Chapter 19 - Accounting for Estates and Trusts

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Chapter 19 - Accounting for Estates and Trusts

CHAPTER 19
ACCOUNTING FOR ESTATES AND TRUSTS

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Chapter 19 - Accounting for Estates and Trusts

30. (30 Minutes) (Define terms used in estate accounting)

a. Willthe instructions, prepared consistent with the applicable state laws,
given by an individual to direct the distribution to be made of the person's
property after death.
b. Estatethe legal entity that holds title to all of a decedent's property until
those assets are properly distributed.
c. Intestaterefers to the death of an individual who passes without having
prepared a valid, legal will.
d. Probate lawsstate laws that govern and regulate wills and estates.
e. Trusta fund of assets that has been conveyed to a fiduciary who will
manage and then distribute those assets according to the specifications of
the individual who created the trust.
f. Inter vivos trusta trust fund created by a living person rather than as a
result of the specifications of a will.
g. Charitable remainder trusta trust fund where the income is paid to one or
more beneficiaries for a specified period (or until their death). After that
point in time, the principal is conveyed to a named charity.
h. Remaindermana beneficiary of a trust who is entitled to receive a
principal balance but only after a specified time. Until then, the income is
distributed to a different income beneficiary (often for the life of that
person).
i. Executoran individual who oversees an estate in a stewardship
(fiduciary) capacity. The person must follow any applicable laws, locate all
assets, discover and satisfy all valid claims against the estate, and uncover
and follow (if possible) the intent of the decedent for any remaining
property.
j. Homestead allowancean amount that is provided to a decedent's
surviving spouse and/or minor and dependent children before claims
against the estate are paid. This allowance ensures that (if assets are
available) some amount is given to the immediate family regardless of the
amount of debt incurred by the decedent.

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Chapter 19 - Accounting for Estates and Trusts

31. (25 Minutes) (Discussion of questions about estates)

a. Probate laws are state laws that govern wills and estates. These laws
provide an orderly structure for the process of administering a decedents
estate (property). The Uniform Probate Code has been adopted by many
states so that laws are consistent, at least between those particular states.
The general objectives of probate laws are:
To gather and preserve all of the decedent's property held at death.
To locate and provide a fair settlement for all debts.
To discover the decedent's intent for any remaining property and to
follow those wishes if possible.
b. The executor must locate and preserve all of the assets owned by the
decedent at death, discover and satisfy (if sufficient assets are available)
all valid claims against the estate, determine the wishes of the decedent as
to any remaining property, comply with all laws, and distribute assets
according to the intentions of the decedent. The executor is also entitled
to reasonable compensation for his/her performance of these tasks.
c. All property of value should be included in an inventory of estate assets.
Thus, cash, investments, receivables, and other valuables should all be
listed. In some states, real property (such as land) is conveyed directly to a
beneficiary at death so that it is not included in the estate. However, even
this real property is assumed to be part of the estate for estate tax
purposes. Additionally, chooses in action (the ability or right to pursue a
claim) may have value and should be considered by the executor.
d. The order of priority for paying claims against an estate are as follows:
(1)expenses of administering the estate.
(2)funeral expenses and the medical expenses of any last illness.
(3)taxes and debts given preference under federal or state laws.
(4)all other claims.

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Chapter 19 - Accounting for Estates and Trusts

32. (10 Minutes) (Identify parties in connection with will)

a. Howard Amadeus has been designated to receive the principal of the trust
fund after Lucy Van Jones' death and is, therefore, referred to as the
remainderman.
b. Josh OBrien has established the trust fund and is known legally as the trustor
and in some states is referred to as the settlor same meaning as trustor.
c. A demonstrative legacy is a cash gift from a particular source. The gift of all
money from the First Savings Bank to Richard Blaine is a demonstrative
legacy.
d. Since the $9,000 cash gift to Nelson Tucker does not come from a designated
source, it is known as a general legacy. If it were to originate from a specified
source, then it would be a demonstrative legacy.
e. The gift of the antique collection to Lisa Lunn is a specific legacy because it is
a gift of specified personal property.
f. Lucy Van Jones will receive the income from the trust fund for the remainder
of her life, a position known as a life tenant.
g. Josh OBrien is the testator the decedent passing with a valid will.
33. (20 Minutes) (Distribution to be made of an estate)
a. 800 shares of Coca-Cola Co. stock are given to Cindy Cheng. Since the estate
does not own more Coca-Cola stock, this is all Cindy will receive.
Title to the house goes to Dennis Davis as the decedent directed.
$41,000 cash in the First National Bank goes to Jack Abrams. Because this
bequest was limited to $50,000 in this bank account, and the account
contained less than $50,000, the $41,000 is all that Jack Abrams will receive.
$16,000 cash in the New Hampshire Savings and Loan still remains. However,
the will specifically directs that Suzanne is to receive $18,000. Therefore, to
have the $16,000 amount, more cash must be added. Either the Xerox stock or
the other property (or both) must be liquidated in order to give Suzanne
Benton $18,000.
Any remaining property is conveyed to Wilbur N. Ed, the residuary beneficiary.
b. 1,000 shares of Coca-Cola Co. stock are given to Cindy Cheng. The additional
200 shares will either be transferred to the residuary beneficiary, or liquidated
if necessary to satisfy other bequests.
$50,000 cash in the First National Bank goes to Jack Abrams.

