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Chapter 23

Estates and
Trusts
Estates and Trusts: Objectives
1. Understand basic accounting for the estate
of a decedent.
2. Understand the principal versus income
issues in estate and trust accounting.
3. Understand basic accounting for a trust.
4. Understand how estates are taxed.

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Estates and Trusts

1: ESTATES

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Understanding Estates
Estates come into existence at the death of
an individual (decedent)
Testate (with a valid will)
Intestate (no will or will not validated by
probate court)
Governed by state laws
Uniform Probate Code followed in text
Not all states have adopted it
Court-appointed administrator or executor
Personal representative of deceased
Administers the estate
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Intestate Succession

All passes to spouse if


Decedent has no living descendants, or
All surviving descendants are also
descendants of spouse
Otherwise
Spouse receives first $100,000
Plus one-half of remaining estate
Remainder to other descendants
Varies by state

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Administering the Estate
Executor or Administrator
30 days to inform heirs and devisees of
appointment
- Those entitled to property according to will
(devisees) and law (heirs)
3 months to file inventory of property
- Fair value
- Disclose liens and claims
- May exclude personal items of limited value
Notices in county newspaper for three
consecutive weeks

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Exempt Property
Uniform Probate Code allows
Homestead allowance $15,000
Entitlement to personal property
(furniture, vehicles) $10,000
Family allowance
- Reasonable amount during
administration of estate
- To surviving spouse (equally to
minor children if no spouse)

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Classification of Claims
Claims made against the estate prior to
death, or within four months of death (or
three years if notice to creditors not
published) are considered valid.
If estate is insufficient to pay all claims,
payments are made first to
Administration costs and expenses,
Reasonable funeral and medical
expenses of last illness,
Debts and taxes with legal preference,
Then, all other claims.

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Accounting for the Estate
Executor lists estate property and claims
Property for which responsibility has
been assumed
Manner in which that property is
discharged to discharge claims

Liabilities of decedent are not assumed by


executor/administrator
Record the payment of the debt, not
the unpaid debt

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Estates and Trusts

2: PRINCIPAL VERSUS
INCOME

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Principal and Income
Estates and trusts often have separate
treatment for income and principal.
One may remain in trust, the other
distributed
Distributions may be to different
individuals

Accounting must clearly differentiate


principal (the estate property at the time of
death) and income (the earnings on the
principal after the date of death) amounts.

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Measurement
Initial fair values are recorded at the establishment
of the estate or trust.
Changes in value after that
Income (loss)
Adjustments for inaccurate fair values
Change to principal

For example, interest collected after establishing a


trust would be considered
Principal, if receivable at start of trust
Income, if earned after start of trust

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Estate Income
Accounting for estates has two control tools for
income and principal.

1. Use separate accounts for cash


Cash principal
- Cash in original inventory
- Cash from conversion of other principal

2. Use separate Estate accounts


- Estate principal
- Estate income

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Example: Record Inventory
Cash principal 30
Note Receivable 93
Interest receivable 2
Common stock 40
Municipal bonds 15
Summer home 55
2011 Nissan 8
Estate principal 243

Assets are recorded at fair value at decedent's


death.

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Example: Collect on
Receivables

Cash - principal 95
Notes receivable 93
Interest receivable 2

Collect the note and interest due.


If additional interest had accrued, the additional
amount is recorded
Debit: Cash income
Credit: Estate income

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Example: Convert Assets to
Cash
Cash principal 8
Cash income 1
2011 Nissan 8
Estate income 1

Sell the Nissan for $9.


Fair value at time of death was $8
Additional $1 is income to the estate
If $9 was deemed to be the true value at time of
death, but the value had been recorded as $8 in
error,
Cash principal gets full $9
Credit: Estate principal $1
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Example: Pay Expenses and
Debts
Administration expense 4
Funeral expense 5
Medical expense 19
Debts of decedent 100
Cash - principal 128

Expenses and debts are paid from principal.


Payments and distributions must follow
State laws
Valid will

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Example: Distributions of Cash
Devise - L. Hunt 19
Devise - S. Tyson 6
Devise - Church 10
Cash principal 35
Devise - G. Olds 1
Cash income 1

Cash distributions are from


Cash principal
Cash income
Records are specific as to recipients

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Example: Distributions in Kind
Devise - summer home to L. Hunt 55
Devise - Common stock to M. Wallace 40
Summer home 55
Common stock 40

Distributions of assets other than cash.


Clearly indicate both
Item distributed
Recipient

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Example: Settling the Estate
After payments and distributions of cash and assets
Expenses and costs
Debts
All devisees or heirs other than residual
beneficiary
Nominal accounts are closed, with remaining assets
left in account balances and distributed to the
residual beneficiary (or trustee).
Prepare the Charge-Discharge Statement (detailed
under Objective 4).

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Estates and Trusts

3: TRUSTS

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Accounting for Trusts
Guidance
State laws
Uniform Trusts Act
Uniform Probate Code
Revised Uniform Principal and Income
Act

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Purpose of Trust
Accounting should provide sufficient
evidence to show that the applicable laws
and instructions of the particular trust are
followed.

Control for income and principal


Use separate net asset accounts
- Trust fund principal
- Trust fund income

Often, trust funds do not segregate cash.

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Charge-Discharge Statement
Detail of all transactions of trust or estate:
Assets of estate or trust
Included in inventory
Discovered after inventory
Payments and distributions of estate principal
Cash payments for expenses, debts, to
heirs and devisees
Distributions in kind in settlement of
expenses, debts, or made to heirs and
devisees
Estate income: receipts and disposition
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Charge-Discharge Statement

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Estates and Trusts

4. ESTATE TAXES

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Estate Taxes

Estates may be subject to federal and/or


state inheritance taxes.

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Estate Tax Planning
Maximum tax rate in 2013 is 40%
Estates under $5,250,000 are exempt

For large estates, proper tax planning can


lead to significant "savings"
Additional amounts available for heirs
or devisees
Amounts available for charities and
other organizations

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