1. Estates and Trusts: Their Nature and the Accountant’s Role20

2. Learning Objectives Describe the goals of estate planning.
Account for the various factors that affect estate principal and income.
Describe various forms in which an estate may be distributed.
Explain how one’s estate is taxed and how such taxes may be minimized.
Explain what a trust is and what the basic accounting issues are.
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3. Key Terms Regarding Estates and Trusts
Decedent The deceased individual Will A legal declaration containing directions as to the disposition of property Died testate Decedent has left a will Probate court Determines validity of will Probate process Identifies the decedent’s assets and liabilities, determines asset values, disburses assets to pay debts and taxes, and distributes the net assets of the estate per the instructions in the will Executor The fiduciary responsible for the administration of a will, named or nominated in the will (also: personal representative)
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4. Key Terms Regarding Estates and Trusts
Administrator If necessary, a court appointed individual responsible for the administration of a will Died intestate Decedent has no will Inter vivos trust A trust formed during one’s lifetime which passes property to one’s heirs without a will and therefore avoids the probate process (also: living trust) Probate estate The decedent’s assets which pass to others by means of a will
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5. Key Terms Regarding Estates and Trusts
Gross estate The assets of an estate which are considered for federal and/or state estate tax purposes Corpus The assets of an estate (also principal) Joint tenancy Property passes in its entirety to the surviving tenant and is excluded from the decedent’s estate Community property Only the decedent’s interest in such property is included in the estate Homestead or family allowance Certain assets of the decedent which are exempt from the probate process and are intended to support the family homestead and its members
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6. Identifying the Probate Principal (Corpus) of an Estate
Assets are measured at fair value
Identify those assets that were the legal property of the decedent at the time of death
Include additional assets that are subsequently discovered
No reduction for liabilities of the decedent
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7. Exempt Property and Allowances
Assets titled as joint tenants pass outside the probate process
Interest held by decedent is included in estate for tax purposes
Assets held as tenants in common are excluded from estate
Decedent’s interest is included in the estate
Assets held as marital property are not included in the estate
Homestead allowance or family allowance assets are removed from the estate; certain personal property also
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8. Accounting for the Inventory of a Probate Estate
Determine exemptions and allowances
Fiduciary files a report with probate court identifying the estate principal
Accounting
Debit various assets
Credit Estate Principal
Subsequent sale and liquidation of estate assets
Debit Cash; Credit appropriate asset
Recognize gain or loss on sale
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9. Identifying Claims Against the Probate Estate
Claims are identified, validated, and generally placed in the following order of priority:
Claims having a special lien against property, but not to exceed the value of the property
Funeral and administrative expenses
Taxes: income, estate, and inheritance
Debts due the United States and various states
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10. Identifying Claims Against the Probate Estate
Judgments of any court of competent jurisdiction
Wages due domestic servants for a period of not more than one year prior to date of death and medical claims for the same period
All other claims
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11. Measurement of Estate Income
Distinguish estate corpus from estate income
Estate income is derived from estate assets
Identified parties
Income beneficiary: Recipient of estate income
Remainderman: Party ultimately receiving the principal
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12. Components of Estate Income
Rents collected or accrued on principal assets
Interest on monies lent
Interest and dividends received on principal assets which were not accrued or declared as of date of death
Business profits including farming and extractive endeavors
Charges against income:
Ordinary expenses incurred in connection with the principal assets after the date of death such as ordinary repairs, taxes, and utilities
Professional fees associated with income issues and the management of income
Taxes imposed on income
A reasonable allowance for depreciation/depletion
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13. Distributions of the Property
In an intestate distribution, generally only a spouse or blood relative may receive property
In a testate distribution:
A distribution of real property is a devise to a devisee
A distribution of personal property is a legacy to a legatee
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14. Distributions of Property
Devise Distribution of specific testate real property Devisee Recipient of the testate property Legacies Distributions of personal property (also bequest) Legatee Recipient of personal property
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15. Distributions of Property
Legacies
Specific
Demonstrative
General
Residuary
If assets are not adequate to satisfy legacies, abatement occurs
Legacies are satisfied to the extent possible in the order above
Available amount is abated proportionately among the recipients if insufficient to fully cover all
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16. The Charge and Discharge Statement
The statement is prepared by the fiduciary
Summarizes the results during the period of stewardship
Two sections
Principal
Income
Fiduciary responsibilities complete
Close estate principal
Close estate income
