Our Practice Advice Service explains what constitutes an insolvent estate.
I have an estate where there is no residue, only specific legacies consisting of property and jewellery. Does this mean the estate is insolvent as there is no money to pay the debts?
No. An estate is insolvent if, when realised, there will be insufficient funds to meet in full all the debts and other liabilities of the deceased. In such circumstances, beneficiaries will not receive anything and some creditors will not be paid in full.
An estate is solvent if all the creditors will be paid, but some beneficiaries will have their share of the assets reduced. S34 and Schedule 1, Part II Administration of Estates Act 1925, set out the order in which legacies are reduced to provide assets to pay debts (residue, retained pecuniary legacy fund, specific gifts). Where there are insufficient funds to pay all the pecuniary legacies in full, they abate proportionately unless the will provides otherwise.
Personal representatives who choose to distribute assets before paying all the debts should follow the statutory order. Paying pecuniary legacies too early may mean that there are insufficient assets to meet the debts without recourse to items specifically given. Personal representatives would then be personally liable to the disappointed beneficiaries. (See Mitchell and Others v. Halliwell and Others  EWHC 937 (Ch)).
For further information, please see the Law Society’s Probate Practitioner’s Handbook (9th edition) which is available to purchase from the Law Society’s online bookshop at www.lawsociety.org.uk/bookshop.
While every effort has been made to ensure the accuracy of the information in this article, it does not constitute legal advice and cannot be relied upon as such.
The Law Society does not accept any responsibility for liabilities arising as a result of reliance upon the information given.
This article is compiled by the Law Society’s Practice Advice Service. Comments relating to the questions should be sent to firstname.lastname@example.org