When individuals pass away, families and friends of the deceased will be grieving. Unfortunately, there are also a number of tasks that have to be carried out at this difficult time. These include planning the funeral, packing up the belongings and winding up the affairs of the deceased.
Winding up financial affairs involves identifying and closing down the bank accounts of the individual. The closing balances should be brought into the estate of the deceased.
The total can then be distributed to the beneficiaries, either under a valid Will or, if the individual died without one, under the Rules of Intestacy.
To facilitate this process, banks have long released funds up to a certain threshold to Executors or relatives on the basis of a death certificate, without requiring proof that probate has been granted.
In recent years there has been a worrying upward trend in the limits under which banks will release funds without evidence of probate. These thresholds have now skyrocketed under Covid-19.
As a result of these estates falling under the radar, probate practitioners are missing out on thousands of estate administrations every year. Additionally, the Department of Work and Pensions (DWP) may be missing significant repayments due to them.
In this article, we examine the legal background for this practice, as well as the risks and consequences of releasing large sums in the absence of probate.
We also point out the risks to beneficiaries, who may not realise there are debts that need to be repaid.
The standard procedure for estate administration over £5,000
Under s.1 of the Administration of Estates (Small Payments) Act 1965 (the Act), a Grant of Probate or Letters of Administration is not required when somebody dies with assets worth under £5,000. The figure was originally £500, and was substituted with £5,000 by way of a statutory instrument in 1984.
Normally, if an estate is worth over £5,000 then a Personal Representative (PR) will need to apply for probate by way of an application to the Probate Registry, which is part of HM Courts & Tribunal Service.
If successful, the Registry will issue the Grant of Representation, which confirms that the PR has the authority to administer the estate. Since 1858 this process has always been open and transparent, with annual indexes made publicly available for inspection in one form or another. Nowadays, the same transparency and the opportunity for oversight is maintained via publication on the Government’s website.
Muddied waters – discretionary payments by banks
When banks and building societies release monies without requiring proof of probate, this allows the formal processes to be bypassed. It means lost income for probate practitioners and potential future problems for beneficiaries.
Despite the Act clearly setting the threshold for probate at £5,000, it is silent on the release of funds from bank accounts. As a result, financial institutions have been free to choose their own limits.
Most banks in the UK raised their thresholds in 2015 after a review in response to campaigning by consumer groups and the public. The move was to enable families to wind up financial affairs more easily, which is an understandable motive.
However, this seems to have taken place without due regard for potential consequences, such as lost DWP repayments and the increased risk of tax or inheritance fraud.
In 2012 the Law Society published the Banking Practices Protocol on Estate Administration. This was developed together with the British Bankers’ Association and the Society of Trust and Estate Practitioners (STEP).
The Protocol’s purpose was to provide clarity on the role of banks following the death of a customer. However, the document does not recommend any designated threshold for dispensing account funds without proof of probate.
Regardless of the overall increase in 2015, there is no standard figure at which financial institutions insist on evidence of probate. There is still huge inconsistency across the sector, with thresholds ranging from £5,000 to £50,000.
It is unclear why the majority of institutions choose to deviate from the upper figure of £5,000 provided in the Act.
Institutions also seem to differ as to the practical application of the threshold. Some apply it to the overall value of the estate, which may be spread across several accounts. Others apply the limit to the figure held by that individual bank.
Where institutions release funds on the basis of the amount they hold, rather than the total estate, it can result in particularly high sums being released without probate.
Intestacies and Bona Vacantia estates
In England & Wales, most ownerless property, including intestacies where there is no known entitled relative, vests with the Crown. These unclaimed or ownerless estates are known as ‘bona vacantia’.
In addition to the situation described above, the Bona Vacantia Division (BVD) of the Government Legal Department also uses a threshold of £15,000 to define small estates. Not only does this exceed the limit contained in the Act, it appears that the BVD frequently breaches its own threshold and releases funds well in excess of £15,000 without requiring a Grant.
The application for, and extraction of, a Grant of Representation is quite rightly a reserved activity. The bypassing of this process not only represents lost business for qualified probate practitioners, it can also lead to a variety of potential problems, such as the loss to the public purse.
