Accounting for an “Estate”

1. Accounting for an “Estate” LO 1 • “Estate” literally means property owned by an individual • Typically refers to a separate legal entity holding title to the assets of a deceased person • “Estate accounting” focuses on “the recording and reporting of financial events from the time of a person’s death until the ultimate distribution of all property held by the estate” 19-1

2. Laws governing wills and estates are called “probate laws”. Each state establishes its own laws of descent and laws of distribution. Almost half of the states have adopted the Uniform Probate Code. Estate Accounting Probate Laws -- Three general purposes: Gather and preserve all of the property. Carry out orderly and fair settlement debts. Discover and implement the decedent’s intentions for remaining property. 19-2

3. Estate Property Includes: Cash Investments in stocks and bonds Interest accrued to the date of death Dividends declared prior to death Investments in businesses Unpaid wages Accrued rents and royalties Valuables such as jewelry, paintings and antiques 19-3

4. Legacies and Devises LO 2 • Gifts of personal property are called “legacies” or “bequests”… • Specific legacy (Gift of personal property from a directly identified source), • Demonstrative legacy , (Cash gift from particular source), • General legacy (Cash gift from an unspecified source), and • Residual Legacy (Gift from remaining estate property). 19-4

5. If funds are insufficient to satisfy all of the legacies, the reduction of these gifts is called “the process of abatement”. Estate Distributions Priority: Specific legacies Demonstrative legacies General legacies Residual legacies A gift of real property is called a “devise”. 19-5

6. The recipient of estate income is called the “income beneficiary”. The recipient of the estate principal (also called “corpus”) is called the “remainderman”. How income is to be determined should be defined by the decedent in the will to avoid confusion. The Distinction Between Income and Principal LO 4 19-6

7. The Distinction Between Income and Principal • Principal of the estate includes the assets that existed at the date of death, which became assets of the decedent’s estate. • Adjustments to principal include: • Life insurance proceeds where the estate was named beneficiary. • Debts. • Funeral expenses. • Gains and Losses from sale of assets. • Homestead and family allowances. 19-7

8. The Distinction Between Income and Principal • Income of the estate includes all revenues and • expenses incurred after the date of death. • Reductions to income include: • Recurring taxes (such as real and personal • property taxes), • Ordinary repair expenses, • Water and other utility expenses, • Insurance expenses, and • Other ordinary expenses required for the • “management and preservation of the estate”. 19-8

9. Recording the Transactions of an Estate Estate assets are recorded at FMV. Debts, taxes & other obligations are recorded when paid. Distribution of legacies are not recorded until actually conveyed. Separately identify income and principal transactions. Often, two cash accounts are maintained. 19-9

10. Periodic reports disclose progress in settling the estate. Separate statements are required for income and principal. Each statement reports: Assets under the control of the executor. Disbursements made to date. Any property still remaining. Charge and Discharge Statement LO 5 19-10

11. Trusts LO 6 A TRUST is created by the conveyance of assets to a fiduciary (or trustee) who manages the assets according to the stipulated instructions. Trusts are often established to reduce the size of a person’s taxable estate and the estate taxes that must be paid. A trustee may be an Individual or an organization. 19-11