Chapter 22 ESTATES AND TRUSTS Answers to Questions 1No, trust accounting is essentially cash basis accounting Income is earned on the principal amounts of estate and trust assets Estates frequently realize income from various investments between the time that the property inventory is filed by the executor and the time the estate is fully administered A primary reason for dividing estate principal and income is that the beneficiaries are likely to be different Separation of principal and income is also important for trusts, because often a trust’s principal is to be maintained intact until the death of the beneficiary A devise is a testamentary disposition of real or personal property If a decedent had a valid will in force at the time of death, he or she is said to have died testate In the absence of a valid will, the decedent is said to have died intestate The Uniform Probate Code entitles the surviving spouse to a homestead allowance that is exempt from and has priority over all claims against the estate The surviving spouse and minor children who were dependent on the deceased are also entitled to a reasonable family allowance to be paid out of estate property during the period in which the estate is being administered The family allowance is exempt from and has priority over all claims except the homestead allowance Allowance amounts vary across the states Yes, the value of the estate is reduced by funeral expenses, settlements of estate liabilities, bequests to qualified charities, a marital deduction, state-level taxes, expenses of estate administration, and a tax exempt amount The taxable amount of an estate is based on fair values of all estate assets at the date of death Yes, within certain limitations Currently any number of annual gifts of $12,000 each can be made, with a lifetime limit of $1,000,000 Income for estates and trusts and applicable tax rates are defined in essentially the same manner as for individuals Income includes interest and dividends, rent, etc Deductions and/or exemptions for estate administration fees, charitable donations and distributions to beneficiaries reduce taxable income The fiduciary of the estate must provide applicable information to the beneficiary on Schedule K-1 10 An estate may be subject to taxation (referred to as estate or inheritance taxes) at both the state and federal levels Accountants and attorneys play a vital role in estate planning to minimize these tax burdens for their clients and heirs Even if the federal tax is © 2009 Pearson Education, Inc publishing as Prentice Hall 22-1 22-2 Estates and Trusts permanently repealed, estate planning services will remain critical for larger estates subject to state level taxation Federal taxation of estates is currently in a period of flux The Economic Growth and Tax Relief Reconciliation Act of 2001 proposed reduction of the tax, and a total repeal in 2010 However, unless Congress acts to make the repeal permanent, the tax will return in 2011 11 A valid will ensures the disposition of estate assets in accordance with the wishes of the deceased If a valid will is not in place, assets will be distributed in accordance with state probate laws Preparation of a will is also an important part of overall estate planning and can be useful in reducing estate and inheritance taxes 12 In addition to federal and state estate and inheritance taxes, estates are also subject to federal (and possibly state) income taxes An estate is a taxable entity and is subject to tax on income earned from the date of death until final settlement of the estate The tax may be paid by the estate or by the beneficiary if estate property has already been distributed to the beneficiary SOLUTIONS