A double whammy – the DWP also loses out
The DWP has the right to recover debts owed to them from the estate of a deceased person.
To this end, the DWP monitors all Grants that are issued and checks the names against its records. This appears to be the only method by which the DWP determines whether a deceased benefit claimant owned more assets than was declared. If funds are released without probate, the DWP never becomes aware of the estate and they will be unable to assess the true position. This leaves the public purse deprived of much-needed funds.
Likelihood of DWP debts
Debts owed to the DWP due to overpayments may be more common than many people realise.
According to the DWP’s National Statistics on fraud and error in the benefits system, in the tax year ending April 2020, overpayments increased compared to the previous year. A total of £270 million was overpaid.
The report indicates that Pension Credit, the primary benefit for elderly people of State Pension age, had an overpayment rate of 5.3%.
In addition, almost a quarter of all cases involved overpayment. The increase in Pension Credit overpayments was attributed mainly to a rise in fraud as well as genuine errors by claimants, such as not immediately declaring changes.
Most grieving families do not consider that their deceased relative may have fallen foul of the strict rules on Pension Credit or other social security benefits.
If they are administering the deceased’s estate without obtaining a Grant, they may be unaware of the trouble they could be storing up for the future. These potential problems are easily avoidable if due process is followed and a solicitor is instructed to obtain the Grant.
An example
Even substantial estates can be hidden from the DWP’s view when banks and building societies release sums to relatives without probate.
It would be perfectly possible for a relative to access £200,000 without probate, across multiple financial institutions. For example, this could be achieved by closing down three bank accounts containing just under £50,000 each, plus two building society accounts containing just under £25,000 each.
In this example, the beneficiary may not realise that the deceased had neglected to declare their considerable savings to the DWP. In fact, the deceased had been incorrectly in receipt of low income benefits for a number of years, accruing overpayments in the thousands of pounds.
Not knowing this, the beneficiary could spend their inheritance on the purchase of a family home.
If the DWP later discover the existence of the estate and the debt, it would cost considerable time and resources to claw back the debt. The beneficiary could even be forced to sell their property if they had insufficient funds available to repay.
Of course, if the DWP remains unaware of the estate, there will be a loss to the public purse.
Either way, the risk to beneficiaries of distressing debt recovery and legal action is best avoided by using the formal mechanism and employing a professional to obtain probate.
Ever-increasing sums
Both Solicitors for the Elderly (SFE) and STEP have reported that, since Covid-19, sums being released without probate have skyrocketed. While the previous maximum was £50,000, institutions are now issuing as much as £125,000.
Ownership of real estate property triggers the requirement for probate. However, sometimes the deceased did not own property but had financial accounts with multiple institutions. This can result in hefty sums being handed to individuals who have no formal authority to manage the estate.
SFE in particular have raised concerns about this matter. The worrying implications extend even beyond the financial impact on the DWP, given that the practice reduces transparency and legal oversight in a way that may facilitate fraud and could be considered prejudicial to law enforcement.
Bearing in mind the substantial sums involved, there is also a risk that individuals could abuse this process to avoid paying inheritance tax. The practice may therefore be problematic for HM Revenue and Customs.
Our view
At Anglia Research we believe that matters relating to death and associated finances should be managed with the utmost transparency, accountability and due process, and that the probate court system should be utilised by professionals or personal applicants for all but minor values.
We also consider that the public purse can sorely afford for estates to be hidden from view when there is a possibility of recovering DWP overpayments.
For these reasons, we feel that financial bodies and other institutions should adhere to a lower, specific, standard limit, above which they will not freely issue funds. In the absence of any other clearly defined figure, we recommend that this should be set at the £5,000 threshold for Small Estates as stated in the Act.
We would also welcome government guidance, or indeed legislation, to improve consistency in this area. This could help prevent the complications that can arise when estates are administered without the authority of a Grant of Probate.
Note:
The DWP’s attention has been drawn to the likelihood that Estates are concealed from them due to this loophole in the probate system. Unfortunately, they declined to comment on the matter.
The DWP was also asked to confirm that the strict application of a £5,000 small estate threshold for probate purposes would be of benefit to the public purse. Again, they declined to comment.
Rosie Kelly ACILEx is a Legal Consultant at Anglia Research
