What is abatement?
Background to abatement
There are two general types of legacy that can be included in a Will:
(i) Specific Legacies – Gifts of specified assets, for example a particular property, piece of jewellery or art work; and
(ii) General Legacies – Gifts of money, for example “£5,000 each to all of my Grandchildren”.
Once all specific legacies have been made, all general legacies have been paid, and all debts, liabilities and expenses have been settled, the remainder is known as the residuary estate.
An estate must be distributed in the following order,
(i) Specific Legacies;
(ii) General Legacies; and
(iii) The Residuary Estate.
A legal explanation of abatement
If there are insufficient funds in an estate to pay all of the legacies in full, those legacies must abate. That means that they must be reduced proportionately. They abate in the reverse order of distribution.
As an example, A makes a Will leaving some shares worth £10,000 to B, £30,000 each to his four Siblings (C, D, E and F) and the residuary estate to his two children.
On A’s death, his estate is only worth £110,000, including the shares. There is insufficient money to pay all the legacies.
By way of abatement, B takes the shares in full, being a specific legacy with priority on distribution. C, D, E and F’s general legacies are reduced proportionately to £25,000 each. There is then no residuary estate to pass to A’s two children.
A further key point to note in respect of legacies is that, pursuant to s. 35 of the Administration of Estates Act 1925, where an asset which is the subject of a charge is gifted by way of a specific legacy, the recipient will take the asset together with its associated liability, unless the Will says anything to the contrary.
How abatement can be incorrectly applied
In the current case, the deceased had a substantial estate worth over £6 million, including a portfolio of properties.
Under the terms of the deceased’s Will, there were numerous specific legacies of properties, which are mortgaged, and general legacies of cash sums. There was also an express provision in the Will, which stated as follows:
“I direct that any charge on any of the properties gifted by my Will is discharged from my residuary estate”.
The problem faced in this case is that the residuary estate is not sufficiently large enough to bear all of the Inheritance Tax, the administration expenses and all of the mortgages on the properties.
As a result, the professional administrator (a bank) has said that the general legacies will have to be subject to abatement, meaning that a beneficiary who was left £100,000 will either receive a substantially reduced sum or nothing at all.
The beneficiary has consulted ourselves. Having reviewed the case we believe that the bank is wrong about the legal position. It has based its decision on a fundamental misunderstanding of the rules of abatement and the principles that apply to an insolvent estate.
This is not a case where the residuary estate is insufficient to meet its general liabilities, i.e. Inheritance Tax or administration expenses. If that was the case, the general legacies would then abate and if that was still not enough, the specific legacies would also abate.
Instead, it is simply that the residuary estate is not large enough to also clear all of the mortgages on the properties that are subject to specific legacies.
As mentioned, the default position is that a specific legacy of a property subject to a mortgage means that the recipient receives the property as it comes (i.e. subject to the mortgage). While the deceased in our case expressly directed that the residuary estate is to bear any mortgage, if that is not possible, then the situation should revert to the default position, at least for any portion of the charge that isn’t covered by the residuary estate.
Part II of the First Schedule to the Administration of Estates Act 1925 confirms that this is the correct position.
This matter is ongoing and should the bank not amend its position, then an application to the Court will likely be needed to ensure that our client does not unjustly lose out.
If you would like to know more about the legal principle of abatement then please contact our contentious probate team on 0333 888 0404 or send an email to us at [email protected]