Chapter 20

1. Chapter 20 Estates and Trusts: Their Nature and the Accountant’s Role

2. 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 C20

3. 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 C20

4. Key terms, continued • Probate 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 C20

5. Key terms, continued • Community 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 C20

6. 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 C20

7. 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 C20

8. Computation of the federal estate tax Gross estate XX Less deductions allowed - XX Taxable Estate XX Add post-1976 taxable gifts +XX Unified tax base XX Tentative tax on total transfers XX Less tax credits - XX Estate tax due XX C20

9. 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 C20

10. 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 C20

11. 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 C20

12. 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 C20

13. 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 C20

14. Valuation of gross estate assets • Assets are valued at fair market value at the date of death • An alternative valuation date may be employed • 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 C20

15. 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 C20

16. 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 C20

17. 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 C20

18. 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 C20

19. Measurement of income, continued • Generally depreciation is not charged against estate income • Depletion on wasting assets is generally charged against estate income C20

20. 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 C20

21. 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 C20

22. 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 C20

23. 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 C20

24. Trusts, continued • Trusts are created for a variety of purposes • charitable remainder trusts • inter vivos trusts • credit shelter trusts • Q-TIP trusts C20

25. 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 C20