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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Estates and Trusts: Objectives

1. Understand basic accounting for the estate of a
decedent.
2. Understand the principal versus income issues
in estate and trust accounting.
3. Understand basic accounting for a trust.
4. Understand how estates are taxed.

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Estates and Trusts

1: Estates

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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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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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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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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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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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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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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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 Pearson Education, Inc. publishing as Prentice

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Record Inventory
Cash principal

30

Notes receivable

93

Interest receivable

FFF common stock

40

Municipal bonds

15

Summer home

55

2005 Nissan
Estate principal

8
243

Assets are recorded at fair value at decedent's

death
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Collect on Receivables
Cash - principal

95

Notes receivable
Interest receivable

93
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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Convert Some Assets to Cash

Cash principal

Cash income

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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Pay Expenses and Debts

Administration expense

Funeral expense

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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Distributions of Cash
Devise - L. Hunt

19

Devise - S. Tyson

Devise - Church

10

Cash principal
Devise - G. Olds
Cash income

35
1
1

Cash distributions are from

Cash principal
Cash income
Records are specific as to recipients
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Distributions in Kind
Devise - summer home to L. Hunt

55

Devise - FFF common stock to M. Wallace

40

Summer home

55

FFF common stock

40

Distributions of assets other than cash

Clearly indicate both
Item distributed
Recipient

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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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Estates and Trusts

2: Principal versus Income

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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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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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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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Estates and Trusts

3: Trusts

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Accounting for Trusts

Guidance
State laws
Uniform Trusts Act
Uniform Probate Code
Revised Uniform Principal and Income Act

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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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Estates and Trusts

4: Estate Taxes

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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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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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Publishing as Prentice Hall
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