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What happens on death if there are insufficient funds to pay the legacies contained in a Will?
Sometimes a person’s estate can be solvent (i.e. able to satisfy the debts, liabilities and administration expenses of the estate) but still not hold enough funds to settle all the monetary legacies listed in the Will. For example, on occasions this might be due to the fact that the estate was unexpectedly depleted by care fees.
The first matter to check is whether the Will itself sets out a specified order. Often the Will echoes the statutory provisions. These provisions state that if there are any assets not disposed of by the Will (i.e. those which are subject to a partial intestacy), a sum equal to the total legacy amount should be reserved from this fund. If, as will usually be the case, all the assets are fully disposed of by the Will, then broadly speaking the liabilities and administration expenses should be settled out of the estate first with the balance left to be proportionately distributed between the beneficiaries entitled to legacies. This process is called abatement.
As mentioned, the legacies abate in proportion. So for example, if the estate is only worth £20,000 after the payment of liabilities and administration expenses, but there are two legacies in the Will of £20,000 each (so a total of £40,000) then each beneficiary will be entitled to receive £10,000 (i.e. 50%).
Care must be taken in these circumstances regarding the incidence of Inheritance Tax, particularly where some legacies are expressed to be subject to IHT but others are not. It is usually advisable to obtain specialist advice in the administration of estates, especially where legacies abate, in particular due to the personal liability which executors can carry if they deal with the distribution incorrectly.