A recent case gives a rare insight into the legal rules on the incidence of debts related to a will.

Petterson v Ross [2013] EWHC 2724 (Ch) is a rare thing – a reported case on the legal rules on the incidence of debts. Such matters are normally dealt with by agreement since the costs of an application to court inevitably deplete the funds available to the beneficiaries. It is a good reminder of the way in which the rules work.

Section 34 of the Administration of Estates Act 1925 and part II of the first schedule set out a statutory order in which assets are applied to meet unsecured debts. Any undisposed of property is taken first, followed by residue. If the residue is insufficient then any funds set aside for the payment of pecuniary legacies are taken followed by property which has been specific given. Pecuniary legacies and specific gifts are reduced rateably, with the result that each beneficiary bears a proportion of the debts. It is open to the testator to make express provision varying the statutory rules. For example, in the days when a solicitor’s charging clause in a will was treated as a pecuniary legacy, it was usual to provide that this legacy would be paid in priority to other pecuniary legacies.

Section 35 of the Administration of Estates Act 1925 deals with secured debts and provides that, in the absence of contrary intention (which can be expressed in the will or in another document), a debt charged on an asset which passes under a specific gift in a will is not payable from residue. Instead, it is borne by the specific beneficiary.

Where property is taken in the wrong order, the disappointed beneficiary is entitled to be compensated from the assets which should have been taken first. This is referred to as ‘marshalling’ the assets. It is obviously preferable for personal representatives to have regard to the correct order when paying debts as it will generally simplify the administration.

In this case, a mother owned a number of properties of modest value (some subject to mortgages) and had very little in the way of liquid assets. Her will made specific gifts of all the properties with the result that there was insufficient residue to discharge the liabilities.

One daughter was given two properties. One gift was expressed to be ‘free from any mortgage or legal charge to which the same may be subject at the date of my death’; the other was ‘subject to any charge or liability which may be subsisting at my death which shall not be discharged out of my residuary estate’. The result was that the daughter was responsible only for the charge on the second property. The first charge was treated with the other liabilities of the estate.

The property given free of mortgage had been repossessed by the Woolwich building society which had already discharged the mortgage out of the proceeds of sale of the property. This brought into play the principle of marshalling. The effect was that the daughter, contrary to the wishes of the residuary beneficiaries, was entitled to be repaid from estate funds the amount that had been wrongly deducted from the property.  

Behrens J had to consider how the calculation of the appropriate proportion of debt to each asset should be made. He directed that when calculating the reduction on each specific gift, it was the value at the date of the death that was relevant not the current value.

Points arising

  • If a will disposes of the bulk of the assets by specific gifts, it is likely that there will be insufficient residue to cover the debts so it is worth considering the general ‘workability’ of the proposed gifts when drafting.
  • The disputing parties could have agreed how to deal with the debts which would have saved costs.
  • When dealing with the payment of liabilities, personal representatives should consider which beneficiary bears the legal burden for each debt and whether directions contained in the will alter that burden.

The spate of cases challenging the validity of wills continues. Pearce v Beverley [2013] EWHC 2627 (Ch) also included claims of undue influence in relation to various lifetime gifts made to the beneficiary of the disputed will. It is useful as a summary of the rules on burden of proof and presumptions.

In relation to lifetime gifts, Behrens J found that the donee (variously described as a friend, partner and carer) was in a position of trust and confidence in relation to the deceased and that the extent of the gifts meant that she needed to provide an explanation for them. There was a presumption of undue influence which she was unable to rebut.

The will made in the donee’s favour was successfully challenged by the deceased’s daughter on the basis of lack of testamentary capacity and lack of knowledge and approval. Behrens J set out the rules on the burden of proof of capacity as follows:

‘a) While the burden starts with the propounder of a will to establish capacity, where the will is duly executed and appears rational on its face, then the court will presume capacity.

b) In such a case the evidential burden then shifts to the objector to raise a real doubt about capacity.

c) If a real doubt is raised, the evidential burden shifts back to the propounder to establish capacity nonetheless.’

There was sufficient medical evidence to raise a real doubt as to the testator’s capacity which the beneficiary was unable to dispel. In relation to knowledge and approval, the judge said that the circumstances excited the suspicions of the court. The sole beneficiary had arranged the meeting with the will-writer and was present throughout the interview. The testator was a highly vulnerable adult suffering from mental and physical problems. In the period before his death, he had completely changed his relationship with his daughter and grandchildren for no apparent reason. As a result there was no presumption of knowledge and approval. Instead it was for the beneficiary to establish it. She was unable to do so.

Re Devillebichot (deceased) Brennan v Prior [2013] EWHC 2867 (Ch) is also worth a look. Here the disappointed daughter failed in her attempt to overturn her father’s will, which left the bulk of his estate to his siblings rather than to her.

Mark Herbert QC, sitting as a deputy judge, accepted that the will (which was made less than two weeks before his death) was encouraged and drawn up by members of the family who stood to benefit under it. However, the beneficiaries were able to establish that the testator had capacity and knew and approved the contents of the will. There was evidence of persuasion but it did not amount to undue influence.

Lesley King, College of Law