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Chapter 19 - Accounting for Estates and Trusts

$5,000 cash remains in the First National Bank along with $6,000 in the New
Hampshire Savings and Loan. To this total, more cash must be added in order
to obtain enough cash to satisfy Suzannes bequest. Either the Xerox stock,
the remaining Coca-Cola stock, and/or the other remaining property must be
liquidated In order to give Suzanne Benton a total of $18,000.
Any remaining property is conveyed to Wilbur N. Ed.
34. (5 Minutes) (Compute the taxable estate value)
Value of estate assets .....................................................
Conveyed to spouse ........................................................
Conveyed to charities .....................................................
Funeral expenses ............................................................
Administrative expenses ................................................
Debts .................................................................................
Taxable estate .................................................................

$2,300,000
(1,000,000)
(260,000)
(23,000)
(41,000)
(246,000)
$ 730,000

Amounts conveyed to children or to most trusts are not deductible in

computing the taxable value of a decedents estate. Thus the $500,000
transfer and the $230,000 transfers are components of the taxable estate.
35. (15 Minutes) (Determine taxable estate value and the effect of the Unified
Transfer Credit)
a. Gross Estate (fair market value) ....................................
Funeral Expenses ...........................................................
Administration Expenses ...............................................
Charity Bequests ............................................................
Marital Deduction ............................................................
Taxable Estate ............................................................

$ 20,000
10,000
60,000
870,000

$2,381,000

(960,000)
$1,421,000

b. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation

Act of 2010 had several effects on federal estate taxes. First, it confirmed the
elimination of estate taxes for 2010 estates, unless the executor elected to
apply the estate tax, presumably to utilize the step-up in basis / value
provisions. Second, it established a much larger exemption from the federal
estate tax beginning in 2011 - $5.0 million per person which is portable /
available for a surviving spouse to utilize if not utilized by the decedent. Thus
a decedent passing in 2010 may have been able to escape the federal estate
tax entirely. On the other hand, appreciated assets passing from such estate
will not have a step up in basis and as such beneficiaries will ultimately pay a
capital gain tax on the disposition of such assets. Decedents passing in 2011
will have a $5.0 million exclusion coupled with the traditional step up in basis
procedure.

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Chapter 19 - Accounting for Estates and Trusts

36. (10 Minutes) (Computation of income tax on an estate)

Rental income .................................................................
Interest income ................................................................
Dividend income ..............................................................
Total income .....................................................................
Personal exemption .........................................................
Gift to charity ....................................................................
Distributed to beneficiary ...............................................
Taxable income ................................................................

$ 9,000
6,000
5,000
$20,000
(600)
(5,000)
(6,000)
$ 8,400

Income Tax (based on 2012 tax rates):

15% of first $2,400 ...........................................................
25% on next $3,200 (up to $5,600) .................................
28% on next $2,800(up to $8,400) ..................................
Total income tax .........................................................

$360.00
800.00
784.00
$1,944.00

37. (50 Minutes) (Record journal entries for an estate and prepare charge and
discharge statement)
a. CashPrincipal ..........................................................
Life Insurance Receivable .........................................
Investment in Stocks and Bonds...............................
Rental Property ...........................................................
Personal Property .....................................................
Estate Principal ................................................
(To record property held by Rose Shields at death.)

300,000
200,000
100,000
90,000
130,000
820,000

1. No entry. Estates do not record liabilities until assets are used in payment.
2. CashPrincipal ..........................................................
5,000
CashIncome ............................................................
7,000
Assets Subsequently Discovered (Interest Rec.)
5,000
Estate Income .................................................
7,000
(To record receipt of interest income. The $5,000 earned prior to the
decedent's death was not included in original listing of estate assets so it
is an asset subsequently discovered.)
3. ExpensesIncome ....................................................
6,000
CashIncome ..................................................
6,000
(Ordinary repair expenses are made to rental property and are generally
charged to income rather than principal.)
4. Debts of the Decedent ..............................................
CashPrincipal ...............................................
(To pay liabilities and obligations of the decedent.)

