Wills are usually drafted to set out specific gifts the testator wishes to make, with the balance, known as the residue, then passing to named beneficiaries. The specific gifts are stated to either be free of, or subject to, inheritance tax. Any gifts of property should also confirm if they are to be subject to any mortgage. All liabilities and expenses of the estate, except those stated to be attributable to a specific gift, are paid from the residue before it is appointed out to the residuary beneficiaries of the estate.

The idea behind preparing a Will in this way is to ensure that your beneficiaries receive the gifts (whether cash or property) that you intend, hopefully without the need to find money to pay inheritance tax where this wasn’t intended.

However, what happens if the testator’s circumstances have changed vastly from the time when their Will was made? What if they have gone into care or ended up in financial difficulty? Or what if the person preparing the Will hadn’t really thought about whether or not the testator’s estate could make the gifts claimed free of inheritance tax?

In these circumstances the rules of abatement will apply to the estate and the distributions under the Will. These rules set out the order in which funds within the estate are used to pay liabilities and expenses. The rules of abatement are straightforward, however their application can become very complicated.

The rules of abatement state that, where there are insufficient funds in an estate to settle all expenses due, the residue will be utilized first. If this is completely used but liabilities remain then any general gifts are used, followed by specific legacies. In each case, the liabilities are paid proportionately between the legacies (i.e. the larger legacies pay a larger share of the liabilities), and where funds remain this reduced amount is then received by the original beneficiaries. If the liabilities of the estate exceed the available assets then the estate is insolvent, and a specialist insolvency practitioner should be instructed to complete the estate administration.

Where the estate is solvent, but abatement has occurred then the executor will need to calculate how the estate is to be distributed. Calculating this proportionate liability is where things can get complicated and is a point on which, if it arises, executors should take professional advice to ensure that they are correctly distributing the estate. Any miscalculation could lead to a personal liability on the part of the executor.

Additionally, if any of the beneficiaries involved are charities or the deceased’s spouse, then additional complexities arise for taxable estates as these 2 entities do not pay inheritance tax and so any abatement calculation must take this into account.

If you would like assistance with any elements of estate administration or probate then please contact our Private Client Department on 01494 521301.