1. © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter 15 Estates And Trusts

2. 2 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.

3. 3 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.

4. 4 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.

5. 5 Provisions of Uniform Probate Code The 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.

6. 6 Property of decedent Property of a decedent is awarded to persons specified in the will. In the absence of a will, the decedent is said to have died intestate, the decedent’s property goes to heirs, as described in the code.

7. 7 Wills A person creating will is know as testator. A valid will should be in writing, signed by the testator and at least two witnesses.

8. 8 Probate of Will The probate of a will is action to validate the will. A will is probated by a probate court (also known as a surrogate or orphan's court). After 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).

9. 9 Personal Representative Personal representative is the person administrating the estate. A personal representative named in the decedent’s will is called an executor. If the decedent died intestate, the court appointed personal representative is known as administrator.

10. 10 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.

11. 11 Devisees A devisee is any person or trust named in a will to receive real or personal preperty of the decedent in a transfer known as dvise.

12. 12 Inventory of decedent’s property 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

13. 13 Allowances and exemptions stipulated for estates 1. Homestead allowance  The decedent's surviving spouse, or surviving minor and dependent children, are entitled to a total homestead allowance of a specified amount. 2.Family allowance  The surviving spouse and dependent minor children of the decedent are entitled to a reasonable cash allowance during administration of the estate. 3.Exempt property  The decedent's surviving spouse or children are entitled to an aggregate specified amount of current fair value of automobiles and household and personal effects.

14. 14 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.

15. 15 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 decedent’s last illness – (5) debts and taxes with preference under state laws and – (6) all other claims.

16. 16 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).

17. 17 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

18. 18 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.

19. 19 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.

20. 20 Provisions of the Revised Uniform Principal and Income Act The 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.

21. 21 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.

22. 22 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

23. 23 Entry for property subsequently discovered – Dr Asset Accounts Cr Property Discovered Entry for Receipt of Income – Dr Income Cash Cr Estate Income Entry for Distribution of Income – Dr Distribution to Income Beneficiaries Cr Income Cash Entry for Payment to Devisees – Dr Devises Distributed Cr Principal Cash Entry for Medical and Funeral costs paid – Dr Liabilities Paid Cr Principal Cash

24. 24 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 sections  principal 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.

25. 25 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.

26. 26 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.

27. 27 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

28. 28 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

29. 29 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.

30. 30 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