Chapter 19 – Accounting for Estates and Trusts
CHAPTER 19
1. State probate laws govern wills and estates. These statutes facilitate three (3) goals.
a. To gather and preserve the decedent’s property.
2. Where no will exists, the laws of descent (for real property) and the laws of
distribution (for personal property) govern the distribution of the decedent’s property.
1. Expenses of administering the estate – which include legal costs, executor fees and
similar items.
2. Funeral expenses and medical expenses of last illness.
3. Taxes and debts given legal preference.
4. All other claims.
D. Estate distributions.
1. Devise—a testamentary gift of real property.
2. Specific legacy (or bequest)—an item of personal property that is identified directly
by the testator in his/her will.
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1. Trusts ensure that the distribution of a person’s assets is as intended.
2. An inter vivos trust is created by a living individual.
3. A testamentary trust is created by a will.
B. CPAs often utilize trusts to decrease the size of a client‘s estate and, thus, reduce estate
taxes.
C. Many types of trusts exist including:
1. Qualified Terminable Interest Property Trust—income goes to one or more parties
with the principal eventually being conveyed to a different party.
2. Charitable Remainder Trust—income goes to one or more parties with the principal
eventually being conveyed to a specified charity.
3. Spendthrift Trust – income is utilized for the benefit of the beneficiaries in a manner
4. Life Insurance Trust – assets are utilized to obtain life insurance on a party and
provided that the trust is irrevocable, the proceeds of the life insurance policies are
not included in the insured’s taxable estate.
D. Accounting for a trust.
1. In many trusts, the distinction between income and principal is essential.
2. Income and principal have their transactions and balances separately identified.
Answer to Discussion Question
Is this Really an Asset?
Fulfilling the instructions found in a will is not always an easy task. In this case, the will contains
a specific legacy: letters written by the decedent’s grandfather were to be given to a cousin.
Perhaps the decedent intended for this property to be retained by a family member. However,
the cousin cannot now be located. Moreover, sufficient cash does not exist to satisfy a general
cash legacy of $20,000 that remains. Normally, a sale of the letters would be ordered to help
resolve this cash shortage but differing opinions exist as to the value of the property. Finding a
Chapter 19 – Accounting for Estates and Trusts
buyer (if one can be located) may take a considerable amount of time and energy. How should
the administrator report these letters and what should be done?
The administrator should begin by contacting an attorney to learn of the specific probate laws of
the state in which the estate is located. For reporting purposes, the letters should be listed on a
charge and discharge statement but with no dollar value attached. They must, however, be
identified as an asset of the estate. With any property of this type, no true worth can be
determined until a legitimate offer to purchase is made. Thus, to report a value without any
obtain the services of a qualified professional – an attorney, or other experienced estate
representative.
Answers to Questions
1. The term “testate” refers to a decedent who dies leaving a valid will. “Intestate” indicates an
individual who has died without having written a valid will.
2. When an individual dies without having prepared a valid will, state inheritance laws become
applicable. Normally, these laws are written to correspond with the most common methods
3. Probate laws are state statutes which govern wills and estates. Depending upon the nature
4. Probate laws provide an orderly structure for the process of administering and distributing a
decedent’s estate. The objectives of probate laws are
5. The executor (or administrator if an executor is not named in the will or is unable to serve)
must first ensure that all applicable laws are satisfied. Second, the executor must attempt to
learn the decedent’s wishes and then carry them out, if possible. The executor is a fiduciary
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6. Estate assets are reported at fair market value since historical cost (if known) would not be
important in paying debts, making distributions, or determining transfer tax obligations.
7. All assets of an estate should be presented on the discharge statement. If the asset has a
speculative value the asset should be identified but without a dollar value. With assets of
8. Since an executor must satisfy (if possible) all of the claims against an estate, an adequate
search for these claims must be made. In most states, a public notice has to be placed in an
9. Because of the possibility that estate assets may be insufficient to satisfy all debts and
claims, state probate laws usually specify the following order of priority. Thus, if a shortage
10. An estate that is heavily in debt could possibly leave the members of the decedent’s
immediate family with nothing. This potential hardship is often viewed by state probate laws
11. A devise is a gift of real property such as land or a building. In contrast, a legacy (or
12.
—A specific legacy is the conveyance of an identified piece of personal property. The gift of
a car, for example, or shares of corporate stock would be viewed as a specific legacy.
