Solvent and Insolvent Estates

Administering an estate can be a complex process to deal with for the person appointed to act (the ‘personal representative’ – also known as the ‘executor’ if the deceased left a Will, or the ‘administrator’ if the deceased didn’t leave a Will).  In most cases, the assets held by the deceased at his or her death will be sufficient to pay all their debts, and to satisfy all the gifts left in their Will.  What is the situation where the assets in their estate are not sufficient to pay all the gifts made in the Will, or all of their debts?

Insolvent estates:

Where the assets of an estate are not sufficient to pay the deceased’s debts, the estate is insolvent.  When a personal representative is dealing with an insolvent estate, they are under a duty to ensure that the debts are paid in a specified order, as some creditors rank higher than others.  It may also be the case that there are debts which the personal representative is not personally aware of, but which they are still under a duty to pay.  In this situation, advice should be sought about the appropriate way to ascertain details of these debts (usually by the placing of specified notices).

An insolvent estate can be difficult to deal with and, if not handled correctly, can leave a personal representative personally liable to the creditors.  Therefore, it is important that a personal representative receives expert advice if they are dealing with an insolvent estate.

Solvent estates:

A solvent estate is where the assets of the estate are sufficient to pay the debts of the estate, so there are assets left to distribute between the beneficiaries of the Will.  However, it may be the case that the assets left over once the debts have been paid are not sufficient to pay all of the gifts set out in the Will.  If there is not enough money in the estate to pay all the gifts, some or all of the gifts will be subject to ‘abatement’.   In an abatement situation, there is a specified order in which the beneficiaries will receive their entitlement from the estate, unless there is an express provision to the contrary in the Will.  Again, a personal representative should take specialist advice in an abatement situation.  However, in a very general sense, the order is as follows:

Residuary beneficiaries:

These are the people who receive a share in the remainder of the estate, after the payment of any debts, taxes or legacies.  Gifts to residuary beneficiaries abate first, i.e. if there is not enough money in the estate to pay all of the beneficiaries under the Will, the residuary beneficiaries will not receive their gifts, but other categories of beneficiaries under the Will would receive their gifts.

Pecuniary legatees:

Pecuniary legatees are beneficiaries who receive a specific sum under a Will, for example, a gift of £20,000.  If the residuary beneficiaries have not received anything from the Will and there is still not enough money to pay all of the pecuniary legatees, these gifts will abate (i.e. not be payable).  If there is enough money in the estate to pay some, but not all, of the pecuniary legacies, these legacies will abate ‘rateably’.  This means that each gift will reduce proportionately.

Specific legatees:

Specific legatees are beneficiaries who receive a specified item of the deceased’s property (often in the form of physical property, such as a gift of ‘my piano’ or ‘my house’).  These gifts will abate last, so they will only abate if the residuary beneficiaries have not received any of their entitlements under the Will, and the pecuniary legatees also haven’t received any of their gifts under the Will.

If you require any specialist advice regarding the administration of an estate, please do not hesitate to contact our Wills, Trusts and Probate Team on 0161 926 9969.