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Pecuniary Legacies – Avoiding Abatement

What is abatement?

Abatement is what happens when the assets in an estate on death are insufficient to match the provisions in the Will.

Example

A testator makes his Will on the basis that his estate is worth £180,000 but between date of his Will and the date of his death most of his estate has gone in payment of care fees. When he dies some five years later without amending his Will there is only £10,000 left but he made legacies of £100,000 and left the residue to charity.

The estate is used first to discharge any funeral, testamentary and administration expenses, debts and liabilities.

Unless the Will says otherwise, there is a strict order in which the estate abates:

  • The residue will abate first
  • The pecuniary legacy fund next; and
  • Finally, any specific gifts

In the example, the charity as residuary beneficiary, will receive nothing; the legacies will abate rateably according to value i.e. 1/10th of the original legacy will be available for each beneficiary less any expenses of the administration.

The order of priority is set out in Part II Schedule 1 of the Administration of Estates Act 1925 but can be overridden by the provisions of the testator’s Will.

What sort of estate is at risk of abatement?

When clients make a lot of pecuniary legacies there is a real risk that abatement may occur if they do not keep them under review. If they enter a care home and must pay or contribute to their fees they will soon eat into available capital. In times of austerity, people’s wealth can be eroded and if they are in business, their resources deplete. Take for example the case of Mitchell v Halliwell [2005] EWHC 937.

The deceased was ostensibly a wealthy man whose estate was sworn at over £22 million gross and nearly £15 million net.

The deceased included pecuniary legacies of £2 million in his Will. The money to meet these legacies should have been ringfenced but not paid out until the actual net estate was ascertained. Despite the above figures, the estate was bordering on insolvency. The four professional executors, under pressure from the family, paid out the pecuniary legacies, and this left a shortfall to pay tax and other debts of potentially £4.1 million.

As the Judge said:

“It is, therefore, of fundamental importance that, before any payments are made by the executors of an estate, the executors must be satisfied, or have reasonable grounds to believe the estate is solvent, and that it has assets which can be applied in the order stipulated in the Administration of Estates Act 1925.”

What can be done to avoid a pecuniary legacy being abated?

Where a testator wants to leave a number of pecuniary legacies on their death to their children from their first marriage and leave the residue to their surviving cohabitant then consider which is more important, leaving something for the cohabitant or protecting the pecuniary legacies?

In this sort of case it would be wise discussing abatement with the testator and suggesting that in addition to the gift of residue to the cohabitant a pecuniary legacy which is given priority over other gifts might be best to ensure the cohabitant received something rather than nothing e.g.

If my estate is insufficient to meet in full all the non-residuary gifts made by this Will then the gift in clause [  ] shall rank in priority to all other gifts made by this Will.

Author: Gill Steel (Solicitor, Trainer and Consultant)

Curator of www.lawskills.co.uk and the LawSkills Monthly Digest subscription service https://www.lawskills.co.uk/digest/.