1. © The McGraw-Hill Companies, Inc., 2004 Slide 19-1 McGraw-Hill/Irwin Chapter Nineteen Accounting for Estates and Trusts

2. © The McGraw-Hill Companies, Inc., 2004 Slide 19-2 McGraw-Hill/Irwin Estate Accounting

3. © The McGraw-Hill Companies, Inc., 2004 Slide 19-3 McGraw-Hill/Irwin Laws governing wills and estates are called “probate laws”. Each state establishes its own laws of descent and laws of distribution. 50% of states have adopted the Uniform Probate Code. Laws governing wills and estates are called “probate laws”. Each state establishes its own laws of descent and laws of distribution. 50% of states have adopted the Uniform Probate Code. Will Estate Accounting Probate Laws generally have 3 purposes: Gather and preserve all of the decedent’s property. Gather and preserve all of the decedent’s property. Carry out an orderly and fair settlement of all debts. Carry out an orderly and fair settlement of all debts. Discover and carrying out the decedent’s intentions for remaining property at death. Discover and carrying out the decedent’s intentions for remaining property at death. Probate Laws generally have 3 purposes: Gather and preserve all of the decedent’s property. Gather and preserve all of the decedent’s property. Carry out an orderly and fair settlement of all debts. Carry out an orderly and fair settlement of all debts. Discover and carrying out the decedent’s intentions for remaining property at death. Discover and carrying out the decedent’s intentions for remaining property at death.

4. © The McGraw-Hill Companies, Inc., 2004 Slide 19-4 McGraw-Hill/Irwin Probate Process 1. The will is presented to the court. 3. An executor or administrator is assigned. 2. The court rules on the will’s validity. 4. The terms of the will are carried out. Entitled to compensation. Administration of the Estate

5. © The McGraw-Hill Companies, Inc., 2004 Slide 19-5 McGraw-Hill/Irwin Executor Responsibilities 1.Take possession of all decedent’s assets and complete an inventory of the property. 2.Discover claims against the estate and settle those claims. 3.File estate tax returns. Federal and State 4.Distribute property 5.Make a full accounting to the probate court.

6. © The McGraw-Hill Companies, Inc., 2004 Slide 19-6 McGraw-Hill/Irwin Property Included in the Estate

7. © The McGraw-Hill Companies, Inc., 2004 Slide 19-7 McGraw-Hill/Irwin Order of priority: Expenses of administering the estate. Funeral and medical expenses. Debts and taxes. All other claims. Order of priority: Expenses of administering the estate. Funeral and medical expenses. Debts and taxes. All other claims. Discovery of Claims Against the Estate

8. © The McGraw-Hill Companies, Inc., 2004 Slide 19-8 McGraw-Hill/Irwin Types of Gifts: l l Specific legacy. l l Demonstrative legacy. l l General legacy. l l Residual Legacy. Types of Gifts: l l Specific legacy. l l Demonstrative legacy. l l General legacy. l l Residual Legacy. Discovery of Claims Against the Estate

9. © The McGraw-Hill Companies, Inc., 2004 Slide 19-9 McGraw-Hill/Irwin Order of abatement in the event of insufficient funds to pay debts and expenses: Specific legacies. Demonstrative legacies. General legacies. Residual legacies. Order of abatement in the event of insufficient funds to pay debts and expenses: Specific legacies. Demonstrative legacies. General legacies. Residual legacies. Discovery of Claims Against the Estate

10. © The McGraw-Hill Companies, Inc., 2004 Slide 19-10 McGraw-Hill/Irwin Estate and Inheritance Taxes

11. © The McGraw-Hill Companies, Inc., 2004 Slide 19-11 McGraw-Hill/Irwin Federal Estate Taxes Funeral expenses. Admin. expenses. Liabilities. Casualties & thefts. Charitable bequests. Marital deduction.

12. © The McGraw-Hill Companies, Inc., 2004 Slide 19-12 McGraw-Hill/Irwin Federal Estate Tax Rates The rates below were established by Congress in the Economic Growth and Tax Relief Reconciliation Act of 2001.

