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© The McGraw-Hill Companies, Inc., 2004
Slide 19-1
McGraw-Hill/Irwin
Chapter Nineteen
Accounting for Accounting for Estates and Estates and
TrustsTrusts
© The McGraw-Hill Companies, Inc., 2004
Slide 19-2
McGraw-Hill/Irwin
Estate Accounting
© The McGraw-Hill Companies, Inc., 2004
Slide 19-3
McGraw-Hill/Irwin
Laws governing wills and estates are called “probate laws”.
Each state establishes its own laws of descent and laws of distribution.
50% of states have adopted the Uniform Probate Code.
Laws governing wills and estates are called “probate laws”.
Each state establishes its own laws of descent and laws of distribution.
50% of states have adopted the Uniform Probate Code.
Will
Estate Accounting
Probate Laws generally Probate Laws generally have 3 purposes:have 3 purposes:
Gather and preserve all Gather and preserve all of the decedent’s of the decedent’s property.property.
Carry out an orderly and Carry out an orderly and fair settlement of all fair settlement of all debts.debts.
Discover and carrying Discover and carrying out the decedent’s out the decedent’s intentions for remaining intentions for remaining property at death. property at death.
Probate Laws generally Probate Laws generally have 3 purposes:have 3 purposes:
Gather and preserve all Gather and preserve all of the decedent’s of the decedent’s property.property.
Carry out an orderly and Carry out an orderly and fair settlement of all fair settlement of all debts.debts.
Discover and carrying Discover and carrying out the decedent’s out the decedent’s intentions for remaining intentions for remaining property at death. property at death.
© The McGraw-Hill Companies, Inc., 2004
Slide 19-4
McGraw-Hill/Irwin
Probate Process
1. The will is presented to
the court.
1. The will is presented to
the court.
3. An executor or administrator
is assigned.
3. An executor or administrator
is assigned.
2. The court rules on the
will’s validity.
2. The court rules on the
will’s validity.
4. The terms of the will are carried out.
4. The terms of the will are carried out.
Entitled to compensation.
Administration of the Estate
© The McGraw-Hill Companies, Inc., 2004
Slide 19-5
McGraw-Hill/Irwin
Executor Responsibilities
1. Take possession of all decedent’s assets and complete an inventory of the property.
2. Discover claims against the estate and settle those claims.
3. File estate tax returns. Federal and State
4. Distribute property5. Make a full accounting
to the probate court.
© The McGraw-Hill Companies, Inc., 2004
Slide 19-6
McGraw-Hill/Irwin
Property Included in the Estate
© The McGraw-Hill Companies, Inc., 2004
Slide 19-7
McGraw-Hill/Irwin
Order of priority: Expenses of
administering the estate.
Funeral and medical expenses.
Debts and taxes. All other claims.
Order of priority: Expenses of
administering the estate.
Funeral and medical expenses.
Debts and taxes. All other claims.
Discovery of Claims Against the Estate
© The McGraw-Hill Companies, Inc., 2004
Slide 19-8
McGraw-Hill/Irwin
Types of Gifts: Specific legacy. Demonstrative
legacy. General legacy. Residual Legacy.
Types of Gifts: Specific legacy. Demonstrative
legacy. General legacy. Residual Legacy.
Discovery of Claims Against the Estate
© The McGraw-Hill Companies, Inc., 2004
Slide 19-9
McGraw-Hill/Irwin
Order of abatement in the event of
insufficient funds to pay debts and
expenses: Specific legacies. Demonstrative legacies. General legacies. Residual legacies.
Order of abatement in the event of
insufficient funds to pay debts and
expenses: Specific legacies. Demonstrative legacies. General legacies. Residual legacies.
Discovery of Claims Against the Estate
© The McGraw-Hill Companies, Inc., 2004
Slide 19-10
McGraw-Hill/Irwin
The federal gov't hasrepealed the relatedcredit for 2002-2004.
Som e states alsoim pose an estate tax.
The tax is repealed for2010, but returns in 2011unless Congress extends
the repeal.
The estate tax only appliesto estates in excess of $1m illion, increasing to $3.5
m illion by 2009.
F ed era l es ta te tax ra tesu sed to b e as h ig h as 50%.
