CHAPTER 23

ESTATES AND TRUSTS

FOCUS OF CHAPTER 23

• The Role Accountants Play in Estate Planning

• Principal Versus Income• Accounting for Estates• Accounting for Trusts

Trusts: The Parties Involved

• The parties to a trust are the:– Trustor: The party creating the trust.– Trustee: The party that serves in a

fiduciary capacity for the trust beneficiaries.

– Beneficiaries: The parties who benefit from the trust.

Trusts: Types of Beneficiaries

• Trust beneficiaries are of the following two classes:– Income beneficiary—entitled to the

income earned by the trust’s assets.– Principal beneficiary—entitled to the

principal, or corpus, of the trust.• Principal is distributed according to

the terms of the trust (usually at the end).

Beneficiaries: Clashes of Interest

• A built-in clash of interests when:– The income and principal beneficiaries

are different persons.• WHO GETS WHAT?

– The income and principal beneficiaries are the same person.• WHEN DO I GET IT?

Income Beneficiary: Beginning of Rights

• The interests of the income beneficiary must be accounted for separately from the interests of the principal beneficiary BOTH:– During the period of the estate

administration as well as– After the property is actually

transferred to the trustee.

Distinguishing BetweenPrincipal and Income

• In determining whether a transaction pertains to principal or income, the determination is made by referring to:– First: The trust agreement.– Second: State law.*– Third: Case law.– Fourth: GAAP.

*State law may be based on The Revised Uniform Principal and Income Act [of either 1962 or 1997].

Income Beneficiaries:Beginning of Rights

• Under the Revised Uniform Principal and Income Act [of 1962], the rights of the income beneficiary begin:– At the date of death of the decedent

who created the trust.

Trust Principal:Determining Initial Amounts

• In determining at the time of the person’s death the assets that are to be treated as part of the TRUST PRINCIPAL:– The accrual basis is to be used

(under the Revised Uniform Principal and Income Act [of 1962]).

Estates: Fiduciaries

• A fiduciary may be either:– An EXECUTOR(RIX).

• The person named in the will (decedent has died testate) or

– An ADMINISTRATOR(RIX).• The person appointed by the court

(decedent has died intestate).

Estates: Probate

• Probate is the act by which the COURT determines whether:– The will submitted to it meets the

statutory requirements concerning wills.

• If the court so determines, then it issues a certificate or decree that enables the terms of the will to be carried out.

Estates: Probate

• Under the state probate laws, the affairs of decedents must be:– Administered by FIDUCIARIES.

• These fiduciaries are subject to the control of the state probate courts.

Estates: Gifts

• A gift of real property is called a devise.• A gift of personal property is called a

legacy.• Types of LEGACIES:

– Specific: A specific noncash item.– Demonstrative: Cash—from a certain

fund.– General: Cash—from no certain fund.– Residual: What remains.

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Estates: Duties of An Estate Fiduciary

• The fiduciary of an estate:– Takes an inventory of the decedent’s

property.– Pays estate liabilities.– Prepares and files tax returns for:

• The decedent.• The decedent’s estate.

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Federal Form 1041: U.S. Fiduciary Income Tax Return

Trusts: Compared With Estates

• Accounting for trusts is virtually identical to accounting for estates, even though the nature of the transactions is substantially different.

Accounting for Estates and Trusts

• For both estates and trusts, the interests of both the income beneficiary and the principal beneficiary can easily be accounted for using: – A single general ledger.– ONLY one bank account.

• Which is separated into two general ledger accounts:

– One pertaining to principal.– One pertaining to income.

Trusts: The Revised Uniform Principal And Income Act (of 1962)

• Requirements of the Act:– Depreciation is mandatory.– Unusual charges against income

may be recouped from income over a reasonable period of time.

Trusts: The Revised Uniform Principal And Income Act (of 1962)

• Under the Act, certain costs and expenses must be charged to PRINCIPAL. Examples are:– Costs of investing principal assets.– Costs of preparing property for rental

or sale.– Taxes on gains allocated to principal.– Costs incurred to protect trust

property.

Revised Uniform PrincipalAnd Income Act (of 1962)

• Under the Act, certain costs and expenses must be shared equally between PRINCIPAL and INCOME. Examples:– Court costs.– Attorney and accounting fees.– Trustee’s fees.

End of Chapter 23

Time to Clear Things Up—Any Questions?