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17. Tax Implications of an Estate
Unified transfer tax rate equal to
Federal gift tax rate
Federal estate tax rate
Unified credit may reduce tax on gifts and estates
Most estates are not subject to estate tax
Estates subject to tax have a claim against assets from
Federal estate tax
State estate tax
State inheritance tax
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18. Tax Implications of an Estate
Recipient of gift or estate assets
Do not pay gift tax
Do not pay estate tax
Do not pay income taxes on amounts received
Gift tax
Paid by party making the gift; unified transfer tax rate
Estate tax
Paid by the estate; unified transfer tax rate
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19. Estate Reduction with Gifts
Reduce taxable estate
Annual nontaxable gifts
First $13,000 ($26,000 with spousal consent)
To any one person
During any calendar year
Gift from one spouse to the other
No limit
Other nontaxable gifts
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20. The Unified Credit Lifetime credit
Applied against gross tax on taxable gifts
Renders (currently) the first $1,000,000 of other-wise taxable gifts tax-free
Unified credit that is applied against assessed gift tax is not available as a credit against estate taxes
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21. Federal Estate Taxation
Taxable gifts and taxable estates are taxed at the same (unified) tax rate
Tax associated with gifts and estate are determined separately
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22. Computation of the Federal Estate Tax
Gross estate XX
Less deductions allowed – XX
Taxable estate XX
Add post-1976 taxable gifts + XX
Unified tax base XX
Tentative tax on total transfers XX
Less tax credits – XX
Estate tax due XX
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23. Computation of the Federal Estate Tax
Gross estate XX
Less deductions allowed – XX
Taxable estate XX
Add post-1976 taxable gifts + XX
Unified tax base XX
Tentative tax on total transfers XX
Less tax credits – XX
Estate tax due XX
The fair value of all property in which the decedent has an interest at date of death…
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24. Computation of the Federal Estate Tax
Gross estate XX
Less deductions allowed – XX
Taxable estate XX
Add post-1976 taxable gifts + XX
Unified tax base XX
Tentative tax on total transfers XX
Less tax credits – XX
Estate tax due XX
Allowable expenses
Indebtedness against property included in the gross estate
Unpaid property and income taxes of the decedent to date of death
Uninsured losses
Transfers to charity
Marital deduction
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25. Marital Deduction
Allowed for the value of qualifying property passing to the surviving spouse
Amount of the deduction is unlimited
Full transfer tax-free to surviving spouse
On death of surviving spouse, remaining estate is subject to net-of-unified-credit tax
Effect: Defers estate taxes until the death of the surviving spouse
Possible strategy: Credit shelter trust
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26. Credit Shelter Trusts
Also referred to as marital deduction trusts, family trusts, bypass trusts, “A-B” trusts
Such trusts shelter a portion of the estate from estate tax
To maximize their benefit, the amount of such trusts should equal the exclusion amount which corresponds with the unified credit
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27. Valuation of Assets Included in the Gross Estate
Assets are valued at fair market value at the date of death
An alternative valuation date may be employed
If employed, all estate assets must be valued as of six months after the decedent’s death
Exception: property sold, distributed, or otherwise disposed of during the six-month period
Value as of the date of disposition
The alternative valuation date may be used only if it would reduce the total gross estate and decrease the estate tax liability
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28. Valuation of Assets Included in the Gross Estate
Recipient’s basis of property acquired from a decedent
Fair market value on the date of death or alternative valuation date
May result in a stepped-up basis
If decedent does not have estate tax
No tax on appreciation at either estate or recipient
Tax planning strategy
Hold appreciated assets as part of estate
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29. Other Taxes Affecting an Estate
Most states assess an inheritance tax on the value of estate assets conveyed to heirs
State inheritance tax is deductable against the gross estate
An estate is viewed as a separate entity
Estate income that is distributed to a beneficiary generally is excluded from the taxable income of an estate
Estate income retains its character in the hands of recipient
Estate is taxed on income it accumulates
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30. Trust Accounting Issues
Trust: A separate entity that receives assets for purposes of managing them and distributing them over time
A trust is recognized as a taxable entity
Reasons for creation
Manage assets for heir(s)
Exempt assets from the probate process and probate taxes
Convey assets to special organizations or causes
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31. Trust Accounting Issues
Forms of trusts
Charitable remainder: income from assets distributed to beneficiaries for life; assets transferred to remainderman
Credit shelter (bypass): split assets between surviving spouse and trust to maximize the marital deduction and unified credit
QTIP (qualified terminable interest property): similar to bypass
Testamentary: operative while the grantor is alive
Inter vivos: created through a will
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32. Financial Accounting For Trusts
Accounting for a trust is similar to accounting for an estate
The distinction between principal and income must be maintained through the use of trust principal and trust income accounts
The trust agreement should provide direction regarding how income is to be determined
A charge and discharge statement is required periodically for both trust principal and income
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