TO EXERCISES Solution E22-1 a b Cash (+A) 4,500 Interest receivable - bonds (-A) 2,200 Estate income (R,+SE) 2,300 Devise - Atlanta Animal Shelter (E,-SE) 50,000 Cash (-A) c Funeral expenses (E,-SE) 50,000 8,200 Cash (-A) d Cash (+A) Interest receivable (+A) 8,200 25,000 600 Assets subsequently discovered (-A) Cash (+A) 25,600 1,500 Interest receivable (-A) 600 Estate income (R,+SE) 900 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 22 22-3 Solution E22-2 a b Cash (+A) 7,500 Interest receivable - bonds (-A) 5,800 Estate income (R,+SE) 1,700 Devise - symphony orchestra (E,-SE) 75,000 Cash (-A) c Probate expenses (E,-SE) 75,000 1,400 Cash (-A) d Funeral expenses (E,-SE) 1,400 6,400 Cash (-A) e Estate principal (-SE) 6,400 22,000 Accounts payable (+L) 22,000 Solution E22-3 a Dividend receivable (+A) 150,000 Estate income (R,+SE) 150,000 b No entry on this date, since no distribution has yet been made c Probate court expenses (E,-SE) 1,900 Cash (-A) d Funeral expenses (E,-SE) 1,900 5,800 Cash (-A) e Hospital fees and expenses (E,-SE) 5,800 18,500 Cash (-A) f Cash (+A) 18,500 150,000 Dividends receivable (-A) © 2009 Pearson Education, Inc publishing as Prentice Hall 150,000 22-4 Estates and Trusts Solution E 22-4 Melanie Triciao, Testator Inventory of Estate Assets As of the date of Death on August 15, 2009 Description of Property Fair Value Cash $ 118,225 Savings accounts 250,000 ViaReggio common stock 225,000 City of Roma municipal bonds 412,000 Mercedes sports car Condominium on Italian Riviera 41,000 1,265,500 Atlanta personal residence 430,000 Collection of rare hand puppets 85,000 Fully restored Model T Ford 125,000 $2,951,725 Submitted by K T Tim, executor Solution E22-5 Estate Inventory Jeff Carpenter, Testator Inventory of Estate Assets As of the date of death on August 25, 2009 Description of Property Fair Value Cash in Oxford National Bank $15,000 Certificates of deposit, includes $7,000 accrued interest 807,000 Personal effects* $822,000 *The probate court permitted exclusion of Jeff’s personal effects from the estate inventory Prepared by Ms Colleen Ryan, Executrix, Oxford National Bank © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 22 22-5 Solution E22-5 (continued) a b Cash (+A) 11,500 Interest receivable - bonds (-A) 7,000 Estate income (R,+SE) 4,500 Cash (+A) 800,000 Certificates of deposit (-A) c Devise- Sooner XXV trust account (E,-SE) 800,000 100,000 Cash (-A) d 100,000 Funeral expenses (E,-SE) 7,200 Cash (-A) e 7,200 Executrix expenses (E,-SE) 2,500 Cash (-A) 2,500 Devise - J.J Kara (E,-SE) 716,800 Cash (-A) 716,800 Closing Entries Estate principal (-SE) 822,000 Estate income (-R,-SE) 4,500 Funeral expenses (-E,+SE) 7,200 Executrix expenses (-E,+SE) 2,500 Devise - Sooner XXV trust (-E,+SE) Devise - J.J Kara (-E,+SE) © 2009 Pearson Education, Inc publishing as Prentice Hall 100,000 716,800 22-6 Estates and Trusts Solution E22-5 (continued) Charge-Discharge Statement Estate of Jeff Carpenter Charge-Discharge Statement For the period of estate administration, August 25 to September 28, 2009 Estate principal I charge myself for: Assets included in estate inventory - total estate principal charge $822,000 I credit myself for: Funeral expenses paid Executrix expenses paid $ 7,200 2,500 Devise paid in cash to Sooner XXV trust account 100,000 Devise paid in cash to J.J Kara 712,300 Total estate principal discharge $822,000 Estate income I charge myself for: Estate income received during estate administration $4,500 I credit myself for: Payment of estate income to J.J Kara $4,500 Respectfully submitted, Colleen Ryan, Estate Executrix, September 28, 2009 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 22 22-7 Solution E22-6 