Chapter 15

Estates And Trusts

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc. 2006

Estates and Trusts

Estates and Trusts are separate accounting and taxable entities. Persons acting as legal representatives of estates and trusts are known as fiduciaries.

A Fiduciary

An executor of an estate is named in the decedent's will, but if the will does not name an executor or the decedent dies intestate, the court appoints an administrator. The fiduciary of a trust is known as a trustee.

Legal and Accounting aspect of Estates

State laws (known as probate codes) regulate the administration of estates. Because these laws differ widely, a Uniform Probate Code has been drafted and adopted in part by many states. Though the Code has not yet been adopted in total by all states, it is used to illustrate statutory provisions.

Provisions of Uniform Probate Code

Code defines an estate as all property of a decedent, trust, or other person whose affairs are subject to the Code. A person is deemed to be an individual or an organization.

Property of decedent

Property of a decedent is awarded to persons specified in the will. Absence of a will, the decedent is said to have died intestate, the decedents property goes to heirs, as described in the code.

Wills

A person creating will is know as testator. Valid will : -Be in writing, - Signed by the testator - Signed by at least two witnesses.

Probate of Will

Probate of a will is action to validate the will. Will is probated by a probate court (also known as a surrogate or orphan's court). Completion of any hearings, the court issues an order for formal probate of a valid will, or an order that the decedent died intestate (without a will).

Personal Representative

Personal representative is the person administrating the estate. A personal representative named in the decedents will is called an executor. If the decedent died intestate, the court appointed personal representative is known as administrator.

Powers of Personal Representative

The personal representative takes possession and control of the decedent's property in trust for the benefit of creditors and beneficiaries. The personal representative has the authority

to allocate cash receipts and payments to estate principal (corpus) or to estate income pursuant to the provisions of the will or applicable state statutes.

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Devisees

A devisee is any person or trust named in a will to receive real or personal property of the decedent in a transfer known as devise.

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Inventory of decedents property

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Within three months after appointment, the personal representative prepares an inventory (at current fair value) of the decedent's property and debts as of the date of death. No earlier than six months after the date of appointment, the personal representative may close an estate by filing appropriate documents and financial statements with the probate court. If other property of the decedent is discovered after the filing of the original inventory, the personal representative must file a supplementary inventory with the probate court

Allowances and exemptions stipulated for estates

Homestead allowanceThe decedent's surviving spouse, or surviving minor and dependent children, are entitled to a total homestead allowance of a specified amount. 2. Family allowanceThe surviving spouse and dependent minor children of the decedent are entitled to a reasonable cash allowance during administration of the estate. 3. Exempt propertyThe decedent's surviving spouse or children are entitled to an aggregate specified amount of current fair value of automobiles and household and personal effects.
1.

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Claims of creditors against estate

The personal representative is required to publish a notice in a newspaper once a week for three successive weeks requesting creditors of the estate to present their claims within four months after the date of the first publication.

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Payments

Payments then are made in the following order:

(1) costs of administering the estate (2) decedent's reasonable funeral costs (3) debts and taxes with preference under federal law (4) reasonable and necessary medical and hospital costs of decedents last illness (5) debts and taxes with preference under state laws and (6) all other claims.

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Distributions to Devisees

After payment of creditors, estate property is distributed as follows: 1. Specific devises (gifts of identifiable objects, such as named paintings, automobiles, or real property) 2. General devises (gifts of money or monetary assets, such as corporate bonds) 3. Residuary devises (gifts of all estate property remaining after specific and general devises are distributed).

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Abate

If estate property that is not exempt is insufficient to pay estate creditors and the devises, the devises abate (are reduced) or are eliminated. Residuary devises are reduced or eliminated first, followed by general devises and specific devises in that order

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Estate and Inheritance Taxes

The federal estate tax assessed against the estate and state inheritance taxes against devisees, sometimes called death taxes

are apportioned against the various devises according to the provisions of the will or are prorated according to provisions of the Uniform Probate Code.

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Closing the Estate

No earlier than six months after the date of appointment, a personal representative may close an estate by filing statement with the probate court. This legal statement is accompanied by a financial statement known as a charge and discharge statement.

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Provisions of the Revised Uniform Principal and Income Act

Allocation of revenue and expenses of the estate between principal and income is important because the income beneficiary and the principal beneficiary (or remainderman) may be different persons. If the will does not provide specific instructions for such allocation, provisions of the Revised Uniform Principal and Income Act, or other applicable state laws, should be followed.

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Provisions of Uniform Probate Code Governing Trusts

It contains sections dealing with trust registration with appropriate state probate court, duties, powers and liabilities of trustees and courts jurisdiction concerning trusts. This jurisdiction may include appointing or removing a trustee, reviewing trustees fees, and reviewing or settling interim or final accountings of trustee. In accordance with this code trustee is required to administer the trust expeditiously and take appropriate care while handling the property. Further, the Trustee has to inform the beneficiaries the administration of the trust from time to time and is held responsible to furnish annually or more often, if necessary, the account statements and at the termination of trust

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Accounting for an Estate

Estate accounting is carried out in accordance with the Accountability technique. The accounting records of the personal representative include only those items for which the representative is accountable under the equation Assets = Accountability.

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Accounting records of an Estate

The accounting records of an estate are opened by

Debits to Principal Cash Debits to Other asset accounts Credits to Liability accounts for liens on estate property Credits to Estate Principal Balance account

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Entry for property subsequently discovered

Entry for property subsequently discovered

Dr Asset Accounts Cr Property Discovered

Entry for Receipt of Income

Dr Income Cash Cr Estate Income

Dr Distribution to Income Beneficiaries Cr Income Cash Dr Devises Distributed Cr Principal Cash Dr Liabilities Paid Cr Principal Cash

Entry for Distribution of Income

Entry for Payment to Devisees

Entry for Medical and Funeral costs paid

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Reports Filed by the Executor

A charge and discharge statement is prepared periodically and on closing of an estate by the personal representative of the estate. This statement usually is prepared in two sectionsprincipal and income. "Charges" include the inventory of principal property, property discovered, and gains on the disposal of principal property. "Credits" include liabilities paid, devises and income distributed, and administrative costs paid. The charge and discharge statement details the accountability of the personal representative of the decedent.

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Closing Entries

Once all estate assets have been distributed, the estate ceases to exist. The final act of of the personal representative is the filing of a final report with the probate court. On approval of the final charge and discharge statement by the probate court, the accounting records for the estate may be closed.

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Trusts

A trust created by a will is termed a testamentary trust. A trust created by a living person is known as an inter vivos or living trust.

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Parties to a Trust

A trust is created by the settlor (also known as donor or trustor) And is administered by a trustee for the benefit of beneficiaries. The trustee must comply with the provisions established by the settlor

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Legal and Accounting aspects of Trusts

The procedure established to account for a trust are similar to those discussed for an Estate. The Uniform Probate Code regulates the administration of Trust. The provisions for allocations between principal and income that are set forth in the Revised Uniform Principal and Income Act are applicable

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Accounting records of a Trust

The trustee must comply with the provisions established by the settlor. The accounting records of a trust usually differ from those of an estate because of the longer life of trust. And must maintain appropriate accounting records, generally on the cash basis.

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Accounting Entries for a Trust

There is no need to accrue revenue or expenses for a trust because a balance sheet and an income statement generally are not prepared. The periodic financial report prepared by the trustee is a charge and discharge statement. A closing journal entry is required for a trust at the end of each reporting period for which a charge and discharge statement is prepared to clear the revenue, expense, and distributions to beneficiaries ledger accounts for the next reporting period

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