Abatement of Legacies – when the estate debts exceed total bequests

October 29, 2013

The England and Wales High Court has recently given judgment in a complex case, Petterson v Ross [2013] EWHC 2724 (Ch), where the total amount of the bequests in the will exceeded the estate’s total debts. The court had to decide the proportions to abate the specific legacies in accordance with the statutory rules.

At the heart of the case was, in the words of Behrens J, ‘an unfortunate family dispute.’ The testatrix owned a number of properties and a modest business but had very little liquid assets. She left her estate between her daughter and two sons through a number of specific legacies in her will. A dispute arose because there were insufficient assets to discharge the liabilities without resorting to the specific bequests.

As the children were unable to reach any agreement in relation to which assets should be used to discharge the debts of the estate, it was left to the court to apply the rules on abatement contained in sections 34, 35 and Part II of Schedule 1 of the Administration of Estates Act 1925.

When dealing with unsecured debts, the statutory rules state that any undisposed of property is taken first and, then, the residue. If however, the residue is insufficient, then, pecuniary and specific legacies and gifts are taken into account. These legacies and gifts are reduced rateably, with each beneficiary bearing a proportion of the debts. A secured debt which passes under a specific gift in a will is not payable out of the residue but is borne instead by the beneficiary inheriting that gift. The legislation is clear however, that an express contrary provision in the will, or in any other document in relation to secured debts, can vary these rules.

In Petterson v Ross, the Testatrix’s daughter was given two properties. The first property was given ‘free from any mortgage or legal charge to which the same may be subject at the date of my death’, whilst the second property was given ‘subject to any charge or liability which may be subsisting at my death which shall not be discharged out of my residuary estate’. Behren J held that the charge on the first property was to be treated with the other liabilities of the estate whereas the daughter was responsible for payment of the charge on the second property out of that specific property.

The first property had been repossessed and the mortgage had been paid out of the net proceeds of sale by the time the case reached the High Court. As the personal representatives had not followed the correct order, laid down by the will or the statutory rules, when paying the debts, the daughter, as a disappointed beneficiary, could be compensated from the assets that should have been taken in priority under a principle known as marshalling the assets. She was therefore entitled to be repaid from the remainder of the estate as that debt had been wrongly deducted from the property.

It was apparent from Behren J’s judgement that had the parties agreed on how to deal with the debts from the legacies, they could have saved the estate substantial costs. It is worthy to note his comments that ‘like the litigants in Bleak House’, there is a risk that ‘the whole estate will have been eaten up in costs’.

Please note: The content of this article is for information purposes only and further advice should be sought from a professional advisor before any action is taken.