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80,000
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Chapter 19 - Accounting for Estates and Trusts

5. CashPrincipal .........................................................
Investments in Stocks and Bonds .................

19,000
16,000

Gain on Sale of Stocks Principal ...................

(To record sale of stocks and to reflect gain on such sale with the
additional proceeds becoming part of the estates principal.)

3,000

6. CashPrincipal .........................................................
2,000
CashIncome ............................................................
12,000
Assets Subsequently Discovered (Rent Rec.)
2,000
Estate Income ..................................................
12,000
(To record receipt of rental income. The $2,000 earned prior to the
decedent's death was not included in original listing of estate assets and is
therefore an asset subsequently discovered.)
7. LegacyJim Arness .................................................
CashIncome ..................................................
(Payment is made to income beneficiary.)

6,000

8. CashPrincipal .........................................................
Life Insurance Receivable ..............................
(Collection is made from life insurance policy.)

200,000

6,000

200,000

LegacyAmanda Blake .............................................

200,000
CashPrincipal ...............................................
(Payment is made of proceeds from life insurance policy.)
9. Funeral Expenses .......................................................
CashPrincipal................................................
(To record cost of decedent's funeral.)

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200,000

10,000
10,000

Chapter 19 - Accounting for Estates and Trusts

b.
ESTATE OF ROSE SHIELDS
Charge and Discharge Statement
As to Principal
I charge myself with:
Assets per original inventory ....................................
Assets subsequently discovered:
Interest receivable ................................................
Rental income receivable .....................................
Gain on sale of stocks ...............................................
Total charges .........................................................

I credit myself with:

Debts of decedent ......................................................
Funeral expenses .......................................................
Legacy: Amanda Blake (proceeds of life
insurance) ..............................................................
Estate principal .....................................................

$820,000
$ 5,000
2,000

7,000
3,000
830,000

80,000
10,000
200,000

Estate principal:
Cash .............................................................................
Investments in stocks and bonds ............................
Rental property ...........................................................
Personal property .......................................................
Estate principal .....................................................

290,000
$540,000
$236,000
84,000
90,000
130,000
$540,000

As to Income
I charge myself with:
Interest income ...........................................................
Rental income .............................................................
I credit myself with:
Repair expenses .........................................................
Legacy: Jim Arness ....................................................
Balance as to Income ...........................................
Balance as to income:
Cash .............................................................................

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$ 7,000
12,000
$ 6,000
6,000

$19,000

12,000
$ 7,000
$ 7,000

Chapter 19 - Accounting for Estates and Trusts

41. (20 Minutes) (Prepare journal entries for a trust)

a. CashPrincipal ...............................................................
Investments in Stocks .....................................................
Rental Property ................................................................
Trust Principal .............................................................

300,000
200,000
150,000

b. Investments in Bonds ......................................................

CashPrincipal ..........................................................

260,000

Commission ExpensePrincipal ..................................

CashPrincipal ..........................................................

3,000

c. Repair ExpensePrincipal .............................................

CashPrincipal ..........................................................

7,000

d. CashPrincipal ...............................................................
CashIncome .................................................................
Trust Principal .............................................................
Trust IncomeDividends ..........................................

1,000
3,000

e. Insurance ExpenseIncome ..........................................

CashIncome .............................................................

2,000

f. CashIncome .................................................................
Trust IncomeRental ................................................

8,000

g. Trustee ExpensePrincipal ...........................................

Trustee ExpenseIncome ..............................................
CashPrincipal ..........................................................
CashIncome .............................................................

3,000
1,000

h. Equity in Income: Beneficiary ........................................

CashIncome .............................................................

5,000

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650,000
260,000
3,000
7,000

1,000
3,000
2,000
8,000

3,000
1,000
5,000

Chapter 19 - Accounting for Estates and Trusts

42. (15 Minutes) (Prepare journal entries for a trust)

Land .................................................................................
TrustPrincipal...........................................................

320,000

CashIncome .................................................................
TrustIncome .............................................................

60,000

Insurance ExpenseIncome ..........................................

CashIncome .............................................................

4,000

Property Taxes ExpenseIncome .................................

CashIncome .............................................................

6,000

Land Improvements .........................................................

CashIncome .............................................................

4,000

320,000
60,000
4,000
6,000
4,000

(This payment for paving is made from cash income because no principal
cash is held. The trust agreement should indicate how such payments are to
be made and recorded. The following adjustment is also likely necessary to
indicate that this payment has been made from income rather than principal.)
Due from TrustPrincipal ..............................................
Due to TrustIncome ................................................

4,000

Maintenance ExpenseIncome .....................................

CashIncome .............................................................

8,000

Equity in Income: Beneficiary ........................................

CashIncome .............................................................

30,000

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4,000
8,000
30,000