Estate and Inheritance Taxes
© The McGraw-Hill Companies, Inc., 2004
Slide 19-11
McGraw-Hill/Irwin
An alternative dateof 6 m onths after
death m ay be usedif it reduces taxes.
Adjust the grossestate figure by
allow ed deductions.
For 2002, the taxapplies only to
estates in excess of$1 million.
A tax rate up to50% is applied to
the taxable estate.
Determ ine the FM V ofall property held at death.
Federal Estate Taxes
Funeral expenses. Admin. expenses. Liabilities.
Casualties & thefts. Charitable bequests. Marital deduction.
© The McGraw-Hill Companies, Inc., 2004
Slide 19-12
McGraw-Hill/Irwin
Federal Estate Tax Rates
The rates below were established by The rates below were established by Congress in the Economic Growth and Tax Congress in the Economic Growth and Tax
Relief Reconciliation Act of 2001.Relief Reconciliation Act of 2001.
The rates below were established by The rates below were established by Congress in the Economic Growth and Tax Congress in the Economic Growth and Tax
Relief Reconciliation Act of 2001.Relief Reconciliation Act of 2001.
© The McGraw-Hill Companies, Inc., 2004
Slide 19-13
McGraw-Hill/Irwin
State Inheritance TaxesState Inheritance Taxes Often, recipients of Often, recipients of propertyproperty, ,
must contribute must contribute cashcash to the to the estate to cover the estate to cover the applicable taxes.applicable taxes.
Estate Income TaxesEstate Income Taxes Any income from the estate Any income from the estate
assets is taxable to the assets is taxable to the estate.estate.
An exemption of $600 is An exemption of $600 is provided.provided.
Separate tax rates are Separate tax rates are available for estate income.available for estate income.
State Inheritance TaxesState Inheritance Taxes Often, recipients of Often, recipients of propertyproperty, ,
must contribute must contribute cashcash to the to the estate to cover the estate to cover the applicable taxes.applicable taxes.
Estate Income TaxesEstate Income Taxes Any income from the estate Any income from the estate
assets is taxable to the assets is taxable to the estate.estate.
An exemption of $600 is An exemption of $600 is provided.provided.
Separate tax rates are Separate tax rates are available for estate income.available for estate income.
Other Estate Issues
© The McGraw-Hill Companies, Inc., 2004
Slide 19-14
McGraw-Hill/Irwin
The recipient of estate income is called the “income beneficiary”.
The recipient of the estate principal is called the “remainderman”.
How income is to be determined should be defined by the decedent in the will.
The recipient of estate income is called the “income beneficiary”.
The recipient of the estate principal is called the “remainderman”.
How income is to be determined should be defined by the decedent in the will.
The Distinction Between Income and Principal
Income of the Estate often includes:
Recurring taxes such as property taxes.
Ordinary repair expense. Utility expense. Insurance expense. Other expenses
necessary for the management and preservation of the estate.
Income of the Estate often includes:
Recurring taxes such as property taxes.
Ordinary repair expense. Utility expense. Insurance expense. Other expenses
necessary for the management and preservation of the estate.
Principal of the Estate often includes:
Life insurance proceeds. Dividends. Debts. Funeral expenses. Gains/Losses from sale of
assets. Homestead and family
expenses.
Principal of the Estate often includes:
Life insurance proceeds. Dividends. Debts. Funeral expenses. Gains/Losses from sale of
assets. Homestead and family
expenses.
© The McGraw-Hill Companies, Inc., 2004
Slide 19-15
McGraw-Hill/Irwin
R e co rds m u stb e kep t re :
th e d isp o s it iono f a ll asse ts.
All estate assetsare recorded at
FM V.
T ra n sa c tio nsa re o n ly re le va n t
a s re so u rcesa re d ispe rse d .
Debts, taxes, &other obligationsare recorded only
at paym ent.
O fte n , tw o ca sha cco un ts a rem a in ta in e d .
Separately identifyincome and
principaltransactions.
Recording the Transactions of an Estate
© The McGraw-Hill Companies, Inc., 2004
Slide 19-16
McGraw-Hill/Irwin
A periodic statement disclosing progress in settling the estate.
Separate statements are required for income and principal.
