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CHAPTER 23

CHAPTER 23. ESTATES AND TRUSTS. FOCUS OF CHAPTER 23. The Role Accountants Play in Estate Planning Principal Versus Income Accounting for Estates Accounting for Trusts. Trusts: The Parties Involved. The parties to a trust are the: Trustor: The party creating the trust.

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CHAPTER 23

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  1. CHAPTER 23 ESTATES AND TRUSTS

  2. FOCUS OF CHAPTER 23 • The Role Accountants Play in Estate Planning • Principal Versus Income • Accounting for Estates • Accounting for Trusts

  3. Trusts: The Parties Involved • The parties to a trust are the: • Trustor: The party creating the trust. • Trustee: The party that serves in afiduciary capacity for the trust beneficiaries. • Beneficiaries: The parties who benefit from the trust.

  4. Trusts: Types of Beneficiaries • Trust beneficiaries are of the following two classes: • Income beneficiary—entitled to the income earned by the trust’s assets. • Principal beneficiary—entitled to the principal, or corpus, of the trust. • Principal is distributed according to the terms of the trust (usually at the end).

  5. Beneficiaries: Clashes of Interest • A built-in clash of interests when: • The income and principal beneficiaries are different persons. • WHO GETS WHAT? • The income and principal beneficiaries are the same person. • WHEN DO I GET IT?

  6. Income Beneficiary: Beginning of Rights • The interests of the income beneficiary must be accounted for separately from the interests of the principal beneficiary BOTH: • During the period of the estate administration as well as • After the property is actually transferred to the trustee.

  7. Distinguishing BetweenPrincipal and Income • In determining whether a transaction pertains to principal or income, the determination is made by referring to: • First: The trust agreement. • Second: State law.* • Third: Case law. • Fourth: GAAP. *State law may be based on The Revised Uniform Principal and Income Act [of either 1962 or 1997].

  8. Income Beneficiaries:Beginning of Rights • Under the Revised Uniform Principal and Income Act [of 1962], the rights of the income beneficiary begin: • At the date of death of the decedent who created the trust.

  9. Trust Principal:Determining Initial Amounts • In determining at the time of the person’s death the assets that are to be treated as part of the TRUST PRINCIPAL: • The accrual basis is to be used(under the Revised Uniform Principal and Income Act [of 1962]).

  10. Estates: Fiduciaries • A fiduciary may be either: • An EXECUTOR(RIX). • The person named in the will (decedent has died testate) or • An ADMINISTRATOR(RIX). • Thepersonappointed by the court (decedent has died intestate).

  11. Estates:Probate • Probate is the act by which the COURT determines whether: • The will submitted to it meets the statutory requirements concerning wills. • If the court so determines, then it issues a certificate or decree that enables the terms of the will to be carried out.

  12. Estates: Probate • Under the state probate laws, the affairs of decedents must be: • Administered by FIDUCIARIES. • These fiduciaries are subject to the control of the state probate courts.

  13. Estates: Gifts • A gift of real property is called a devise. • A gift of personal property is called a legacy. • Types of LEGACIES: • Specific: A specific noncash item. • Demonstrative: Cash—from a certain fund. • General: Cash—from no certain fund. • Residual: What remains. $

  14. Estates: Duties of An Estate Fiduciary • The fiduciary of an estate: • Takes an inventory of the decedent’s property. • Pays estate liabilities. • Prepares and files tax returns for: • The decedent. • The decedent’s estate. #1 #2 #3 Federal Form 1041: U.S. Fiduciary Income Tax Return

  15. Trusts: Compared With Estates • Accounting for trusts is virtually identical to accounting for estates, even though the nature of the transactions is substantially different.

  16. Accounting for Estates and Trusts • For both estates and trusts, the interests of both the income beneficiary and the principal beneficiary can easily be accounted for using: • A single general ledger. • ONLYone bank account. • Which is separated into two general ledger accounts: • One pertaining to principal. • One pertaining to income.

  17. Trusts: The Revised Uniform Principal And Income Act (of 1962) • Requirements of the Act: • Depreciation is mandatory. • Unusual charges against income may be recouped from income over a reasonable period of time.

  18. Trusts: The Revised Uniform Principal And Income Act (of 1962) • Under the Act, certain costs and expenses must be charged to PRINCIPAL. Examples are: • Costs of investing principal assets. • Costs of preparing property for rentalor sale. • Taxes on gains allocated to principal. • Costs incurred to protect trust property.

  19. Revised Uniform PrincipalAnd Income Act (of 1962) • Under the Act, certain costs and expenses must be shared equally between PRINCIPAL and INCOME. Examples: • Court costs. • Attorney and accounting fees. • Trustee’s fees.

  20. End of Chapter 23 Time to Clear Things Up—Any Questions?

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