13. The process of abatement is utilized if an estate has insufficient resources to satisfy all of
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14. The federal estate tax is an excise tax on the right to convey property. Thus, the value of the
decedent’s property at death is the basis for this assessment although an alternate valuation
date (six months after death or at the date of distribution, whichever comes first) can be
chosen by the executor. The value of estate assets is then reduced by a series of costs,
15. The ATRA makes most changes made by the Tax Relief, Unemployment Insurance
16. Individuals are allowed to make gifts of up to $14,000 per person per year (the amount is
17. Distributions to a spouse directly decrease the taxable value of an estate and, hence,
reduce the amount of federal estate taxes. However, when the spouse eventually dies, a
large estate may be left by the subsequently deceased spouse, thus creating a significant
1. No estate taxes are paid on the first decedent’s estate.
2. The income of the trust fund assets can still be used for the benefit of the spouse.
18. Several deductions are allowed in the computation of estate income taxes:
—A personal exemption of $600.
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Education.
19. In addition to identifying the proper distribution of assets, a testator may identify proposed
20. The distinction between principal and income may be of paramount importance, especially if
they are to be conveyed to different parties. Assets held at the decedent’s death comprise
21. The following are examples of the usual method by which the distinction between the
principal and income of an estate is established:
Adjustments to principal: gains and losses on the sale of securities, debts incurred prior to
22. For federal estate tax purposes, the value of an estate at the date of the decedent’s death
23. The executor is given the responsibility of locating, valuing, and distributing all estate assets.
Therefore, the reporting process emphasizes the value of all assets being held and their
24. The charge and discharge statement of an estate is produced for several purposes. It lists
the assets originally included in the estate. The statement also reports the assets that have
25. A trust fund is comprised of assets that have been conveyed to a fiduciary who will manage
and distribute them as specified by the party (the trustor) creating the fund. The trust fund is
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26. Trust funds have become popular as a means of reducing the size of a decedent’s estate,
as well as shielding assets from third parties. Thus, trusts may serve to decrease the
27. An inter vivos trust is simply one that is started by a living individual. Such a trust may be
28. A testamentary trust is simply a trust created by a will.
29.
—QTIP Trust (Qualified Terminable Interest Property Trust)—The income of the trust (and
possibly some of the principal) is conveyed to a party (frequently a spouse) for a period of
30. The distinction between principal and income is especially important in accounting for a trust
because in many cases they are to be given to different parties. Many trusts are created so
that one group of beneficiaries is to collect income for a period of time with the principal then
going to a different group of beneficiaries. Only by keeping principal and income balances
separate can all parties receive the amounts that are appropriate.
Answers to Problems
1. B (the laws of distribution apply to the distribution of an intestate person’s
personal property).
6. A (although state probate statutes vary, most states require the publication of
notice of death and then permit claims against the decedent’s estate only for a
statutorily shortened period of time).
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Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
7. B (many persons pass without sufficient assets to satisfy their obligations and
the prioritization of the decedent’s claims permits an executor/executrix to
distribute assets with the confidence that she will not be personally liable for a
misapplication of estate assets).
14. C (estate values are typically based upon the date of death, although an
alternate date is permitted if such would result in a reduction in estate taxation –
15. C (the ATRA of 2012 provided a $5.45 million exemption per transferor
beginning in 2016, as a result of indexing).
21. A (the use of this estate / trust planning will reduce the overall size of the
couple’s taxable estates while still providing income for the surviving spouse).
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22. B (funeral expenses are deductible from the estate for federal estate tax
purposes).
29. A (Rental income of $5,000 less $600 exemption).
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30. (30 Minutes) (Define terms used in estate accounting)
a. Will—the instructions, prepared consistent with the applicable state laws,
given by an individual to direct the distribution to be made of the person’s
g. Charitable remainder trust—a 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. Remainderman—a 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).
Chapter 19 – Accounting for Estates and Trusts
Education.
31. (30 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 decedent’s
estate (property). The Uniform Probate Code has been adopted by many
states so that laws are consistent, at least between those particular states.
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)
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
d. The order of priority for paying claims against an estate are as follows:
(1)—expenses of administering the estate.
Chapter 19 – Accounting for Estates and Trusts
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32. (20 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.
33. (30 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
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.
Chapter 19 – Accounting for Estates and Trusts
to obtain enough cash to satisfy Suzanne’s bequest. Either the Xerox stock,
34. (5 Minutes) (Compute the taxable estate value)
Value of estate assets …………………………………………… $2,300,000
Conveyed to spouse ……………………………………………… (1,000,000)
35. (15 Minutes) (Determine taxable estate value)
Gross Estate (fair market value) …………………………….. $2,381,000
36. (5 Minutes) (Computation of taxable income of an estate)
Rental income ……………………………………………………… $ 9,000
Interest income …………………………………………………….. 6,000
37. (60 Minutes) (Record journal entries for an estate and prepare charge and
discharge statement)
a. –– Cash—Principal ……………………………………………….. 300,000