Chapter Nineteen

Accounting for Estates and Trusts

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Accounting for an “Estate”

“Estate” literally means property owned by an individual

Typically refers to a separate legal entity holding title to the 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”

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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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Estate Property Includes:

Cash

Investments in stocks and bonds

Interest accrued to the date of death

Dividends declared prior to death

Investments in businesses

Unpaid wages

Accrued rents and royalties

Valuables such as jewelry, paintings and antiques

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Gifts of personal property are called “legacies” or “bequests”…

Specific legacy (Gift of personal property from a directly identified source),

Demonstrative legacy , (Cash gift from particular source),

General legacy (Cash gift from an unspecified source), and

Residual Legacy (Gift from remaining estate property).

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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

A gift of real property

is called a “devise”.

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Estate and Inheritance Taxes

Federal estate tax rates used to be as high as 50%.

The estate tax limits vary widely from

2009-2011 because of expiring tax laws.

Some states also impose an estate tax.

The federal gov’t has repealed the related credit for state taxes and changed it to a

deduction going forward.

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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.

The Distinction Between Income and Principal

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

assets of the decedent’s estate.

Adjustments to principal include: Life insurance proceeds where the estate

was named beneficiary. Debts. Funeral expenses. Gains and Losses from sale of assets. Homestead and family allowances.

The Distinction Between Income and Principal

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The Distinction Between Income and Principal

Income of the estate includes all revenues and expenses incurred after the date of death.

Reductions to income include:Recurring taxes (such as real and personal property taxes),Ordinary repair expenses,Water and other utility expenses,Insurance expenses, andOther ordinary expenses required for the “management and preservation of the estate”.

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Recording the Transactions of an Estate

Estate assets are recorded at FMV.

Debts, taxes & other obligations are recorded when paid.

Distribution of legacies are not recorded until actually conveyed.

Separately identify income and principal transactions. Often, two cash accounts are maintained.

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Periodic reports 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.

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Trusts

A TRUST is created by the conveyance of assets to a fiduciary (or trustee) who manages the assets according to the stipulated instructions.

Trusts are often established to reduce the size of a person’s taxable estate and the estate taxes that must be paid.

A trustee may be an Individual or an organization.

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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

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