Explanation:

- When A dies, his outstanding liabilities need to be settled from his estate.

- A owes Rs 60,000 to B, but his estate is only worth Rs 40,000.

- Legal representatives are required to settle debts only up to the value of the estate.

- Option 1, Rs 20,000: Incorrect; the estate covers Rs 40,000, not Rs 20,000.

- Option 2, Rs 40,000: Correct; they can pay only Rs 40,000 from the estate.

- Option 3, Rs 60,000: Incorrect; they can't pay more than the estate's value.

- Option 4, None of the above: Incorrect; option 2 is correct.

Option 2 is the correct answer: the estate only covers Rs 40,000.