13. © The McGraw-Hill Companies, Inc., 2004 Slide 19-13 McGraw-Hill/Irwin State Inheritance Taxes State Inheritance Taxes  Often, recipients of property, must contribute cash to the estate to cover the applicable taxes. Estate Income Taxes Estate Income Taxes  Any income from the estate assets is taxable to the estate.  An exemption of $600 is provided.  Separate tax rates are available for estate income. State Inheritance Taxes State Inheritance Taxes  Often, recipients of property, must contribute cash to the estate to cover the applicable taxes. Estate Income Taxes Estate Income Taxes  Any income from the estate assets is taxable to the estate.  An exemption of $600 is provided.  Separate tax rates are available for estate income. Other Estate Issues

14. © The McGraw-Hill Companies, Inc., 2004 Slide 19-14 McGraw-Hill/Irwin The recipient of estate income is called the “income beneficiary”. The recipient of the estate principal is called the “remainderman”. How income is to be determined should be defined by the decedent in the will. The recipient of estate income is called the “income beneficiary”. The recipient of the estate principal is called the “remainderman”. How income is to be determined should be defined by the decedent in the will. The Distinction Between Income and Principal Income of the Estate often includes: Recurring taxes such as property taxes. Ordinary repair expense. Utility expense. Insurance expense. Other expenses necessary for the management and preservation of the estate. Income of the Estate often includes: Recurring taxes such as property taxes. Ordinary repair expense. Utility expense. Insurance expense. Other expenses necessary for the management and preservation of the estate. Principal of the Estate often includes: Life insurance proceeds. Dividends. Debts. Funeral expenses. Gains/Losses from sale of assets. Homestead and family expenses. Principal of the Estate often includes: Life insurance proceeds. Dividends. Debts. Funeral expenses. Gains/Losses from sale of assets. Homestead and family expenses.

15. © The McGraw-Hill Companies, Inc., 2004 Slide 19-15 McGraw-Hill/Irwin Recording the Transactions of an Estate

16. © The McGraw-Hill Companies, Inc., 2004 Slide 19-16 McGraw-Hill/Irwin A periodic statement disclosing progress in settling the estate. Separate statements are required for income and principal. Each statement reports:  Assets under the control of the executor.  Disbursements made to date.  Any property still remaining. A periodic statement disclosing progress in settling the estate. Separate statements are required for income and principal. Each statement reports:  Assets under the control of the executor.  Disbursements made to date.  Any property still remaining. Charge and Discharge Statement

17. © The McGraw-Hill Companies, Inc., 2004 Slide 19-17 McGraw-Hill/Irwin Let’s look at accounting for trusts.

18. © The McGraw-Hill Companies, Inc., 2004 Slide 19-18 McGraw-Hill/Irwin Accounting for a Trust A TRUST IS the conveyance of assets to a fiduciary who manages the assets according to the stipulated instructions.

19. © The McGraw-Hill Companies, Inc., 2004 Slide 19-19 McGraw-Hill/Irwin A trust established while the trustor is still alive. A trust established by the will after the trustor’s death. Accounting for a Trust A TRUST IS the conveyance of assets to a fiduciary who manages the assets according to the stipulated instructions. testamentary trust inter vivos trust VS.

20. © The McGraw-Hill Companies, Inc., 2004 Slide 19-20 McGraw-Hill/Irwin Revocable Living Trust Credit Shelter Trust Qualified Terminable Interest Property Trust Charitable Remainder Trust Charitable Lead Trust Grantor Retained Annuity Trust Minor’s Section 2503(c) Trust Spendthrift Trust Irrevocable Life Insurance Trust Qualified Personal Resident Trust Different Types of Trusts

21. © The McGraw-Hill Companies, Inc., 2004 Slide 19-21 McGraw-Hill/Irwin Usually, the cash basis is used to record trust fund transactions. Adjustments to the Trust’s Principal: Investing costs and commissions. Income taxes on gains added to the principal. Costs of preparing property for sale. Adjustments to the Trust’s Principal: Investing costs and commissions. Income taxes on gains added to the principal. Costs of preparing property for sale. Record-Keeping for a Trust Fund

22. © The McGraw-Hill Companies, Inc., 2004 Slide 19-22 McGraw-Hill/Irwin Adjustments to the Trust’s Income: Adjustments to the Trust’s Income: Rent expense. Rent expense. Lease cancellation fees. Lease cancellation fees. Interest expense. Interest expense. Insurance expense. Insurance expense. Income taxes on trust income. Income taxes on trust income. Adjustments to the Trust’s Income: Adjustments to the Trust’s Income: Rent expense. Rent expense. Lease cancellation fees. Lease cancellation fees. Interest expense. Interest expense. Insurance expense. Insurance expense. Income taxes on trust income. Income taxes on trust income. Record-Keeping for a Trust Fund Usually, the cash basis is used to record trust fund transactions.

23. © The McGraw-Hill Companies, Inc., 2004 Slide 19-23 McGraw-Hill/Irwin Bob, if anything happens to you, can I have your golf clubs? End of Chapter 19 Wow! Sounds like Bob’s trip could be dangerous!