Chapter 20
Estates and Trusts:
Their Nature and
the Accountant’s
Role
Key terms regarding estates and
trusts
 Decedent
- the deceased individual
 Died testate - decedent has left a will
 Died intestate - decedent has no will
 Probate court - determines validity of will
 Executor or Executrix - the fiduciary
responsible for the administration of a will as
named in a will
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Key terms, continued
 Administrator
- if necessary, a court appointed
individual responsible for the administration of
a will
 Principal or corpus - the assets of an estate
 Inter vivos trust - a trust formed during one’s
lifetime which passes property to one’s heirs
without a will and therefore avoids the probate
process
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Key terms, continued
estate - the decedent’s assets which
pass to others by means of a will
 Gross estate - the assets of an estate which are
considered for federal and/or state estate tax
purposes
 Property as joint tenants - such property
passes in its entirety to the surviving tenant and
is excluded from the decedent’s estate
 Probate
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Key terms, continued
property - only the decedent’s
interest in such property is included in the estate
 Homestead or family allowance - certain
assets of the decedent which are exempt from
the probate process and are intended to support
the family homestead and its members
 Community
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Identifying claims against the
probate estate
Claims are identified, validated, and
generally placed in the following order of
priority:
1. Claims having a special lien against property, but not
to exceed the value of the property
2. Funeral and administrative expenses
3. Taxes: income, estate, and inheritance
4. Debts due the United States and various states
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Identifying claims, continued
5. Judgements of any court of competent jurisdiction
6. Wages due domestic servants for a period of not
more than one year prior to date of death and
medical claims for the same period
7. All other claims
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Computation of the federal
estate tax
Gross estate
Less deductions allowed
Taxable Estate
Add post-1976 taxable gifts
Unified tax base
XX
- XX
XX
+XX
XX
Tentative tax on total transfers
Less tax credits
Estate tax due
XX
- XX
XX
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Allowable deductions
 Allowable
expenses, such as funeral expenses
and costs of administrating the estate
 Indebtedness against property included in the
gross estate, such as a mortgage and other
debts of the decedent
 Unpaid property and income taxes of the
decedent to date of death
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Allowable deductions, continued
 Uninsured
losses from casualty or theft of
estate assets during the period of settlement
 Transfers to charity specified by the will
 Marital deduction, which is unlimited in
amount, for estate property that passes to the
surviving spouse if they are a U.S. citizen
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Post-1976 taxable gifts
 Such
gifts are included in the unified tax base
 For gifts after 1981, taxable gifts result if such
gifts exceed $10,000 ($20,000 for consenting
spouse gifts) per donee per year
 The Taxpayers Relief Act of 1997 contains
provisions to increase the $10,000 annual
exclusion for inflation beginning in 1998
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The Unified Credit
 Excludes
a portion of the taxable estate from
taxation
 The credit amount corresponds with the
unified transfer tax which would be due on the
exclusion amount
 The applicable exclusion amount and
corresponding credit vary by year
 The credit may be used to reduce estate or gift
taxes
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Credit Shelter Trusts
 Sometimes
referred to as marital deduction
trusts or “A-B” trusts
 Such trusts shelter a portion of the estate from
estate tax
 To maximize their benefit, the amount of such
trusts should equal the exclusion amount
which corresponds with the unified credit
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Valuation of gross estate assets
 Assets
are valued at fair market value at the
date of death
 An alternative valuation date may be employed
–
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if employed, all estate assets must be valued as of
six months after the decedent’s death, except for
property sold, distributed, or otherwise disposed of
during the six month period
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Valuation of gross estate,
continued
–
such property is valued as of the date of
disposition
–
the alternative valuation date may be used only if
it would reduce the total gross estate and decrease
the estate tax liability
 The
recipient of property acquired from a
decedent has a basis in such property at its fair
market value on the date of death or alternative
valuation date
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Other taxes affecting an estate
 Most
states assess an inheritance tax on the value
of estate assets conveyed to heirs. The tax is
levied on the heirs rather than the estate
 An
estate is viewed as a separate entity
 Estate income that is distributed currently and
properly to a beneficiary generally is excluded
from the taxable income of an estate
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Other taxes affecting an estate,
continued
 Normally,
the beneficiary is taxed on taxable
income received, and the estate, as a separate
taxable entity, is taxed on any taxable income that
it accumulates
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Measurement of estate income
 The
gains or losses on the sale of estate assets
are considered a component of estate principal
rather than estate income
 When bonds are part of an estate at the time of
death, the premium or discount on such bonds
is not amortized
 If bonds are subsequently purchased by the
fiduciary, a premium is amortized whereas a
discount is not amortized
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Measurement of income,
continued
 Generally
depreciation is not charged against
estate income
 Depletion on wasting assets is generally
charged against estate income
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Settling a Probate Estate;
Distributions of the Property
 In
an intestate distribution, generally only a
spouse or blood relative may receive property
 In a testate distribution:
–
a distribution of real property is a devise to a
devisee
–
a distribution of personal property is a legacy to
a legatee
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Settling a Probate Estate,
continued
 Types
of legacies include
–
specific
–
demonstrative
–
general
–
residuary
 If
assets are not adequate to satisfy legacies, a
process called abatement is followed
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The Charge and Discharge
Statement
 The
statement is prepared by the fiduciary
in order to report to the probate court the
activities during the period of stewardship
 The statement reports on estate principal
and estate income
 The fiduciary is charged for the assets of the
estate and discharged or credited for assets
distributed or conveyed
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Trusts
 A separate
entity that receives an
individual’s assets for purposes of managing
them and distributing them over time
 A trust is recognized as a taxable entity
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Trusts, continued
 Trusts
are created for a variety of purposes
–
charitable remainder trusts
–
inter vivos trusts
–
credit shelter trusts
–
Q-TIP trusts
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Trusts, continued
 Trusts
which become operative during one’s
lifetime are referred to as inter vivos or
living trusts
 Trusts which are created through a will are
referred to as testamentary trusts
 Accounting for a trust is similar to
accounting for an estate. A distinction is
made between trust principal and income
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