© The McGraw-Hill Companies, Inc., 2004 Slide 19-1 McGraw-Hill/Irwin Chapter Nineteen Accounting for Estates and Trusts.

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Chapter Nineteen

Accounting for Accounting for Estates and Estates and

TrustsTrusts

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Estate Accounting

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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.

50% of states have adopted the Uniform Probate Code.

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

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

50% of states have adopted the Uniform Probate Code.

Will

Estate Accounting

Probate Laws generally Probate Laws generally have 3 purposes:have 3 purposes:

Gather and preserve all Gather and preserve all of the decedent’s of the decedent’s property.property.

Carry out an orderly and Carry out an orderly and fair settlement of all fair settlement of all debts.debts.

Discover and carrying Discover and carrying out the decedent’s out the decedent’s intentions for remaining intentions for remaining property at death. property at death.

Probate Laws generally Probate Laws generally have 3 purposes:have 3 purposes:

Gather and preserve all Gather and preserve all of the decedent’s of the decedent’s property.property.

Carry out an orderly and Carry out an orderly and fair settlement of all fair settlement of all debts.debts.

Discover and carrying Discover and carrying out the decedent’s out the decedent’s intentions for remaining intentions for remaining property at death. property at death.

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Probate Process

1. The will is presented to

the court.

1. The will is presented to

the court.

3. An executor or administrator

is assigned.

3. An executor or administrator

is assigned.

2. The court rules on the

will’s validity.

2. The court rules on the

will’s validity.

4. The terms of the will are carried out.

4. The terms of the will are carried out.

Entitled to compensation.

Administration of the Estate

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Executor Responsibilities

1. Take possession of all decedent’s assets and complete an inventory of the property.

2. Discover claims against the estate and settle those claims.

3. File estate tax returns. Federal and State

4. Distribute property5. Make a full accounting

to the probate court.

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Property Included in the Estate

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Order of priority: Expenses of

administering the estate.

Funeral and medical expenses.

Debts and taxes. All other claims.

Order of priority: Expenses of

administering the estate.

Funeral and medical expenses.

Debts and taxes. All other claims.

Discovery of Claims Against the Estate

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Types of Gifts: Specific legacy. Demonstrative

legacy. General legacy. Residual Legacy.

Types of Gifts: Specific legacy. Demonstrative

legacy. General legacy. Residual Legacy.

Discovery of Claims Against the Estate

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Order of abatement in the event of

insufficient funds to pay debts and

expenses: Specific legacies. Demonstrative legacies. General legacies. Residual legacies.

Order of abatement in the event of

insufficient funds to pay debts and

expenses: Specific legacies. Demonstrative legacies. General legacies. Residual legacies.

Discovery of Claims Against the Estate

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The federal gov't hasrepealed the relatedcredit for 2002-2004.

Som e states alsoim pose an estate tax.

The tax is repealed for2010, but returns in 2011unless Congress extends

the repeal.

The estate tax only appliesto estates in excess of $1m illion, increasing to $3.5

m illion by 2009.

F ed era l es ta te tax ra tesu sed to b e as h ig h as 50%.

Estate and Inheritance Taxes

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An alternative dateof 6 m onths after

death m ay be usedif it reduces taxes.

Adjust the grossestate figure by

allow ed deductions.

For 2002, the taxapplies only to

estates in excess of$1 million.

A tax rate up to50% is applied to

the taxable estate.

Determ ine the FM V ofall property held at death.

Federal Estate Taxes

Funeral expenses. Admin. expenses. Liabilities.

Casualties & thefts. Charitable bequests. Marital deduction.

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Federal Estate Tax Rates

The rates below were established by The rates below were established by Congress in the Economic Growth and Tax Congress in the Economic Growth and Tax

Relief Reconciliation Act of 2001.Relief Reconciliation Act of 2001.

The rates below were established by The rates below were established by Congress in the Economic Growth and Tax Congress in the Economic Growth and Tax

Relief Reconciliation Act of 2001.Relief Reconciliation Act of 2001.

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State Inheritance TaxesState Inheritance Taxes Often, recipients of Often, recipients of propertyproperty, ,

must contribute must contribute cashcash to the to the estate to cover the estate to cover the applicable taxes.applicable taxes.

Estate Income TaxesEstate Income Taxes Any income from the estate Any income from the estate

assets is taxable to the assets is taxable to the estate.estate.

An exemption of $600 is An exemption of $600 is provided.provided.

Separate tax rates are Separate tax rates are available for estate income.available for estate income.

