1. Chapter 22: Estates and Trusts
Beams, Advanced Accounting 10e, Ch. 22
5/14/2019
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
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2. Estates and Trusts: Objectives
Understand basic accounting for the estate of a decedent.
Understand the principal versus income issues in estate and trust accounting.
Understand basic accounting for a trust.
Understand how estates are taxed.
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3. 1: Estates Estates and Trusts
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4. 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
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5. 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 consecutive weeks
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6. 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
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7. Exempt Property Uniform Probate Code allows
Homestead allowance $15,000
Entitlement to personal property (furniture, vehicles) $10,000
Family allowance
Reasonable amount during administration of estate
To surviving spouse (equally to minor children if none)
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8. 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
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9. Accounting for the Estate
Purpose
Property for which responsibility has been assumed
Manner in which that responsibility is discharged
Liabilities of decedent are not assumed by executor/administrator
Record the payment of the debt, not the unpaid debt
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10. 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
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12. Record Inventory Assets are recorded at fair value at decedent's death
Cash – principal 30
Notes receivable 93
Interest receivable 2
FFF common stock 40
Municipal bonds 15
Summer home 55
2005 Nissan 8
Estate principal
243
Assets are recorded at fair value at decedent's death
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13. Collect on Receivables
Cash - principal 95
Notes receivable 93
Interest receivable 2
Collect the note and interest due.
If additional interest had accrued, the additional amount is recorded
Debit: Cash – income
Credit: Estate income
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14. Convert Some Assets to Cash
Cash – principal 8
Cash – income 1
2005 Nissan
Estate income
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 death
Cash – principal gets full $9
Credit: Estate – principal $1
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15. Pay Expenses and Debts Expenses and debts are paid from principal
Administration expense 4
Funeral expense 5
Medical expense 19
Debts of decedent
100
Cash - principal
128
Expenses and debts are paid from principal
Payments and distributions must follow
State laws
Valid will
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16. Distributions of Cash Cash distributions are from Cash – principal
Devise - L. Hunt 19
Devise - S. Tyson 6
Devise - Church 10
Cash – principal 35
Devise - G. Olds 1
Cash – income
Cash distributions are from
Cash – principal
Cash – income
Records are specific as to recipients
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17. Distributions in Kind Distributions of assets other than cash
Devise - summer home to L. Hunt 55
Devise - FFF common stock to M. Wallace 40
Summer home
FFF common stock
Distributions of assets other than cash
Clearly indicate both
Item distributed
Recipient
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18. 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
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19. 2: Principal versus Income
Estates and Trusts
2: Principal versus Income
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20. 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
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21. Measurement
Initial fair values are recorded at the establishment of the
Estate or trust
Changes in value after that
Income (loss)
Adjustments for inaccurate fair values
Change to principal
Ex: Interest collected after establishing a trust
Principal, if receivable at start of trust
Income, if earned after start of trust
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22. 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
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23. Beams, Advanced Accounting 10e, Ch. 22
5/14/2019
Estates and Trusts
3: Trusts
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24. Accounting for Trusts Guidance State laws Uniform Trusts Act
Uniform Probate Code
Revised Uniform Principal and Income Act
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25. 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
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26. 4: Estate Taxes Estates and Trusts
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27. Estate Taxes
Estates may be subject to federal and/or state inheritance taxes
Economic Growth and Tax Relief Reconciliation Act of 2001
Reduces inheritance taxes with total repeal in 2010
Act expires in 2011
Old inheritance tax rates will automatically reapply
Unless Congress takes action
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28. 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 significant "savings"
Additional amounts available for heirs or devisees
Amounts available for charities and other organizations
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29. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
Copyright © 2009 Pearson Education, Inc.   Publishing as Prentice Hall
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