Chapter Nineteen

Accounting for
Estates and Trusts

McGraw-Hill/Irwin

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

LO 1

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 persons death until the
ultimate distribution of all property held
by the estate
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Estate Accounting
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.

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
decedents 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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LO 2

Legacies and Devises

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).
19-5

Estate Distributions
Priority:
Specific legacies
Demonstrative legacies
General legacies
Residual legacies
A gift of real
property
is called a
devise.

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

19-6

LO 3

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 govt

has repealed the
related credit for
state taxes and
changed it to a
deduction going
forward.
19-7

The Distinction Between

Income and Principal

LO 4

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.
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The Distinction Between

Income and Principal
Principal of the estate includes the assets that
existed at the date of death, which became
assets of the decedents 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.
19-9

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, and
Other ordinary expenses required for the
management and preservation of the estate.
19-10

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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LO 5

Charge and Discharge Statement

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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LO 6

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 persons taxable estate and the estate
taxes that must be paid.
A trustee may be an Individual or an
organization.
19-13

Different Types of Trusts

Revocable Living Trust
Credit Shelter Trust
Qualified Terminable
Interest Property Trust
Charitable Remainder
Trust
Charitable Lead Trust

Grantor Retained
Annuity Trust
Minors Section
2503(c) Trust
Spendthrift Trust
Irrevocable Life
Insurance Trust
Qualified Personal
Resident Trust

19-14