Each statement reports: Assets under the control of the
executor. Disbursements made to date. Any property still remaining.
A periodic statement disclosing progress in settling the estate.
Separate statements are required for income and principal.
Each statement reports: Assets under the control of the
executor. Disbursements made to date. Any property still remaining.
Charge and Discharge Statement
© The McGraw-Hill Companies, Inc., 2004
Slide 19-17
McGraw-Hill/Irwin
Let’s look Let’s look at at
accounting accounting for trusts.for trusts.
© The McGraw-Hill Companies, Inc., 2004
Slide 19-18
McGraw-Hill/Irwin
Accounting for a Trust
A TRUST ISA TRUST IS the conveyance of assets to a the conveyance of assets to a fiduciary who manages the assets according to fiduciary who manages the assets according to
the stipulated instructions.the stipulated instructions.
A TRUST ISA TRUST IS the conveyance of assets to a the conveyance of assets to a fiduciary who manages the assets according to fiduciary who manages the assets according to
the stipulated instructions.the stipulated instructions.
© The McGraw-Hill Companies, Inc., 2004
Slide 19-19
McGraw-Hill/Irwin
A trust established while the trustor is
still alive.
A trust established while the trustor is
still alive.
A trust established by the will after the
trustor’s death.
A trust established by the will after the
trustor’s death.
Accounting for a Trust
A TRUST ISA TRUST IS the conveyance of assets to a the conveyance of assets to a fiduciary who manages the assets according to fiduciary who manages the assets according to
the stipulated instructions.the stipulated instructions.
A TRUST ISA TRUST IS the conveyance of assets to a the conveyance of assets to a fiduciary who manages the assets according to fiduciary who manages the assets according to
the stipulated instructions.the stipulated instructions.
testamentary trusttestamentary trusttestamentary trusttestamentary trustinter vivos trustinter vivos trustinter vivos trustinter vivos trust VS.
© The McGraw-Hill Companies, Inc., 2004
Slide 19-20
McGraw-Hill/Irwin
Revocable Living Trust
Credit Shelter Trust Qualified Terminable
Interest Property Trust
Charitable Remainder Trust
Charitable Lead Trust
Grantor Retained Annuity Trust
Minor’s Section 2503(c) Trust
Spendthrift Trust Irrevocable Life
Insurance Trust Qualified Personal
Resident Trust
Different Types of Trusts
© The McGraw-Hill Companies, Inc., 2004
Slide 19-21
McGraw-Hill/Irwin
Usually, the cash basis is used to record trust Usually, the cash basis is used to record trust fund transactions.fund transactions.
Usually, the cash basis is used to record trust Usually, the cash basis is used to record trust fund transactions.fund transactions.
Adjustments to the Trust’s Principal:
Investing costs and commissions.
Income taxes on gains added to the principal.
Costs of preparing property for sale.
Adjustments to the Trust’s Principal:
Investing costs and commissions.
Income taxes on gains added to the principal.
Costs of preparing property for sale.
Record-Keeping for a Trust Fund
© The McGraw-Hill Companies, Inc., 2004
Slide 19-22
McGraw-Hill/Irwin
Adjustments to the Adjustments to the Trust’s Income:Trust’s Income:
Rent expense.Rent expense. Lease cancellation Lease cancellation
fees.fees. Interest expense.Interest expense. Insurance expense.Insurance expense. Income taxes on trust Income taxes on trust
income.income.
Adjustments to the Adjustments to the Trust’s Income:Trust’s Income:
Rent expense.Rent expense. Lease cancellation Lease cancellation
fees.fees. Interest expense.Interest expense. Insurance expense.Insurance expense. Income taxes on trust Income taxes on trust
income.income.
Record-Keeping for a Trust Fund
Usually, the cash basis is used to record trust Usually, the cash basis is used to record trust fund transactions.fund transactions.
Usually, the cash basis is used to record trust Usually, the cash basis is used to record trust fund transactions.fund transactions.
© The McGraw-Hill Companies, Inc., 2004
Slide 19-23
McGraw-Hill/Irwin
Bob, if anything happens to you, can I have your golf clubs?
Bob, if anything happens to you, can I have your golf clubs?
End of Chapter 19
Wow! Sounds
like Bob’s trip could
be dangerous
!