Advanced accounting 10th by a beams athony ch22

Understand basic accounting for the estate of a decedent.. Understand the principal versus income issues in estate and trust accounting.. Classification of Claims• If estate is insuffi

Chapter 22: Estates and Trusts

by Jeanne M David, Ph.D., Univ of Detroit Mercy

to accompany Advanced Accounting , 10th edition

by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn

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.

1: Estates

Estates and Trusts

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

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

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

Classification of Claims

• If estate is insufficient to pay all claims,

payments are made

– Administration costs and expenses

– Reasonable funeral and medical expenses of

last illness

– Debts and taxes with legal preference

– All other claims

Accounting for the Estate

Charge-Discharge Statement

• Assets of estate

– 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

Collect on Receivables

• Collect the note and interest due

• If additional interest had accrued, the

additional amount is recorded

• Debit: Cash – income

• Credit: Estate income

Convert Some Assets to Cash

• 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

Pay Expenses and Debts

• Expenses and debts are paid from principal

• Payments and distributions must follow

Distributions in Kind

• Distributions of assets other than cash

• Clearly indicate both

– Item distributed

– Recipient

Devise - FFF common stock to M Wallace 40  

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

• Make the final distribution to residual beneficiary

(or trustee)

• Prepare the Charge-Discharge Statement

2: Principal versus Income

Estates and Trusts

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

and income amounts

• Ex: Interest collected after establishing a trust

• Principal, if receivable at start of trust

Estate Income

• Accounting for estates has two control tools for

income and principal

• Use separate accounts for cash

– Cash – principal

• Cash in original inventory

• Cash from conversion of other principal

• Use separate Estate accounts

• Estate – principal

• Estate – income

3: Trusts

Estates and Trusts

Accounting for Trusts

• Guidance

– State laws

– Uniform Trusts Act

– Uniform Probate Code

– Revised Uniform Principal and Income Act

Purpose of Trust

• Accounting should provide sufficient evidence

to show that the applicable laws and

instructions of the particular trust

• Control for income and principal

– Use separate net asset accounts

• Trust fund principal

• Trust fund income

• Often, trust funds do not segregate cash

4: Estate Taxes

Estates and Trusts

Estate Tax Planning

• Maximum tax rate in 2009 is 45%

• Estates under $3,500,000 are exempt

• For large estates, proper tax planning can lead to

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