Understanding the importance of checking estate accounts

Ashley Rowthorn Good Practice in Legacy Management

Checking estate accounts can seem time-consuming and confusing. So why is it vital that you do it, and what should you look for?

Checking estate accounts is an important part of ensuring that the administration of an estate has been completed correctly, and that a charity has received its full entitlement under the Will. Indeed, a charity should not give formal receipt to an executor, and discharge them of their responsibilities, without having checked the accounts, because to do so may leave your trustees vulnerable in respect of their legal obligation to ensure that the full value of the legacy has been received.  Also, by identifying and rectifying any omissions or errors, it may be that further payment is due to you.

Accounts can be produced in many formats, some a great deal easier to understand than others.  Given this, what should you check and consider, before you give your approval?

Arithmetic

It seems like a simple statement to make, but you should check that everything in the estate accounts add up, including the division of residue. Mistakes in addition are not uncommon, but if any discrepancies are only minor, think twice about mentioning them – this can be seen as a bit pedantic.

The Will

Check that the terms of the Will have been applied, including that the pecuniary legacies have been paid.  There have been instances where payment of a pecuniary gift has been made twice, or even overlooked altogether!

Probate Value/Accounts Value

It is important to check that all the key assets listed in the schedule of assets are represented in the accounts, and that the values correspond, or are as you expected them to be depending on what may have happened during the administration.

Fees

Check the level of solicitor’s fees charged against the estate’s gross value. Generally, for a medium sized estate you could expect to see fees of about 2-5%. Bear in mind that for a smaller estate (say, less than £50,000) the fees may be proportionally higher.

Non-professional executor expenses

By law, a lay executor must not profit from their position and acts voluntarily, although they may charge for reasonable out-of-pocket expenses.  Strictly speaking, therefore, charges made for time spent or loss of earnings should be rejected.  This is a matter in which both pragmatism and sensitive consideration are key to any decisions made.

Capital Gains Tax

Charities are exempt from CGT and if the sale of an asset were to attract a charge to CGT which could not be covered by the executor’s annual exemption, the executor should appropriate the asset to the charities prior to sale and sell on their behalf, thus mitigating the tax. If CGT is listed in the accounts, which you did not expect to see, you should write for clarification.

This is a very brief outline of CGT, and charities.  It is recommended that further assistance is sought, if necessary, in relation to CGT calculations, and matters generally.

Inheritance Tax

Charities are exempt from paying IHT, so in estates where there are both exempt beneficiaries and non-exempt beneficiaries the IHT must be borne by the non-exempt beneficiaries alone, in line with S41 of the Inheritance Tax Act 1984.  If IHT is shown as a general liability of the estate, you should write to the solicitors and ask them to re-draw the accounts applying the correct apportionment.

Before writing, however, do check in the Will if there is any particular instruction regarding apportionment. Some testators may state that they want the beneficiaries in all classes to receive the same amount having taken into account the IHT liability.  This called a Benham calculation.

Also note that if IHT is incurred on pecuniary and/or specific gifts, but the residue is left to exempt beneficiaries, in that case the residuary beneficiaries will have to meet the IHT liability.

Again, IHT is a very big subject in itself and it is recommended that further advice is sought in relation to IHT calculations.

R185s (tax deduction certificates)

Charities can claim back the tax paid on income received during the administration period, or accrued but not paid.  Unless you consider the reclaimable tax would be minimal, ask for this form.

Abated Legacies (re Pecuniary Gifts)

If there are insufficient funds in an estate to pay pecuniary gifts in full, then those gifts have “abated”. If this happens, you should ask for a copy of the Will and accounts. When received, check the accounts in the usual way and make sure your charity receives its proper proportionate share of the available funds.