Chapter Nineteen
Accounting for
Estates and
Trusts
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Learning Objective 19-1
Understand the proper
methods of accounting for and
administering an estate and
the corresponding legal
terminology.
19-2
Estate Accounting
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The term estate refers to the property (assets) owned
by an individual.
More specifically defined as a separate legal entity
holding title to the real and personal assets of a
deceased person.
Estate accounting focuses on the recording and
reporting of financial events from the time of a
person’s death until the ultimate distribution of all
property held by the estate.
19-3
Estate Accounting

A valid will ensures that asset disposition occurs
as intended and avoids disputes when a person dies.
 A will is a person’s declaration of how s/he desires
the property they own to be disposed of after death.
 When someone dies:


With a valid will, they die testate.
• A will serves as the blueprint for settling the estate.
Without a valid will, they die intestate.
• State laws control the administration of the estate.
• Real property is conveyed based on laws of descent.
• Personal property transfers based on laws of distribution.
19-4
Estate Accounting

Laws governing wills
and estates are called
“probate laws”.
 Each state establishes
its own laws of descent
and laws of distribution.
 Almost half of the states
have adopted the
Uniform Probate Code.
Probate Laws -- Three
general purposes:
1) Gather and preserve all
of the property.
2) Carry out orderly and
fair settlement debts.
3) Discover and
implement the
decedent’s intentions
for remaining property.
19-5
Administration of the Estate
Probate Process
The will is presented
to the court.
No will has been
discovered.
Court rules on
will’s validity.
An executor
(administrator)
is assigned.
Court appoints a
representative as
administrator.
Terms of will
are carried out.
Entitled to
compensation.
State laws control
administration of
estate.
19-6
Executor Responsibilities
1. Take possession of all decedent’s assets and
complete an inventory of the property.
2. Discover claims against the estate and settle
those claims.
3. File estate tax returns.
• Federal and State
4. Distribute property.
5. Make a full accounting to the probate
court.
19-7
Estate Property
Estate Property Includes:
 Cash
 Investments in stocks and bonds
 Interest accrued to the date of death
 Dividends declared prior to death
 Investments in businesses
 Unpaid wages
 Accrued rents and royalties
 Valuables such as jewelry, paintings and antiques
19-8
Discovery of Claims Against the Estate
Typical order of priority:
 Expenses of administering the estate.
 Funeral and medical expenses (during last
illness).
 Debts and taxes.
 All other claims.
19-9
Protection for Remaining
Family Members
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A wide variety of probate laws exist and differ according
to the states:
Usually small monetary allowances are paid prior to
payment of legal claims.
Homestead allowances are often provided to the
surviving spouse and/or minor or dependent children.
A family allowance is often allowed for a limited time
while the estate is being administered.
Limited amounts of exempt property (such as
automobiles, furniture and jewelry) are often permitted
to family.
19-10
Learning Objective 19-2
Describe the types of estate
distributions and identify the
process of asset allocations and
distributions from an estate.
19-11
Legacies and Devises
Gifts of personal property are called legacies or
bequests.
 Specific legacy (Gift of personal property from a
directly identified source)
 Demonstrative legacy (Cash gift from particular
source)
 General legacy (Cash gift from an unspecified source)
 Residual Legacy (Gift from remaining estate
property)
19-12
Estate Distributions
Debts and expenses of the administration
of the estate are paid first.
If funds are insufficient to satisfy all of the legacies,
the reduction of these gifts is called “the process of
abatement.”
Priority:
Specific legacies
Demonstrative legacies
General legacies
Residual legacies
19-13
Learning Objective 19-3
Understand the federal estate
tax and state inheritance tax
systems, the corresponding
exemptions, and tax planning
opportunities.
19-14
Estate and Inheritance Taxes
The federal estate tax is an excise tax assessed on the
right to convey property. The computation begins by
determining the fair value of all property held at
death.
Real property transferred immediately to a beneficiary
and not subject to probate must be included for
federal estate tax purposes.
An alternative evaluation date, six months after death,
may be used to determine fair value if it reduces the
amount of estate taxes to be paid.
19-15
Federal Estate Taxes
Items that reduce the gross estate:
a) Funeral expenses
b) Estate administration expenses
c) Liabilities, and losses during the administration
period
d) Charitable bequests
e) Marital deduction for property conveyed to spouse
f) State inheritance taxes
A specified amount may be deducted from the estate value
in arriving at the federal estate tax. The 2010 legislation
renewed increased exemptions, and the 2013 legislation
indexed the exemption and raised the tax rate.
19-16
Federal Estate Taxes
Annual gifts of $14,000 per person (indexed to change with
inflation) can be made tax-free to an unlimited number of donees.
The federal gift tax has not been eliminated, but a $5.25 million
(2013) lifetime tax-free exclusion (indexed at the same rate as the
estate tax exemption) has been established over and above the
$14,000 exclusion per person per year.
19-17
Other Estate Issues
State Inheritance Taxes
 Some wills specify that inheritance taxes are to be
paid from any residual cash amounts the estate holds.
 Often, recipients of property must contribute cash to
the estate to cover the taxes.
 If the will makes no provisions for state inheritance
taxes (or if the decedent dies intestate), the amount
conveyed to each party must be reduced
proportionately based on the fair value received.
19-18
Estate and Trust Income Taxes
Any income from estate assets is taxable to the estate.
 Tax return must be filed for gross income of $600 or
more.
 An exemption of $600 is provided.
 A reduction is allowed for taxable income donated to
charity and taxable income distributed to a
beneficiary.
 Separate tax rates are available for estate income.
 Tax return is due by the 15th day of the 4th month
following the close of the estate’s taxable year.
19-19
Learning Objective 19-4
Understand and account for
the distinction between principal
and income in the context of estate
and trust accounting.
19-20
Distinction Between
Income and Principal

The recipient of estate income is called the “income
beneficiary”.

