Basic issues in combinations

1
Chapter 20
Estates and Trusts Their Nature and the
Accountants 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

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 ones
  lifetime which passes property to ones heirs
  without a will and therefore avoids the probate
  process

4
Key terms, continued

• Probate estate - the decedents 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 decedents estate

5
Key terms, continued

• Community property - only the decedents 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

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
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
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
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

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

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

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

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

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 decedents death, except
  for property sold, distributed, or otherwise
  disposed of during the six month period

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

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

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

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

19
Measurement of income, continued

• Generally depreciation is not charged against
  estate income
• Depletion on wasting assets is generally charged
  against estate income

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

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

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

23
Trusts

• A separate entity that receives an individuals
  assets for purposes of managing them and
  distributing them over time
• A trust is recognized as a taxable entity

24
Trusts, continued

• Trusts are created for a variety of purposes
• charitable remainder trusts
• inter vivos trusts
• credit shelter trusts
• Q-TIP trusts

25
Trusts, continued

• Trusts which become operative during ones
  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