CHAPTER 23

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CHAPTER 23. ESTATES AND TRUSTS. FOCUS OF CHAPTER 23. The Role Accountants Play in Estate Planning Principal Versus Income Accounting for Estates Accounting for Trusts. Trusts: The Parties Involved. The parties to a trust are the: Trustor: The party creating the trust. - PowerPoint PPT Presentation

Text of CHAPTER 23

  • CHAPTER 23ESTATES AND TRUSTS

  • FOCUS OF CHAPTER 23The Role Accountants Play in Estate PlanningPrincipal Versus IncomeAccounting for EstatesAccounting for Trusts

  • Trusts: The Parties InvolvedThe parties to a trust are the:Trustor: The party creating the trust.Trustee: The party that serves in a fiduciary capacity for the trust beneficiaries.Beneficiaries: The parties who benefit from the trust.

  • Trusts: Types of BeneficiariesTrust beneficiaries are of the following two classes:Income beneficiaryentitled to the income earned by the trusts assets.Principal beneficiaryentitled to the principal, or corpus, of the trust.Principal is distributed according to the terms of the trust (usually at the end).

  • Beneficiaries: Clashes of InterestA built-in clash of interests when:The income and principal beneficiaries are different persons.WHO GETS WHAT?The income and principal beneficiaries are the same person.WHEN DO I GET IT?

  • Income Beneficiary: Beginning of RightsThe interests of the income beneficiary must be accounted for separately from the interests of the principal beneficiary BOTH:During the period of the estate administration as well asAfter the property is actually transferred to the trustee.

  • Distinguishing BetweenPrincipal and IncomeIn determining whether a transaction pertains to principal or income, the determination is made by referring to:First: The trust agreement.Second: State law.*Third: Case law.Fourth: GAAP.*State law may be based on The Revised Uniform Principal and Income Act [of either 1962 or 1997].

  • Income Beneficiaries:Beginning of RightsUnder the Revised Uniform Principal and Income Act [of 1962], the rights of the income beneficiary begin:At the date of death of the decedent who created the trust.

  • Trust Principal:Determining Initial AmountsIn determining at the time of the persons death the assets that are to be treated as part of the TRUST PRINCIPAL:The accrual basis is to be used (under the Revised Uniform Principal and Income Act [of 1962]).

  • Estates: FiduciariesA fiduciary may be either:An EXECUTOR(RIX). The person named in the will (decedent has died testate) orAn ADMINISTRATOR(RIX). The person appointed by the court (decedent has died intestate).

  • Estates: ProbateProbate is the act by which the COURT determines whether:The will submitted to it meets the statutory requirements concerning wills.If the court so determines, then it issues a certificate or decree that enables the terms of the will to be carried out.

  • Estates: ProbateUnder the state probate laws, the affairs of decedents must be:Administered by FIDUCIARIES.These fiduciaries are subject to the control of the state probate courts.

  • Estates: GiftsA gift of real property is called a devise.A gift of personal property is called a legacy.Types of LEGACIES:Specific: A specific noncash item.Demonstrative: Cashfrom a certain fund.General: Cashfrom no certain fund.Residual: What remains.$

  • Estates: Duties of An Estate FiduciaryThe fiduciary of an estate:Takes an inventory of the decedents property.Pays estate liabilities.Prepares and files tax returns for:The decedent.The decedents estate.#1#2#3Federal Form 1041: U.S. Fiduciary Income Tax Return

  • Trusts: Compared With EstatesAccounting for trusts is virtually identical to accounting for estates, even though the nature of the transactions is substantially different.

  • Accounting for Estates and TrustsFor both estates and trusts, the interests of both the income beneficiary and the principal beneficiary can easily be accounted for using: A single general ledger.ONLY one bank account.Which is separated into two general ledger accounts: One pertaining to principal. One pertaining to income.

  • Trusts: The Revised Uniform Principal And Income Act (of 1962)Requirements of the Act:Depreciation is mandatory.Unusual charges against income may be recouped from income over a reasonable period of time.

  • Trusts: The Revised Uniform Principal And Income Act (of 1962)Under the Act, certain costs and expenses must be charged to PRINCIPAL. Examples are:Costs of investing principal assets.Costs of preparing property for rental or sale.Taxes on gains allocated to principal.Costs incurred to protect trust property.

  • Revised Uniform PrincipalAnd Income Act (of 1962)Under the Act, certain costs and expenses must be shared equally between PRINCIPAL and INCOME. Examples:Court costs.Attorney and accounting fees.Trustees fees.

  • End of Chapter 23Time to Clear Things UpAny Questions?