Beams10e_Ch22 Estates and Trust

7/23/2019 Beams10e_Ch22 Estates and Trust

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Pearson Education, Inc. publishing as Prentice 22-1

Chapter 22: Estates and Trusts

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany

Advanced Accounting, 10thedition

by Floyd A. Beams, Robin . Clement,!oseph ". Anthony, and #u$anne %o&ensohn


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Estates and Trusts: 'b(ecti)es

1. Understand basic accounting for the estate of a

decedent.

2. Understand the principal )ersus income issues

in estate and trust accounting.

3. Understand basic accounting for a trust.

4. Understand how estates are ta*ed.


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1: Estates1: Estates

Estates and rusts


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+nderstandin Estates Estates come into e*istence at the death o- an indi)idual

decedent/

Testate &ith a )alid &ill/ntestate no &ill or &ill not )alidated by probate court/

o)erned by state la&s+ni-orm robate Code -ollo&ed in te*tot all states ha)e adopted it

Court3appointed administrator or e*ecutorersonal representati)e o- deceasedAdministers the estate


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Administerin the EstateE*ecutor or Administrator

40 days to in-orm heirs and de)isees o-

appointment

Those entitled to property according to will(devisees) and law (heirs)

4 months to -ile in)entory o- property

Fair value

Disclose liens and claimsMay exclude personal items of limited value

otices in county ne&spaper -or three

consecuti)e &ee5s


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ntestate #uccession

All passes to spouse i-6ecedent has no li)in descendants, or

All sur)i)in descendants are also

descendants o- spouse

'ther&ise#pouse recei)es -irst 7100,000lus one3hal- o- remainin estateRemainder to other descendants

Varies by state


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E*empt roperty

+ni-orm robate Code allo&s"omestead allo&ance 718,000

Entitlement to personal property !furniture,

vehic"es# 710,000Family allo&ance

easonable amount during administration of

estate To sur)i)in spouse e9ually to minor children i-

none/


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Classi-ication o- Claims

- estate is insu--icient to pay all claims,

payments are made

Administration costs and e*pensesReasonable -uneral and medical e*penses o-

last illness

6ebts and ta*es &ith leal pre-erence

All other claims


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Accountin -or the Estate

urposeroperty -or &hich responsibility has been

assumed

anner in &hich that responsibility is

dischared

%iabilities o- decedent are not assumed by

e*ecutor;administrator

Record the payment o- the debt, not the

unpaid debt


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Chare36ischare #tatement

Assets o- estatencluded in in)entory6isco)ered a-ter in)entory

ayments and distributions o- estate principalCash payments -or e*penses, debts, to heirs

and de)isees

6istributions in 5ind in settlement o-e*penses, debts, or made to heirs and

de)isees

Estate income: receipts and disposition


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Record n)entory

Cash < principal 30

Notes receivable 93

Interest receivable 2

FFF common stock 40

Municipal bonds 15

ummer !ome 55

2005 Nissan "Estate principal 2=4

Assets are recorded at -air )alue at decedent>sdeath


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Collect on Recei)ables

Collect the note and interest due. - additional interest had accrued, the

additional amount is recorded

Debit! "ash # income "redit! $state income

Cash 3 principal 95

Notes receivable 93

Interest receivable 2


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Con)ert #ome Assets to Cash

#ell the issan -or 7?.

Fair )alue at time o- death &as 7@

Additional 71 is income to the estate - 7? &as deemed to be the true )alue at time o-

death "ash # principal gets full %& "redit! $state # principal %'

#as! principal "

Cash < income 1

2005 Nissan "

Estate income 1


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ay E*penses and 6ebts

E*penses and debts are paid -rom principal

ayments and distributions must -ollotate la&salid &ill

$dministration e%pense 4

Funeral e%pense 5

Medical e%pense 19

&ebts o' decedent 100

Cash 3 principal 12"


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6istributions o- Cash

Cash distributions are -rom "ash # principal "ash # income

Records are speci-ic as to recipients

&evise ( )* +unt 19

&evise ( * ,-son .

&evise ( #!urc! 10

Cash < principal 35

&evise ( /* lds 1

Cash < income 1


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6istributions in ind

6istributions o- assets other than cash Clearly indicate both

tem distributedRecipient

&evise ( summer !ome to )* +unt 55

&evise ( FFF common stock to M* allace 40

ummer !ome 55FFF common stock 40


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Pearson Education, Inc. publishing as Prentice 22-1!

#ettlin the Estate A-ter payments and distributions o- cash and assets

E*penses and costs6ebtsAll de)isees or heirs other than residual bene-iciary

ominal accounts are closed, &ith remainin assets le-t

in account balances

a5e the -inal distribution to residual bene-iciary or

trustee/

repare the Chare36ischare #tatement


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Pearson Education, Inc. publishing as Prentice 22-1"

2: rincipal )ersus ncome2: rincipal )ersus ncome

Estates and rusts


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Pearson Education, Inc. publishing as Prentice 22-2#

rincipal and ncome

Estates and trusts o-ten ha)e separate

treatment -or income and principal

'ne may remain in trust, the other

distributed

6istributions may be to di--erent indi)iduals Accountin must clearly di--erentiate principal

and income amounts


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easurement

nitial -air )alues are recorded at the

establishment o- the

$state or trust Chanes in )alue a-ter that

ncome (loss) Ad(ustments -or inaccurate -air )alues

"hange to principal E*: nterest collected a-ter establishin a trust

rincipal* if receivable at start of trustncome* if earned after start of trust


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Estate ncome

Accountin -or estates has t&o control tools -or

income and principal

+se separate accounts -or cash

Cash < principal "ash in original inventory "ash from conversion of other principal

+se separate Estate accounts$state # principal$state # income


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4: Trusts4: Trusts

Estates and rusts


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Accountin -or Trusts

uidance#tate la&s+ni-orm Trusts Act

+ni-orm robate CodeRe)ised +ni-orm rincipal and ncome Act


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urpose o- Trust

Accountin should pro)ide su--icient e)idence

to sho& that the applicable la&s and

instructions o- the particular trust

Control -or income and principal+se separate net asset accounts

Trust fund principal

Trust fund income '-ten, trust -unds do not sereate cash


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=: Estate Ta*es=: Estate Ta*es

Estates and rusts


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Estate Ta*es

Estates may be sub(ect to -ederal and;or state

inheritance ta*es

Economic ro&th and Ta* Relie- Reconciliation Act

o- 2001Reduces inheritance ta*es &ith total repeal in 2010

Act e*pires in 2011

'ld inheritance ta* rates &ill automatically

reapply+nless Conress ta5es action


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Pearson Education, Inc. publishing as Prentice 22-2!

Estate Ta* lannin

a*imum ta* rate in 200? is =8 Estates under 74,800,000 are e*empt

For lare estates, proper ta* plannin can lead to

sini-icant Dsa)insD

Additional amounts a)ailable -or heirs or

de)isees

Amounts a)ailable -or charities and other

orani$ations


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Beams10e_Ch22 Estates and Trust

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