Chapter Nineteen

Accounting for Estates and

Trusts

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Learning Objective 19-1

Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

19-2

Accounting for an Estate

The term estate refers to the property (assets) owned by an individual.

More specifically defined as a separate legal entity holding title to the real and personal assets of a deceased person.

Estate accounting focuses on the recording and reporting of financial events from the time of a person’s death until the ultimate distribution of all property held by the estate.

19-3

Estate Accounting

A valid will ensures that asset disposition occurs as intended and avoids disputes when a person dies. A will is a person’s declaration of how s/he desires the property they own to be disposed of after death. When someone dies:

With a valid will, they die testate.• A will serves as the blueprint for settling the estate.

Without a valid will, they die intestate.• State laws control the administration of the estate.• Real property is conveyed based on laws of descent.• Personal property transfers based on laws of distribution.

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Laws governing wills and estates are called “probate laws”.

Each state establishes its own laws of descent and laws of distribution.

Almost half of the states have adopted the Uniform Probate Code.

Estate Accounting

Probate Laws -- Three general purposes:

1) Gather and preserve all of the property.

2) Carry out orderly and fair settlement debts.

3) Discover and implement the decedent’s intentions for remaining property.

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Probate Process The will is presented

to the court.

An executor (administrator)

is assigned.

Court appoints a representative as

administrator.

Terms of will are carried out.

Entitled to compensation.

Administration of the Estate

Court rules on will’s validity.

No will has been discovered.OR

State laws control administration of estate.

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Learning Objective 19-2

Describe the types of estatedistributions and identify theprocess of asset allocations anddistributions from an estate.

19-7

If funds are insufficient to satisfy all of the legacies, the reduction of these gifts is called “the process of abatement.”

Estate Distributions

Priority:Specific legacies

Demonstrative legaciesGeneral legaciesResidual legacies

Debts and expenses of the administration of the estate are paid first.

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Learning Objective 19-3

Understand the federal estatetax and state inheritance taxsystems, the correspondingexemptions, and tax planningopportunities.

19-9

Estate and Inheritance Taxes

The federal estate tax is an excise tax assessed on the right to convey property. The computation begins by determining the fair value of all property held at death.Real property transferred immediately to a beneficiary and not subject to probate must be included for federal estate tax purposes.An alternative evaluation date, six months after death, may be used to determine fair value if it reduces the amount of estate taxes to be paid.

19-10

State Inheritance Taxes Some wills specify that inheritance taxes are to be

paid from any residual cash amounts the estate holds. Often, recipients of property must contribute cash to

the estate to cover the taxes. If the will makes no provisions for state inheritance

taxes (or if the decedent dies intestate), the amount conveyed to each party must be reduced proportionately based on the fair value received.

Other Estate Issues

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Learning Objective 19-4

Understand and account forthe distinction between principal and income in the context of estate and trust accounting.

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The recipient of estate income is called the “income beneficiary”.

The recipient of the estate principal (also called “corpus”) is called the “remainderman”.

How income is to be determined should be defined by the decedent in the will to avoid confusion.

Principal of the estate includes assets that existed at the date of death, which became assets of the estate.

Distinction Between Income and Principal

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Learning Objective 19-5

Describe the financial statementsand journal entries utilized to account for estate and trust transactions.

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Periodic Charge and Discharge statements report disclose 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

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Learning Objective 19-6

Describe various trusts, their proper use, and accounting for activities.

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Trusts

A TRUST is created by conveying assets to a fiduciary (or trustee)

Trusts are often established: - from the provisions of a will, specified by the decedent to guide distribution of estate property. - to reduce the size of a taxable estate and estate taxes that must be paid. - to protect assets and ensure that the eventual use of these assets is as intended.

A trustee may be an individual or an organization19-17

A testamentary trust is established by the will after the trustor’s death.

Trusts

The person who funds the trust is called the grantor, trustor, or settlor.

An inter vivos trust is established while a person is still alive.

The person who funds the trust appoints a trustee to manage the investments of the trust.

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Different Types of Trusts

Credit Shelter Trust

Qualified Terminable Interest Property Trust (QTIP Trust)

Charitable Remainder Trust

Charitable Lead Trust

Grantor Retained Annuity Trust (GRAT)

Minor’s Section 2503(c) Trust

Spendthrift Trust

Irrevocable Life Insurance Trust

Qualified Personal Resident Trust (QPRT)

19-19

Usually, the cash basis of accounting is used to record trust 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. Extraordinary repairs.

Record-Keeping for a Trust Fund

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Adjustments to the Trust’s Income: Rent expense Lease cancellation fees Interest expense Insurance expense Income taxes on trust income Property taxes

Trustee fees and periodic reporting costs (accountant and legal fees) must be allocated between trust income and principal based on the value of the assets.

Record-Keeping for a Trust Fund

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