SMch23Beams

8/12/2019 SMch23Beams

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Chapter 23

ESTATES AND TRUSTS

Answers to Questions

1 1No, trust accounting is essentially cash basis accounting.

2 Income is earned on the principal amounts of estate and trust assets.

Estates frequently realize income from various investments between the

time that the property inventory is filed by the executor and the time

the estate is fully administered. primary reason for dividing estate

principal and income is that the beneficiaries are li!ely to be

different. "eparation of principal and income is also important for

trusts, because often a trust#s principal is to be maintained intact

until the death of the beneficiary.

3 devise is a testamentary disposition of real or personal property.

4 If a decedent had a valid will in force at the time of death, he or she

is said to have died testate. In the absence of a valid will, the

decedent is said to have died intestate.

5 $he %niform &robate 'ode entitles the surviving spouse to a homestead

allowance that is exempt from and has priority over all claims against

the estate. $he surviving spouse and minor children who were dependent

on the deceased are also entitled to a reasonable family allowance to

be paid out of estate property during the period in which the estate is

being administered. $he family allowance is exempt from and has

priority over all claims except the homestead allowance. llowance

amounts vary across the states.

6 (es, the value of the estate is reduced by funeral expenses,

settlements of estate liabilities, bequests to qualified charities, a

marital deduction, state)level taxes, expenses of estate

administration, and a tax exempt amount.

7 $he taxable amount of an estate is based on fair values of all estate

assets at the date of death.

8 (es, within certain limitations. 'urrently any number of annual gifts

of *1+, each can be made, with a lifetime limit of *1,,.

9 Income for estates and trusts and applicable tax rates are defined in

essentially the same manner as for individuals. Income includes

interest and dividends, rent, etc. -eductions andor exemptions for

estate administration fees, charitable donations and distributions to

beneficiaries reduce taxable income. $he fiduciary of the estate must

provide applicable information to the beneficiary on "chedule /)1.

10 n estate may be sub0ect to taxation referred to as estate or

inheritance taxes2 at both the state and federal levels. ccountants

and attorneys play a vital role in estate planning to minimize these

tax burdens for their clients and heirs. Even if the federal tax is

2011 Pearson Education, Inc. publisin! as Prentice "all2#$1


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23-2 Estates and Trusts

permanently repealed, estate planning services will remain critical for

larger estates sub0ect to state level taxation.

3ederal taxation of estates is currently in a period of flux. $he

Economic 4rowth and $ax 5elief 5econciliation ct of 61 proposed

reduction of the tax, and a total repeal in 61. $his law was

subsequently amended by the$ax 5elief, %nemployment Insurance5eauthorization, and 7ob 'reation ct that was signed into law

on -ecember 18, 61 which provided the federal estate tax

exemption and rate for 61)616. $his rate is only good until

-ecember +1, 616, at which time the exemption and rate will

revert to 66 levels unless 'ongress acts.

11 valid will ensures the disposition of estate assets in accordance

with the wishes of the deceased. If a valid will is not in place,

assets will be distributed in accordance with state probate laws.

&reparation of a will is also an important part of overall estate

planning and can be useful in reducing estate and inheritance taxes.

12 In addition to federal and state estate and inheritance taxes, estatesare also sub0ect to federal and possibly state2 income taxes. n

estate is a taxable entity and is sub0ect to tax on income earned from

the date of death until final settlement of the estate. $he tax may be

paid by the estate or by the beneficiary if estate property has already

been distributed to the beneficiary.

SOLUTIONS TO EXERCISES

Solution E23-1

a 'ash 92 :,

Interest receivable ) bonds )2 ;,;

Estate income 5,9"E2 ;,


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Chapter 23 23-3

Solution E23-2

a 'ash 92 1=,

Interest receivable ) bonds )2 11,

d 3uneral expenses E,)"E2 16,>

'ash )2 16,>

e Estate principal )"E2 ;;,

ccounts payable 9A2 ;;,

Solution E23-3

a -ividend receivable 92 +,

Estate income 5,9"E2 +,

b No entry on this date, since no distribution has yet been made.

c &robate court expenses E,)"E2 +,>

'ash )2 +,>

d 3uneral expenses E,)"E2 11,


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Solution E 23-4

Melnie T!i"io# Te$tto!

In%ento!& o' E$tte ($$et$

($ o' t)e *te o' +et) on (u,u$t 15# 2011

Description of Property Fair Value

'ash * 11>,66=

"avings accounts 6=,

Bia5eggio common stoc! 66=,

'ity of 5oma municipal bonds ;16,

Cercedes sports car ;1,

'ondominium on Italian 5iviera 1,68,

&ersonal effectsF )

*>66,

F$he probate court permitted exclusion of 7eff#s

personal effects from the estate inventory. &repared by

Cs. 'olleen 5yan, Executrix, Dxford National an!

? 611 &earson Education, Inc. publishing as &rentice @all


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Solution E23-5 continued2

;. Charge-Discharge Statement

E$tte o' e'' C!.ente!

