Advanced accounting 10th by a beams athony ch22

Chapter 22: Estates and Trusts by Jeanne M David, Ph.D., Univ of Detroit Mercy to accompany Advanced Accounting, 10th edition by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn © Pearson Education, Inc publishing as Prentice 22-1 Estates and Trusts: Objectives Understand basic accounting for the estate of a decedent Understand the principal versus income issues in estate and trust accounting Understand basic accounting for a trust Understand how estates are taxed © Pearson Education, Inc publishing as Prentice 22-2 Estates and Trusts 1: Estates © Pearson Education, Inc publishing as Prentice 22-3 Understanding Estates • Estates come into existence at the death of an individual (decedent) – Testate (with a valid will) – Intestate (no will or will not validated by probate court) • Governed by state laws – Uniform Probate Code followed in text – Not all states have adopted it • Court-appointed administrator or executor – Personal representative of deceased – Administers the estate © Pearson Education, Inc publishing as Prentice 22-4 Administering the Estate Executor or Administrator – 30 days to inform heirs and devisees of appointment • Those entitled to property according to will (devisees) and law (heirs) – months to file inventory of property • Fair value • Disclose liens and claims • May exclude personal items of limited value – Notices in county newspaper for three consecutive weeks © Pearson Education, Inc publishing as Prentice 22-5 Intestate Succession • All passes to spouse if – Decedent has no living descendants, or – All surviving descendants are also descendants of spouse • Otherwise – Spouse receives first $100,000 – Plus one-half of remaining estate – Remainder to other descendants – Varies by state © Pearson Education, Inc publishing as Prentice 22-6 Exempt Property • Uniform Probate Code allows – Homestead allowance $15,000 – Entitlement to personal property (furniture, vehicles) $10,000 – Family allowance • Reasonable amount during administration of estate • To surviving spouse (equally to minor children if none) © Pearson Education, Inc publishing as Prentice 22-7 Classification of Claims • If estate is insufficient to pay all claims, payments are made – Administration costs and expenses – Reasonable funeral and medical expenses of last illness – Debts and taxes with legal preference – All other claims © Pearson Education, Inc publishing as Prentice 22-8 Accounting for the Estate • Purpose – Property for which responsibility has been assumed – Manner in which that responsibility is discharged • Liabilities of decedent are not assumed by executor/administrator – Record the payment of the debt, not the unpaid debt © Pearson Education, Inc publishing as Prentice 22-9 Charge-Discharge Statement • Assets of estate – Included in inventory – Discovered after inventory • Payments and distributions of estate principal – Cash payments for expenses, debts, to heirs and devisees – Distributions in kind in settlement of expenses, debts, or made to heirs and devisees • Estate income: receipts and disposition © Pearson Education, Inc publishing as Prentice 22-10 Pay Expenses and Debts Administration expense   Funeral expense   Medical expense 19   Debts of decedent 100   Cash - principal   128 • Expenses and debts are paid from principal • Payments and distributions must follow – State laws – Valid will © Pearson Education, Inc publishing as Prentice 22-15 Distributions of Cash Devise - L Hunt 19   Devise - S Tyson   Devise - Church 10   Cash – principal   Devise - G Olds Cash – income 35     • Cash distributions are from • Cash – principal • Cash – income • Records are specific as to recipients © Pearson Education, Inc publishing as Prentice 22-16 Distributions in Kind Devise - summer home to L Hunt 55   Devise - FFF common stock to M Wallace 40   Summer home   55 FFF common stock   40 • Distributions of assets other than cash • Clearly indicate both – Item distributed – Recipient © Pearson Education, Inc publishing as Prentice 22-17 Settling the Estate • After payments and distributions of cash and assets – Expenses and costs – Debts – All devisees or heirs other than residual beneficiary Nominal accounts are closed, with remaining assets left in account balances • Make the final distribution to residual beneficiary (or trustee) • Prepare the Charge-Discharge Statement © Pearson Education, Inc publishing as Prentice 22-18 Estates and Trusts 2: Principal versus Income © Pearson Education, Inc publishing as Prentice 22-19 Principal and Income • Estates and trusts often have separate treatment for income and principal – One may remain in trust, the other distributed – Distributions may be to different individuals • Accounting must clearly differentiate principal and income amounts © Pearson Education, Inc publishing as Prentice 22-20 Measurement • Initial fair values are recorded at the establishment of the • Estate or trust • Changes in value after that • Income (loss) • Adjustments for inaccurate fair values • Change to principal • Ex: Interest collected after establishing a trust • Principal, if receivable at start of trust • Income, if earned after start of trust © Pearson Education, Inc publishing as Prentice 22-21 Estate Income • Accounting for estates has two control tools for income and principal • Use separate accounts for cash – Cash – principal • Cash in original inventory • Cash from conversion of other principal • Use separate Estate accounts • Estate – principal • Estate – income © Pearson Education, Inc publishing as Prentice 22-22 Estates and Trusts 3: Trusts © Pearson Education, Inc publishing as Prentice 22-23 Accounting for Trusts • Guidance – State laws – Uniform Trusts Act – Uniform Probate Code – Revised Uniform Principal and Income Act © Pearson Education, Inc publishing as Prentice 22-24 Purpose of Trust • Accounting should provide sufficient evidence to show that the applicable laws and instructions of the particular trust • Control for income and principal – Use separate net asset accounts • Trust fund principal • Trust fund income • Often, trust funds not segregate cash © Pearson Education, Inc publishing as Prentice 22-25 Estates and Trusts 4: Estate Taxes © Pearson Education, Inc publishing as Prentice 22-26 Estate Taxes • Estates may be subject to federal and/or state inheritance taxes • Economic Growth and Tax Relief Reconciliation Act of 2001 – Reduces inheritance taxes with total repeal in 2010 • Act expires in 2011 – Old inheritance tax rates will automatically reapply – Unless Congress takes action © Pearson Education, Inc publishing as Prentice 22-27 Estate Tax Planning • Maximum tax rate in 2009 is 45% • Estates under $3,500,000 are exempt • For large estates, proper tax planning can lead to significant "savings" – Additional amounts available for heirs or devisees – Amounts available for charities and other organizations © Pearson Education, Inc publishing as Prentice 22-28 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2009 Pearson Education, Inc   Publishing as Prentice Hall © Pearson Education, Inc publishing as Prentice 22-29 ... are exempt • For large estates, proper tax planning can lead to significant "savings" – Additional amounts available for heirs or devisees – Amounts available for charities and other organizations... © Pearson Education, Inc publishing as Prentice 22-7 Classification of Claims • If estate is insufficient to pay all claims, payments are made – Administration costs and expenses – Reasonable... individuals • Accounting must clearly differentiate principal and income amounts © Pearson Education, Inc publishing as Prentice 22-20 Measurement • Initial fair values are recorded at the establishment