9/15 Cash (+A) 100,000 Trust fund principal (+SE) 9/16 Money market investment (+A) 100,000 100,000 Cash (-A) 10/16 Cash (+A) 100,000 417 Trust fund income (R,+SE) 10/19 Trust fund expenses (E,-SE) 417 300 Cash (-A) 10/27 Trust fund expenses (E,-SE) 300 22 Cash (-A) 11/16 Cash (+A) 22 417 Trust fund income (R,+SE) 11/22 Trust fund expenses (E,-SE) 417 300 Cash (-A) 12/16 Cash (+A) 300 417 Trust fund income (R,+SE) 12/28 Trust fund expenses (E,-SE) 417 700 Cash (-A) 12/31 Trust fund expenses (E,-SE) 700 100 Cash (-A) 12/31 Interest receivable (+A) 100 208 Trust fund income (R,+SE) - Accrued interest for last ½ month 12/31 208 Trust fund principal (-SE) 100,000 Trust fund income (-R,-SE) 1,459 Trust fund expenses (-E,+SE) Interest receivable (-A) Money market investment (-A) Cash (-A) © 2009 Pearson Education, Inc publishing as Prentice Hall 1,422 208 100,000 37 22-8 Estates and Trusts Solution E22-7 Sooner XXV Trust Charge-Discharge Statement For the period of trust administration, September 15 to December 31, 2009 Trust principal I charge myself for: Assets included in trust - total estate principal charge $100,000 I credit myself for: Transfer of money market investment to J.J Kara $100,000 Trust income I charge myself for: Trust income received during trust administration $1,459 I credit myself for: Funeral expenses paid $ 700 Trust administration fee paid 100 Payments to Puppy Paradise 622 Total trust income discharge $1,422 Payment of remaining trust income to J.J Kara $ 37 Respectfully submitted, Colleen Ryan, Trust Officer, December 31, 2009 Solution E22-8 6/1 Cash (+A) 1,000,000 Trust fund principal (+SE) 6/2 Investment in certificate of deposit (+A) 1,000,000 500,000 Cash (-A) 6/2 Investment in stock mutual fund (+A) 500,000 500,000 500,000 Cash (-A) 7/2 Cash (+A) 2,500 Trust fund income (R,+SE) ($500,000 x 6% x 1/12 year) 7/3 Trust fund expenses (E,-SE) 2,500 41 Cash (-A) © 2009 Pearson Education, Inc publishing as Prentice Hall 41 Chapter 22 22-9 © 2009 Pearson Education, Inc publishing as Prentice Hall 22-10 Estates and Trusts Solution E 22-9 Cash (+A) 218,220 Savings accounts (+A) 300,000 Microsystems common stock (+A) 400,000 Big Casino common stock (+A) 120,000 Vintage sports car (+A) 31,000 Mountain cottage (+A) 114,500 Personal residence (+A) 457,500 Trust fund principal (+SE) 1,641,220 - To record receipt of property transferred from executor Solution E 22-10 a Fair value of gross estate 2009 Tax Exempt Estate Taxable estate 45% Estate Tax Due Balance inherited by Emily b $5,300,000 (3,500,000) $1,800,000 $810,000 $4,490,000 There were many estate planning options for Mr Dogbert For example, he could have given assets to Emily during his lifetime or bequeathed funds to his church or some favorite charities, excluding those amounts from his estate If the reduced estate value would fall below the federal tax threshold, it would have left a zero inheritance tax However, all of these options expired with Dogbert’s demise © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 22 22-11 Solution E 22-11 Fair value of gross estate $3,600,000 2009 Tax Exempt Estate (3,500,000) Taxable estate $100,000 45% Estate Tax Due Balance inherited by Emily, Laura and Tom $45,000 $3,555,000 Solution E 22-12 Fair value of gross estate $23,400,000 2009 Tax Exempt Estate (3,500,000) Taxable estate $19,900,000 45% Estate Tax Due Balance inherited by Maggie $8,955,000 $14,445,000 © 2009 Pearson Education, Inc publishing as Prentice Hall 22-12 Estates and Trusts Solution P 22-1 Part June 22 Cash (+A) 15,000 Interest receivable (-A) 5,000 Estate income (R,+SE) June 24 Cash (+A) 10,000 12,000 Dividends receivable (-A) June 30 Estate expense (E,-SE) 12,000 250 Cash (-A) July 250 Estate expense (E,-SE) 4,900 Cash (-A) July 12 4,900 Cash (+A) 501,300 Certificate of deposit (-A) 500,000 Estate income (R,+SE) July 15 1,300 Cash (+A) 750,000 Certificate of deposit (+A) 500,000 Interest receivable (+A) Common stocks (+A) 5,000 460,000 Dividend receivable (+A) 12,000 Lake Michigan cottage (+A) 40,000 2005 Corvette (+A) 35,000 Estate principal (+SE) July 20 1,802,000 Devise - 2005 Corvette - Clark Olson (E,SE) 35,000 Devise- Lake cottage - Kent Olson (E,-SE) 40,000 Devise - ½ stocks - Clark Olson (E,-SE) Devise - ½ stocks - Kent Olson (E,-SE) 230,000 230,000 Lake Michigan cottage (-A) 40,000 2005 Corvette (-A) 35,000 Common stocks (-A) 460,000 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 22 22-13 Solution P 22-1 (continued) July 21 Devise - cash fees - Clark Olson (E,-SE) Devise - Lana Lang (E,-SE) 5,000 200,000 Devise - Jimmy’s church (E,-SE) 50,000 Devise - Metropolis Symphony (E,-SE) 50,000 Cash (-A) Part Closing Entries July 22 Estate income (-R,-SE) 305,000 11,300 Estate expenses (-E,+SE) 5,150 Cash (-A) - Close estate income and expenses and distribute estate net income to Lois Estate principal (-SE) 6,150 840,000 Devise- 2005 Corvette - Clark Olson (-E,+SE) 35,000 Devise - Lake cottage - Kent Olson (E,+SE) 40,000 Devise - ½ stocks - Clark Olson (-E, 230,000 +SE) Devise - ½ stocks - Kent Olson (-E, 230,000 +SE) Devise - cash fees - Clark Olson (-E, 5,000 +SE) Devise - Lana Lang (-E,+SE) 200,000 Devise - Jimmy’s church (-E,+SE) 50,000 Devise - Metropolis Symphony (E,-SE) 50,000 - Close devise distributions Estate principal (-SE) Cash (-A) - Close estate and transfer remaining cash balance to Trust 962,000 962,000 © 2009 Pearson Education, Inc publishing as Prentice Hall 22-14 Estates and Trusts Solution P 22-1 (continued) Part Estate of Jimmy Olson Charge-Discharge Statement For the Period of Estate Administration June 15 to July 22, 2009 Estate Principal I charge myself for: Assets included in estate inventory $1,802,000 I credit myself for: Devises paid in cash to: Clark Olson Lana Lang $ 5,000 200,000 Jimmy’s church 50,000 Metropolis Symphony Orchestra 50,000 305,000 Devises distributed in kind to: Clark Olson 265,000 Kent Olson 270,000 535,000 Transferred to Trust account for Lois Olson: Cash 962,000 Total estate principal discharge $1,802,000 Estate Income I charge myself for: Estate income received during estate administration $11,300 I credit myself for: Funeral expenses paid Cottage repairs paid $4,900 250 Payment of estate net income to Lois Olson Total estate income discharge Respectfully submitted: Clark Olson, Estate Executor, July 22, 2009 © 2009 Pearson Education, Inc publishing as Prentice Hall $ 5,150 6,150 $11,300 Chapter 22 22-15 Solution P 22-2 Date Accounts July 22 Cash (+A) Debit Credit 962,000 Trust fund principal (+SE) July 23 Certificate of deposit (+A) 962,000 300,000 Cash (-A) July 25 Super Stock Mutual Fund (+A) 300,000 500,000 Cash (-A) July 31 Smallville Municipal Bonds (+A) 500,000 100,000 Cash (-A) August 22 Cash (+A) 100,000 1,500 Trust income (R,+SE) August 23 Cash (+A) 1,500 305 Trust income (R,+SE) August 31 405 Trust fund expenses (E,-SE) 100 Trust fund expenses (E,-SE) 3,700 Cash (-A) © 2009 Pearson Education, Inc publishing as Prentice Hall 3,700 22-16 Estates and Trusts Solution P 22-3 Date Accounts March 15 Cash (+A) Dividends receivable (+A) Interest receivable (+A) Debit Credit 66,500 400 2,400 Life insurance receivable (+A) 500,000 Personal residence (+A) 325,000 Household furnishings and personal effects (+A) 76,000 Automobile (+A) 21,000 Investments in stocks (+A) 25,000 Investments in bonds (+A) 200,000 Estate principal (+SE) 1,216,300 - Record estate inventory at fair