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Chapter 15
Estates
And
Trusts
McGraw-Hill/Irwin
©The McGraw-Hill Companies, Inc. 2006
Estates and Trusts
2

Estates and Trusts are separate accounting
and taxable entities.

Persons acting as legal representatives of
estates and trusts are known as fiduciaries.
A Fiduciary
3

An executor of an estate is named in the
decedent's will, but if the will does not name
an executor or the decedent dies intestate, the
court appoints an administrator.

The fiduciary of a trust is known as a trustee.
Legal and Accounting aspect of
Estates
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State laws (known as probate codes) regulate
the administration of estates.
Because these laws differ widely, a Uniform
Probate Code has been drafted and adopted
in part by many states.
Though the Code has not yet been adopted in
total by all states, it is used to illustrate
statutory provisions.
Provisions of Uniform Probate
Code
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
Code defines an estate as all property of a
decedent, trust, or other person whose affairs
are subject to the Code.

A person is deemed to be an individual or an
organization.
Property of decedent
6

Property of a decedent is awarded to persons
specified in the will.

Absence of a will, the decedent is said to have
died intestate, the decedent’s property goes to
heirs, as described in the code.
Wills
7

A person creating will is know as testator.

Valid will :
-Be in writing,
- Signed by the testator
- Signed by at least two witnesses.
Probate of Will
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Probate of a will is action to validate the will.
Will is probated by a probate court (also
known as a surrogate or orphan's court).
Completion of any hearings, the court issues
an order for formal probate of a valid will, or an
order that the decedent died intestate (without
a will).
Personal Representative
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Personal representative is the person
administrating the estate.
A personal representative named in the
decedent’s will is called an executor.
If the decedent died intestate, the court
appointed personal representative is known as
administrator.
Powers of Personal Representative


The personal representative takes possession
and control of the decedent's property in trust
for the benefit of creditors and beneficiaries.
The personal representative has the authority
–
–
10
to allocate cash receipts and payments to estate
principal (corpus) or
to estate income pursuant to the provisions of the
will or applicable state statutes.
Devisees

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A devisee is any person or trust named in a will
to receive real or personal property of the
decedent in a transfer known as devise.
Inventory of decedent’s property
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Within three months after appointment, the personal
representative prepares an inventory (at current fair
value) of the decedent's property and debts as of the
date of death.
No earlier than six months after the date of
appointment, the personal representative may close an
estate by filing appropriate documents and financial
statements with the probate court.
If other property of the decedent is discovered after the
filing of the original inventory, the personal
representative must file a supplementary inventory with
the probate court
Allowances and exemptions
stipulated for estates
Homestead allowanceThe decedent's surviving
spouse, or surviving minor and dependent children,
are entitled to a total homestead allowance of a
specified amount.
2. Family allowanceThe surviving spouse and
dependent minor children of the decedent are entitled
to a reasonable cash allowance during administration
of the estate.
3. Exempt propertyThe decedent's surviving spouse
or children are entitled to an aggregate specified
amount of current fair value of automobiles and
household and personal effects.
1.
13
Claims of creditors against estate
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The personal representative is required to
publish a notice in a newspaper once a week
for three successive weeks requesting
creditors of the estate to present their claims
within four months after the date of the first
publication.
Payments

Payments then are made in the following order:
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–
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(1) costs of administering the estate
(2) decedent's reasonable funeral costs
(3) debts and taxes with preference under federal law
(4) reasonable and necessary medical and hospital costs of
decedent’s last illness
(5) debts and taxes with preference under state laws and
(6) all other claims.
Distributions to Devisees
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After payment of creditors, estate property is
distributed as follows:
1. Specific devises (gifts of identifiable objects, such
as named paintings, automobiles, or real property)
2. General devises (gifts of money or monetary
assets, such as corporate bonds)
3. Residuary devises (gifts of all estate property
remaining after specific and general devises are
distributed).
Abate
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If estate property that is not exempt is insufficient to
pay estate creditors and the devises, the devises abate
(are reduced) or are eliminated. Residuary devises are
reduced or eliminated first, followed by general devises
and specific devises in that order
Estate and Inheritance Taxes

