.
During the course of administering the Estate there are a number of expenses which are incidental to the duties of a Personal Representative. These include the cost of obtaining a Grant of Probate, any professional valuation fees, and Inheritance Tax liabilities.
In some cases the Personal Representative may need to obtain the permission of the Beneficiaries to the Estate before incurring the expenses. This will certainly be the case if the expenses are particularly high, or if there are a range of options available.
If the Estate does not include a pre-paid funeral plan then the cost of the funeral can be covered by the Estate. If the Will does not list any specific wishes for the funeral then the Estate can be used to cover any 'reasonable' funeral expenses. This can include expenses outside of the ceremony itself, such as flowers, providing a wake, and obituaries.
If there are not sufficient funds in the Estate to cover the cost of a funeral, usually the person arranging the funeral and liaising with the funeral director will be responsible for the fees.
Statutory Advertisements - Protection for Personal Representatives
Before making any distributions to the Beneficiaries, the Personal Representative can give notice to any potential creditors of the Estate by putting advertisements in the London Gazette and, if there is a property in the Estate, in a newspaper in the same location as the property.
These adverts are known as Statutory Advertisements or Legal Notices and they provide the Personal Representative with protection against any previously unknown creditor coming forward after the advertisements have expired (2 months after they are placed) and after the Estate has been distributed to the Beneficiaries.
If a new creditor or Beneficiary comes forward they cannot claim the monies owed to them from the Personal Representative, they can only claim from the Beneficiaries who ultimately received the Estate.
Co-op Legal Services is the largest provider of Probate and Estate Administration services in England and Wales, trusted to deal with over £1.3 billion in Estates annually.