Advanced accounting 10th by a beams athony ch22

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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Record Inventory
Cash – principal

30  

Notes receivable

93  

Interest receivable

2  

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

 

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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Convert Some Assets to Cash
Cash – principal

8  

Cash – income

1  

2005 Nissan

 

8

Estate income

 

1

• 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

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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Distributions of Cash
Devise - L. Hunt

19  

Devise - S. Tyson

6  

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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