The federal estate tax assessed against the
estate and state inheritance taxes against
devisees, sometimes called death taxes
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are apportioned against the various devises
according to the provisions of the will or
are prorated according to provisions of the Uniform
Probate Code.
Closing the Estate
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No earlier than six months after the date of
appointment, a personal representative may
close an estate by filing statement with the
probate court.
This legal statement is accompanied by a
financial statement known as a charge and
discharge statement.
Provisions of the Revised Uniform
Principal and Income Act
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Allocation of revenue and expenses of the
estate between principal and income is
important because the income beneficiary
and the principal beneficiary (or
remainderman) may be different persons.
If the will does not provide specific instructions
for such allocation, provisions of the Revised
Uniform Principal and Income Act, or other
applicable state laws, should be followed.
Provisions of Uniform Probate
Code Governing Trusts

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It contains sections dealing with trust registration with appropriate
state probate court, duties, powers and liabilities of trustees and
courts jurisdiction concerning trusts.
This jurisdiction may include appointing or removing a trustee,
reviewing trustee’s fees, and reviewing or settling interim or final
accountings of trustee.
In accordance with this code trustee is required to administer the
trust expeditiously and take appropriate care while handling the
property.
Further, the Trustee has to inform the beneficiaries the
administration of the trust from time to time and is held responsible
to furnish annually or more often, if necessary, the account
statements and at the termination of trust
Accounting for an Estate
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
Estate accounting is carried out in accordance
with the Accountability technique.

The accounting records of the personal
representative include only those items for
which the representative is accountable under
the equation Assets = Accountability.
Accounting records of an Estate

The accounting records of an estate are
opened by
Debits to Principal Cash
Debits to Other asset accounts
Credits to Liability accounts for liens on estate
property
Credits to Estate Principal Balance account
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Entry for property subsequently
discovered
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Entry for property subsequently discovered
–
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Entry for Receipt of Income
–
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Dr Devises Distributed
 Cr Principal Cash
Entry for Medical and Funeral costs paid
–
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Dr Distribution to Income Beneficiaries
 Cr Income Cash
Entry for Payment to Devisees
–
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Dr Income Cash
 Cr Estate Income
Entry for Distribution of Income
–
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Dr Asset Accounts
 Cr Property Discovered
Dr Liabilities Paid
 Cr Principal Cash
Reports Filed by the Executor
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A charge and discharge statement is prepared periodically and
on closing of an estate by the personal representative of the
estate.
This statement usually is prepared in two sectionsprincipal and
income.
"Charges" include the inventory of principal property, property
discovered, and gains on the disposal of principal property.
"Credits" include liabilities paid, devises and income distributed,
and administrative costs paid.
The charge and discharge statement details the accountability of
the personal representative of the decedent.
Closing Entries
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Once all estate assets have been distributed,
the estate ceases to exist.
The final act of of the personal representative
is the filing of a final report with the probate
court.
On approval of the final charge and discharge
statement by the probate court, the accounting
records for the estate may be closed.
Trusts
27

A trust created by a will is termed a
testamentary trust.

A trust created by a living person is known as
an inter vivos or living trust.
Parties to a Trust
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A trust is created by the settlor (also known as
donor or trustor)
And is administered by a trustee for the benefit
of beneficiaries.
The trustee must comply with the provisions
established by the settlor
Legal and Accounting aspects of
Trusts
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The procedure established to account for a
trust are similar to those discussed for an
Estate.
The Uniform Probate Code regulates the
administration of Trust.
The provisions for allocations between
principal and income that are set forth in the
Revised Uniform Principal and Income Act are
applicable
Accounting records of a Trust
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The trustee must comply with the provisions
established by the settlor.
The accounting records of a trust usually differ
from those of an estate because of the longer
life of trust.
And must maintain appropriate accounting
records, generally on the cash basis.
Accounting Entries for a Trust
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There is no need to accrue revenue or expenses for a
trust because a balance sheet and an income
statement generally are not prepared.
The periodic financial report prepared by the trustee is
a charge and discharge statement.
A closing journal entry is required for a trust at the end
of each reporting period for which a charge and
discharge statement is prepared to clear the revenue,
expense, and distributions to beneficiaries ledger
accounts for the next reporting period