The recipient of the estate principal (also called
“corpus”) is called the “remainderman”.

How income is to be determined should be defined
by the decedent in the will to avoid confusion.

Principal of the estate includes assets that existed at
the date of death, which became assets of the estate.
19-21
Distinction Between
Income and Principal
Adjustments to principal include:
 Life insurance proceeds if estate is named beneficiary.
 Dividends declared and other income earned prior to
death.
 Liquidating dividends even if declared after death.
 Debts incurred prior to death.
 Gains and losses on the sale of corporate securities or
rental property.
 Major repairs (improvements) to rental property.
 Investment commissions and other costs.
 Funeral expenses.
 Homestead and family allowances.
19-22
Distinction Between
Income and Principal
Income of the estate includes all revenues and
expenses incurred after the date of death.
Reductions to income include:
Recurring taxes (such as real and personal
property taxes),
Ordinary repair expenses,
Water and other utility expenses,
Insurance expenses, and
Other ordinary expenses required for the
management and preservation of the estate.
19-23
Distinction Between
Income and Principal
Some costs must be apportioned between the
principal and interest in some fair manner if
manner of allocation has not been specified in
the decedent’s last will and testament.
These costs include:
Executor’s fee
Court costs
Attorney’s fees
Accountant’s fees
19-24
Recording Transactions of an Estate
Estate assets are recorded at FMV.
Subsequently discovered assets are disclosed separately.
Debts, taxes & other obligations are recorded when paid.
Distribution of legacies are not recorded until actually
conveyed.
Separately identify income and principal transactions.
 Often, two cash accounts are maintained.
19-25
Learning Objective 19-5
Describe the financial statements
and journal entries utilized to account
for estate and trust transactions.
19-26
Charge and Discharge Statement

Periodic Charge and Discharge statements report
disclose progress in settling the estate.
 Separate statements are required for income and
principal.
 Each statement reports:
 Assets under the control of the executor.
 Disbursements made to date.
 Any property still remaining.
19-27
Learning Objective 19-6
Describe various trusts, their proper
use, and accounting for activities.
19-28
Trusts
A TRUST is created by conveying assets to a fiduciary
(or trustee)
Trusts are often established:
- from the provisions of a will, specified by the
decedent to guide distribution of estate property.
- to reduce the size of a taxable estate and estate taxes
that must be paid.
- to protect assets and ensure that the eventual use of
these assets is as intended.
A trustee may be an individual or an organization
19-29
Trusts
An inter vivos trust is established while a
person is still alive.
A testamentary trust is established by the
will after the trustor’s death.
The person who funds the trust is called
the grantor, trustor, or settlor.
The person who funds the trust appoints a trustee
to manage the investments of the trust.
19-30
Revocable Trusts
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Trustor usually manages the fund and receives
most (if not all) of the income until death.
Revocability means that the trustor can change
beneficiaries and other terms at any time.
Avoids delay and expense of probate.
Allows for privacy (wills are public documents).
At the trustor’s death, the trust continues and
makes future payments as defined in the trust
agreement.
19-31
Different Types of Trusts
Credit Shelter Trust
 Designed for couples, where each spouse agrees to transfer
at death an amount up to the tax-free exclusion ($5.25
million in 2013) to the other.
 Reduces the estate of surviving spouse.
Qualified Terminable Interest Property Trust (QTIP
Trust)
 Property is conveyed to a trust; distributions are paid to
the beneficiary (usually spouse).
 At a specified time, the remainder is conveyed to a
designated party.
 Allows steady income for one beneficiary, while protecting
principal for another.
19-32
Different Types of Trusts
Charitable Remainder Trust
 Trust income is paid to a beneficiary for a period of time (or
death of the beneficiary).
 Then the principal is given to a stated charity.
 Renders appreciated property requiring liquidation
nontaxable.
Charitable Lead Trust
 Trust income paid to a specified charity for a period of time,
then the remaining principal is transferred to a different
beneficiary.
Grantor Retained Annuity Trust (GRAT)
 Trustor collects fixed payments from the trust.
 Principal given to beneficiary after a specified time or at the
death of the trustor.
 Allows for reduction of gift tax.
19-33
Different Types of Trusts
Minor’s Section 2503(c) Trust
 Eligible to receive a tax-free gift of $14,000 ($28,000 if from
a couple) each year.
Spendthrift Trust
 Beneficiary cannot transfer or assign any payments not yet
received.
Irrevocable Life Insurance Trust
 Money is contributed to purchase life insurance on the
donor, so that proceeds can be used to pay estate and
inheritance taxes.
Qualified Personal Resident Trust (QPRT)
 Donor’s home is given, but the donor retains the right to
live there for a period rent free.
19-34
Record-Keeping for a Trust Fund
Usually, the cash basis of accounting is used to record
trust fund transactions.
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Adjustments to the Trust’s Principal:
Investing costs and commissions.
Income taxes on gains added to the principal.
Costs of preparing property for sale.
Extraordinary repairs.
19-35
Record-Keeping for a Trust Fund
Adjustments to the Trust’s Income include:
 Rent expense
 Lease cancellation fees
 Interest expense
 Insurance expense
 Income taxes on trust income
 Property taxes
Trustee fees and periodic reporting costs (accountant
and legal fees) must be allocated between trust income
and principal based on the value of the assets.
19-36
Accounting for the Activities of a Trust
An inter vivos trust reports on an annual basis
(often more frequently) to all income and principal
beneficiaries.
Testamentary trusts, under the jurisdiction of the
courts, issues additional reports regularly.
Two accounts monitor changes that occur:
Trust Principal
Trust Income
19-37