State Inheritance TaxesState Inheritance Taxes Often, recipients of Often, recipients of propertyproperty, ,

must contribute must contribute cashcash to the to the estate to cover the estate to cover the applicable taxes.applicable taxes.

Estate Income TaxesEstate Income Taxes Any income from the estate Any income from the estate

assets is taxable to the assets is taxable to the estate.estate.

An exemption of $600 is An exemption of $600 is provided.provided.

Separate tax rates are Separate tax rates are available for estate income.available for estate income.

Other Estate Issues

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

The recipient of the estate principal is called the “remainderman”.

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

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

The recipient of the estate principal is called the “remainderman”.

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

The Distinction Between Income and Principal

Income of the Estate often includes:

Recurring taxes such as property taxes.

Ordinary repair expense. Utility expense. Insurance expense. Other expenses

necessary for the management and preservation of the estate.

Income of the Estate often includes:

Recurring taxes such as property taxes.

Ordinary repair expense. Utility expense. Insurance expense. Other expenses

necessary for the management and preservation of the estate.

Principal of the Estate often includes:

Life insurance proceeds. Dividends. Debts. Funeral expenses. Gains/Losses from sale of

assets. Homestead and family

expenses.

Principal of the Estate often includes:

Life insurance proceeds. Dividends. Debts. Funeral expenses. Gains/Losses from sale of

assets. Homestead and family

expenses.

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R e co rds m u stb e kep t re :

th e d isp o s it iono f a ll asse ts.

All estate assetsare recorded at

FM V.

T ra n sa c tio nsa re o n ly re le va n t

a s re so u rcesa re d ispe rse d .

Debts, taxes, &other obligationsare recorded only

at paym ent.

O fte n , tw o ca sha cco un ts a rem a in ta in e d .

Separately identifyincome and

principaltransactions.

Recording the Transactions of an Estate

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A periodic statement disclosing 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.

A periodic statement disclosing 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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Let’s look Let’s look at at

accounting accounting for trusts.for trusts.

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Accounting for a Trust

A TRUST ISA TRUST IS the conveyance of assets to a the conveyance of assets to a fiduciary who manages the assets according to fiduciary who manages the assets according to

the stipulated instructions.the stipulated instructions.

A TRUST ISA TRUST IS the conveyance of assets to a the conveyance of assets to a fiduciary who manages the assets according to fiduciary who manages the assets according to

the stipulated instructions.the stipulated instructions.

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A trust established while the trustor is

still alive.

A trust established while the trustor is

still alive.

A trust established by the will after the

trustor’s death.

A trust established by the will after the

trustor’s death.

Accounting for a Trust

A TRUST ISA TRUST IS the conveyance of assets to a the conveyance of assets to a fiduciary who manages the assets according to fiduciary who manages the assets according to

the stipulated instructions.the stipulated instructions.

A TRUST ISA TRUST IS the conveyance of assets to a the conveyance of assets to a fiduciary who manages the assets according to fiduciary who manages the assets according to

the stipulated instructions.the stipulated instructions.

testamentary trusttestamentary trusttestamentary trusttestamentary trustinter vivos trustinter vivos trustinter vivos trustinter vivos trust VS.

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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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Usually, the cash basis is used to record trust Usually, the cash basis is used to record trust fund transactions.fund transactions.

Usually, the cash basis is used to record trust Usually, the cash basis is used to record trust fund transactions.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.

Adjustments to the Trust’s Principal:

Investing costs and commissions.

Income taxes on gains added to the principal.

Costs of preparing property for sale.

Record-Keeping for a Trust Fund

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Adjustments to the Adjustments to the Trust’s Income:Trust’s Income:

Rent expense.Rent expense. Lease cancellation Lease cancellation

fees.fees. Interest expense.Interest expense. Insurance expense.Insurance expense. Income taxes on trust Income taxes on trust

income.income.

Adjustments to the Adjustments to the Trust’s Income:Trust’s Income:

Rent expense.Rent expense. Lease cancellation Lease cancellation

fees.fees. Interest expense.Interest expense. Insurance expense.Insurance expense. Income taxes on trust Income taxes on trust

income.income.

Record-Keeping for a Trust Fund

Usually, the cash basis is used to record trust Usually, the cash basis is used to record trust fund transactions.fund transactions.

Usually, the cash basis is used to record trust Usually, the cash basis is used to record trust fund transactions.fund transactions.

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Bob, if anything happens to you, can I have your golf clubs?

Bob, if anything happens to you, can I have your golf clubs?

End of Chapter 19

Wow! Sounds

like Bob’s trip could

be dangerous

!