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Chapter 7: Payment of Debts and Legacies - Coggle Diagram
Chapter 7: Payment of Debts and Legacies
Order of Payment:
Debts
Priority:
Funeral Expenses and costs of admninstering the estate
Outstanding taxes, including Inheritance Tax
Debts to secured creditors (eg, mortgages, loans)
Unsecured Creditors
Key Law: Insolvency Act 1986: Governs distribution when the state is insolvent, determining priority of claims.
Legacies (gifts made in the will) are paid after debts and expenses
Residuary Legacies:
Residue of the estate is paid after all specific gifts (legacies_ are made.
If the estate is insufficient, the legacy may be reduced pro-rate
Key Law: Wills Act 1837: Governs distribution of gifts in a will
Types of Legacies:
Specific Legacies
Specific items of property (eg, a specific piece of jewellery)
Pecuniary Legacies
Money or sums to be paid out of the estate
Residuary Legacies:
The remaining estate after debts, expenses and specific legacies are settled.
Demonstrative Legacies:
Legacies that come from a specific source (eg gift from a particular bank account)
Payments from the Estate
Executors Discretion:
Executors determine when and how to pay debts and legacies based on the available funds
Sale of Assets
Executors may need to sell estate assets (eg property or shares) to raise funds for debt payment of legacies
Claiming for debts:
Executors can make claims for debts owed to the estate (eg loans due from 3rd parties)
Key Case Law: RE Carter: Executors' responsibility to ensure debts are paid before distributing legacies.
Insolvent Estates
Insolvency:
If the estate does not have enough funds to cover debts and legacies, it is considered insolvent
Insolvency Process
Creditors are paid in order of priority, and legacies are reduced or voided.
If there's a shortfall, creditors must share the assets on a pro-rata basis.
Key Law: Insolvency Act 1986: Sets out the rules for dealing with insolvent estates
Key Laws
Administration of Estates Act 1925: Outlines the order in which debts and legacies are to be paid
Insolvency Act 1986: Provides rules for the treatment of insolvent estates
Wills Act 1837: provides guidance on legacies and how they are to be paid in order.