values March 25 Funeral expenses (E,-SE) 2,800 Cash (-A) March 30 Cash (+A) 2,800 500,000 Life insurance receivable (-A) April Land (+A) 500,000 10,000 Assets subsequently discovered (-A) 10,000 - Record lakefront property at cost, awaiting an appraisal April 15 Cash (+A) 3,000 Interest receivable (-A) 2,400 Estate income (R,+SE) April 19 Land (+A) 600 18,000 Assets subsequently discovered (-A) 18,000 - Adjust lakefront property to appraisal April 28 Debts of decedent paid (E,-SE) 13,250 Cash (-A) © 2009 Pearson Education, Inc publishing as Prentice Hall 13,250 Chapter 22 22-17 Solution P 22-3 (continued) April 29 April 30 Cash (+A) 500 Dividends receivable (-A) 400 Estate income (R,+SE) 100 Devise - Helen Wilson (Home, furnishings and personal effects) (E,-SE) Devise Helen (cash) (E,-SE) 401,000 66,500 Personal residence (-A) 325,000 Household furnishings and personal effects (-A) 76,000 Cash (-A) 66,500 - Transfer cash and property to Helen Devise (stocks)- Denise (E,-SE) 25,000 Devise (automobile) - Dennis (E,-SE) 21,000 Devise (cash) - Denise (E,-SE) 700 Automobile (-A) 21,000 Investments in stocks (-A) 25,000 Cash (-A) (Estate Income) 700 - Transfer property to Denise & Dennis April 30 Assets subsequently discovered (+A) Estate principal (-SE) 28,000 501,550 Devise - Helen Wilson (-E,+SE) 467,500 Devise - Denise (-E,+SE) 25,700 Devise - Dennis (-E,+SE) 21,000 Debts of decedent paid (-E,+SE) 13,250 Funeral expenses (-E,+SE) Estate income (-R,-SE) 2,800 700 - Closing entries April 30 Estate principal (-SE) 714,750 Cash (-A) 486,750 Investment in bonds (-A) 200,000 Land (-A) © 2009 Pearson Education, Inc publishing as Prentice Hall 28,000 22-18 Estates and Trusts - Transfer estate property to Wilson Family Trust © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 22 22-19 Solution P 22-4 Estate of George Wilson Charge-Discharge Statement For the period of estate administration, March to April 30, 2009 Estate principal I charge myself for: Assets included in estate inventory $1,216,300 Assets subsequently discovered Assets included in estate inventory - total estate principal charge 28,00 $1,244,300 I credit myself for: Funeral expenses paid Estate debts paid Devise - transfer cash, residence & furnishings to Helen $ 2,800 13,250 467,500 Devise - Transferred automobile to Dennis 21,000 Devise - Transferred stocks to Denise 25,000 Transferred bond investments to Wilson Family Trust 200,000 Transferred Land to Wilson Family Trust 28,000 Transferred cash to Wilson Family Trust 486,750 Total estate principal discharge $1,244,300 Estate income I charge myself for: Estate income received during estate administration $700 I credit myself for: Payment of estate income to Denise Wilson $700 Respectfully submitted, Estate Executrix, April 30, 2009 Required: Prepare the entry to record the creation of the Wilson Family Trust on April 30 Prepare all required entries to account for trust activities through June 30 © 2009 Pearson Education, Inc publishing as Prentice Hall 22-20 Estates and Trusts Solution P 22-5 Date Accounts April 30 Cash (+A) 486,750 Land (+A) 28,000 Investment in Bonds (+A) Debit Credit 200,000 Trust fund principal (+SE) May Certificate of deposit (+A) 714,750 450,000 Cash (-A) May 25 Cash (+A) 450,000 31,300 Land (-A) 28,000 Trust income (R,+SE) May 31 Trust income (E,-SE) 3,300 165 Cash (-A) June Cash (+A) 165 2,250 Trust income (R,+SE) June 15 Trust income (E,-SE) 2,250 8,700 Cash (-A) June 30 Trust income (E,-SE) 8,700 165 Cash (-A) © 2009 Pearson Education, Inc publishing as Prentice Hall 165 Chapter 22 22-21 Solution P 22-6 Date Accounts Debit May 31 Dividends receivable (+A) 1,200 Interest receivable (+A) Life insurance receivable (+A) Automobile (+A) Credit 6,750 750,000 2,600 Investments in stocks (+A) 52,000 Investments in bonds (+A) 400,000 Estate principal (+SE) 1,212,550 - Record estate inventory at fair values June Government bonds (+A) Life insurance receivable (+A) 200,000 50,000 Assets subsequently discovered (-A) June 15 Cash (+A) 250,000 750,000 Life insurance receivable (-A) June 16 June 18 Cash (+A) 750,000 8,000 Interest receivable (-A) 6,750 Estate income (R,+SE) 1,250 Funeral expenses (E,-SE) 4,300 Cash (-A) June 22 Interest receivable (+A) 4,300 15,000 Assets subsequently discovered (-A) Cash (+A) 15,000 215,000 Government bonds (-A) 200,000 Interest receivable (-A) June 23 Cash (+A) 15,000 50,000 Life insurance receivable (-A) June 24 Debts of decedent paid (E,-SE) 50,000 18,250 Cash (-A) © 2009 Pearson Education, Inc publishing as Prentice Hall 18,250 22-22 Estates and Trusts Solution P 22-6 (continued) June 28 Cash (+A) 1,600 Dividends receivable (-A) 1,200 Estate income (R,+SE) June 30 Devise (stocks) - Sue (E,-SE) 400 52,000 Devise (automobile) - Pat (E,-SE) 2,600 Executrix fees (E,-SE) 2,500 Devise - Humane society (E,-SE) 1,650 Automobile (-A) 2,600 Investments in stocks (-A) 52,000 Cash (-A) June 30 Assets subsequently discovered (+A) 4,150 265,000 Estate principal (-SE) 185,350 Devise - Sue (-E,+SE) 52,000 Devise - Pat (-E,+SE) 2,600 Devise - Humane society (-E,+SE) 1,650 Debts of decedent paid (-E,+SE) 18,250 Executrix fees (-E,+SE) 2,500 Funeral expenses (-E,+SE) 4,300 Estate income (-R,-SE) 1,650 - Closing entries June 30 Estate principal (-SE) 1,397,900 Cash (-A) 997,900 Investment in bonds (-A) 400,000 - Transfer estate property to Josephson Family Trust © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 22 22-23 Solution P 22-7 Estate of Tom Josephson Charge-Discharge Statement For the period of estate administration, May 16 to June 30, 2009 Estate principal I charge myself for: Assets included in estate inventory $1,212,550 Assets subsequently discovered 265,0 00 Assets included in estate inventory - total estate principal charge $1,477,550 I credit myself for: Funeral expenses paid Estate debts paid $ 4,300 18,250 Executrix fees paid 2,500 Devise - Transferred automobile to Pat 2,600 Devise - Transferred stocks to Sue Transferred bond investments to Josephson Family Trust Transferred cash to Josephson Family Trust Total estate principal discharge 52,000 400,000 997,900 $1,477,550 Estate income I charge myself for: Estate income received during estate administration $1,650 I credit myself for: Payment of estate income to Humane Society $1,650 Respectfully submitted, Estate Executrix, June 30, 2009 © 2009 Pearson Education, Inc publishing as Prentice Hall 22-24 Estates and Trusts Solution P 22-8 Date Accounts Debit Credit June 30 Cash (+A) 997,900 Investment in Bonds (+A) 400,000 Trust fund principal (+SE) July Certificate of deposit (+A) 1,397,900 750,000 Cash (-A) July 31 Trust income (E,-SE) 750,000 275 Cash (-A) August Cash (+A) 275 3,750 Trust income (R,+SE) August 19 Trust income (E,-SE) 3,750 15,000 Cash (-A) © 2009 Pearson Education, Inc publishing as Prentice Hall 15,000 ... of the estate The tax may be paid by the estate or by the beneficiary if estate property has already been distributed to the beneficiary SOLUTIONS TO EXERCISES Solution E22-1 a b Cash (+A) 4,500... of rare hand puppets 85,000 Fully restored Model T Ford 125,000 $2,951,725 Submitted by K T Tim, executor Solution E22-5 Estate Inventory Jeff Carpenter, Testator Inventory of Estate Assets As... from the estate inventory Prepared by Ms Colleen Ryan, Executrix, Oxford National Bank © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 22 22-5 Solution E22-5 (continued) a b Cash