The case of Petterson v Ross  EWHC 2724 (Ch) is a recent and useful summary of the correct approach to be taken where there are insufficient assets in an estate to pay specific legacies. The case is useful for will drafters and contentious probate practitioners alike.
The case is a useful refresher of the statutory rules on abatement of legacies in the Administration of Estates Act 1925 but also addresses the approach to abatement where there is a specific provision in a will as to the repayment of debts secured as charges over property in the estate.
Where an estate is solvent but there are insufficient funds to pay all of the legacies in full, the legacies must abate or reduce. Legacies abate proportionately and before tax, unless the will provides otherwise.
Schedule 1, Part II, Administration of Estates Act 1925 sets out a statutory order in which legacies abate. Each category of legacy must be exhausted before moving on to the next category in the list.
That statutory scheme is subject to the following rules concerning the:
- Repayment of secured debts; and
- Equitable marshalling of assets for the payment of debts
Repayment of secured debts
If, at the date of death, property that the deceased passed by his will is charged with the payment of money (usually a mortgage), the general statutory rule is that the secured debt should be repaid out of that specific property unless the deceased has expressed a contrary intention in their will. A contrary intention is not demonstrated merely by the inclusion of a general direction to pay debts out of residue; the specific charge has to be referred to (s35, Administration of Estates Act 1925).
However, where an endowment policy is closely linked with a mortgage this is likely to show sufficient contrary intention even where there is no specific reference to it in the will see Ross v Perrin-Hughes  EWHC 2559 (Ch).
Equitable marshalling rules
The deceased’s creditors can obtain repayment of their debts out of any of the assets in the estate and are not bound by the statutory rules relating to charges and abatement. However, where a debt has been satisfied from an asset but it is properly attributable to another asset in the estate the personal representatives must adjust the position between the beneficiaries to compensate the beneficiary who has lost out. To achieve this, the assets in the estate are marshalled for the payment of debts, to ensure that the statutory order under the Administration of Estates Act 1925, or any contrary intention of the decease is preserved.
Facts in Petterson v Ross  EWHC 2724 (Ch)
Mrs Ross, the testatrix, died in 2008. Her will made specific legacies to her three adult children: Diana, Lorenzo and Gianni. The specific legacies were as follows:
- To Diana: A residential property (subject to a mortgage which was repaid to the lender from the sale proceeds of the property).
- To Lorenzo, Gianni and Diana: A café business together with the downstairs of freehold premises from which it was run (50% for Lorenzo, 25% for Gianni and 25% for Diana).
- To Diana: The upstairs rooms above the café (from which Diana ran a hairdressing business).
- To Lorenzo: A residential property (which was free of mortgage).
- To Lorenzo, Gianni and Diana: Land in Italy in three equal shares.
- To Diana: The benefit of two insurance policies.
The specific legacy (1 above) of the residential property to Diana provided that it should pass:
free from any mortgage or legal charge to which the same may be subject at the date of my death”.
Following the payment of debts owed by Mrs Ross there were insufficient funds to meet the specific legacies in full and the executor (in this case the solicitor who had drafted Mrs Ross’s will and had acted for her during her lifetime, Mr Petterson), needed to determine the proportions by which those legacies should abate.
Mr Petterson also had to consider Lorenzo’s claim that he was a creditor of his mother’s estate in respect of unpaid wages for working in the café. At a meeting of the family after Mrs Ross’s death, the three children agreed that Lorenzo should carry on running the café business until it was sold and that until that time he should take any profits arising from it but be responsible for any losses.
The children were unable to reach an agreement with Mr Petterson about the payment of the debts of the estate so they applied to court so that it could determine the proportions by which their legacies should abate.
There were two preliminary issues to be resolved before the Court could apply the rateable reduction to the value of each portion of the estate:
- Did Lorenzo’s claim for unpaid wages for his work in keeping the café business going following his mother’s death make him a creditor of the estate?
Lorenzo claimed wages were owed to him, his wife and daughter from their employment in the café for a period following Mrs Ross’s death. The Court decided that as the children had agreed that Lorenzo would be responsible, in the role of sole proprietor, for any liabilities of the business as well as being able to take any profits pending its sale, the liabilities of the business included the wages claimed by Lorenzo and his family. His claim for payment of wages as a debt of the wider estate, therefore failed.
- Should the mortgage on the property given to Diana (1 above) be repaid from the sale proceeds of that property alone or should it be discharged, as part of the statutory abatement calculation from the estate as a whole?
The Court decided that the provision from Mrs Ross’s will, quoted above, was specific enough to demonstrate a contrary intention so that the debt secured on the property that passed specifically to Diana should be treated as a debt of the estate. It followed that the mortgage debt was to be paid out of the assets in the estate rather than being paid entirely from Diana’s legacy.
Going through the categories of legacy listed in the order in which they appear in the diagram opposite and Part II of Schedule 1 to the Administration of Estates Act 1925, the court identified two categories as being relevant.
- Assets passing into residue (green box)
- Specific legacies. (purple box)
The third category (light blue box), property subject to a charge, was discounted because of the contrary intention shown in Mrs Ross’s will in the gift of the residential property to Diana.
Assets in the green and purple categories had to be abated rateably according to their probate value not heir current market value). After the small amount of residue (green) had been abated in its entirety, the probate values for the specific gifts (purple) were converted into percentages of their aggregate value so that the liabilities could be apportioned and the legacies could abate rateably.
So – as an example – the downstairs share of the premises where the café business was conducted and the business itself gifted to the three children represented 24.74% of the total value of the specific legacies. The same percentage of the total debts not already satisfied from residue was therefore to be satisfied from that legacy. In each case where the satisfaction of debts ate into the gifts, the beneficiaries could choose to fund the repayment of the debt themselves to avoid a forced sale of their specific legacy.
The mortgagee on the residential property specifically left to Diana would automatically have been repaid from the sale proceeds. Given the contrary intention in Mrs Ross’s will, the mortgage should have been paid off as a general debt of the estate. Diana was therefore entitled to recoup part of what had been paid to the mortgagee from the other legatees as she had been entitled to the property free of mortgage. Even so, the value of her specific legacy represented 35.78% of the aggregate value of the specific legacies and the same percentage of the outstanding debts (including the mortgage) had to be satisfied from the sale proceeds of the house that Diana had received.
- Although the statutory rules of abatement applied where there were insufficient funds, after payment of all debts, to pay all specific legacies, the wording of a legacy of a house subject to a mortgage can be sufficiently specific to disapply the normal rule that debts should be paid from the asset on which they were secured.
- Although this case was decided on its own complicated facts, it is a useful reminder that practitioners should consider the eventual incidence of debts in an estate very carefully when drafting wills.
- Even where the will is unclear, there may be evidence of the testator’s intention outside the will, for example, where an endowment policy is taken out at the same time as a mortgage – see Ross v Perrin-Hughes  EWHC 2559 (Ch)
- The case is also a salutary reminder for executors and those involved in estate administration that in applying the statutory rules of abatement, it is essential to look closely at the terms of the will to see if a contrary intention has ousted their application.