C)!,e-+i$")!,e Stte/ent

o! t)e .e!io* o' e$tte */ini$t!tion#

(u,u$t 25 to Se.te/e! 28# 2011

E$tte .!in"i.l

I charge myself for:

ssets included in estate inventory ) total estate

principal charge

*>66,

I credit myself for:

3uneral expenses paid * 8,6

Executrix expenses paid 6,=

-evise paid in cash to "ooner GGB trust account 1,

-evise paid in cash to 7.7. /ara 816,+

$otal estate principal discharge *>66,

E$tte in"o/e


Estate income received during estate administration *;,=


&ayment of estate income to 7.7. /ara *;,=

5espectfully submitted, 'olleen 5yan, Estate Executrix, "eptember

6>, 611.



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Chapter 23 23-7

Solution E23-6

:1= 'ash 92 1,

$rust fund principal 9"E2 1,

:1< Coney mar!et investment 92 1,

'ash )2 1,

11< 'ash 92 ;18

$rust fund income 5,9"E2 ;18

11: $rust fund expenses E,)"E2 +

'ash )2 +

168 $rust fund expenses E,)"E2 66

'ash )2 66

111< 'ash 92 ;18


1166 $rust fund expenses E,)"E2 +

'ash )2 +

161< 'ash 92 ;18


166> $rust fund expenses E,)"E2 8

'ash )2 8

16+1 $rust fund expenses E,)"E2 1

'ash )2 1

16+1 Interest receivable 92 6>

$rust fund income 5,9"E2

) ccrued interest for last H month.

6>

16+1 $rust fund principal )"E2 1,

$rust fund income )5,)"E2 1,;=:

$rust fund expenses )E,9"E2 1,;66

Interest receivable )2 6>

Coney mar!et investment )2 1,

'ash )2 +8



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Solution E23-7

Soone! XX T!u$t


o! t)e .e!io* o' t!u$t */ini$t!tion#

Se.te/e! 15 to +e"e/e! 31# 2011

T!u$t .!in"i.l


ssets included in trust ) total estate principal

charge

*1,


$ransfer of money mar!et investment to 7.7. /ara *1,

T!u$t in"o/e


$rust income received during trust administration *1,;=:


3uneral expenses paid * 8

$rust administration fee paid 1

&ayments to &uppy &aradise


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Chapter 23 23-9



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Solution E 23-9

'ash 92 61>,66

"avings accounts 92 +,

Cicrosystems common stoc! 92 ;,

ig 'asino common stoc! 92 16,

Bintage sports car 92 +1,

Countain cottage 92 11;,=

&ersonal residence 92 ;=8,=

$rust fund principal 9"E2 1,,

;= Estate $ax -ue *>1,

alance inherited by Emily *;,;:,

b. $here !eremany estate planning options for Cr. -ogbert. 3or example,

he could have given assets to Emily during his lifetime or bequeathed

funds to his church or some favorite charities, excluding those amounts

from his estate. If the reduced estate value would fall below thefederal tax threshold, it would have left a zero inheritance tax.

@owever, all of these options expired with -ogbert#s demise.



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Chapter 23 23-11

Solution E 23-11

3air value of gross estate *+,,:==,

alance inherited by Caggie *1;,;;=,



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Solution 23-1

Part 1

7une 66 'ash 92 1=,

Interest receivable )2 =,

Estate income 5,9"E2 1,

7une 6; 'ash 92 16,

-ividends receivable )2 16,

7une + Estate expense E,)"E2 6=

'ash )2 6=

7uly ; Estate expense E,)"E2 ;,:

'ash )2 ;,:

7uly 16 'ash 92 =1,+

'ertificate of deposit )2 =,

Estate income 5,9"E2 1,+

7uly 1= 'ash 92 8=,

'ertificate of deposit 92 =,

Interest receivable 92 =,

'ommon stoc!s 92 ;


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Chapter 23 23-13

Solution 22-1 "ontinue*

7uly 61 -evise ) cash fees ) 'lar! Dlson E,)"E2 =,

-evise ) Aana Aang E,)"E2 6,

-evise ) 7immy#s church E,)"E2 =,

-evise ) Cetropolis "ymphony E,)"E2 =,

'ash )2 +=,

Part 2 Closing Entries

7uly 66 Estate income )5,)"E2 11,+

Estate expenses )E,9"E2 =,1=

'ash )2 ;,

-evise) 6= 'orvette ) 'lar! Dlson

)E,9"E2

+=,

-evise ) Aa!e cottage ) /ent Dlson )

E,9"E2

;,

-evise ) H stoc!s ) 'lar! Dlson )E,

9"E2

6+,

-evise ) H stoc!s ) /ent Dlson )E,

9"E2

6+,

-evise ) cash fees ) 'lar! Dlson )E,9"E2

=,

-evise ) Aana Aang )E,9"E2 6,

-evise ) 7immy#s church )E,9"E2 =,

-evise ) Cetropolis "ymphony E,)"E2 =,

- Close devise distri"utions

Estate principal )"E2 :


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Part 3

E$tte o' i//& Ol$on


o! t)e e!io* o' E$tte (*/ini$t!tion

une 15 to ul& 22# 2011

E$tte !in"i.l


ssets included in estate inventory *1,>6,


-evises paid in cash toJ

'lar! Dlson * =,

Aana Aang 6,

7immy#s church =,

Cetropolis "ymphony Drchestra =, +=,

-evises distributed in !ind toJ

'lar! Dlson 6


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Chapter 23 23-15

Solution 23-2

+te (""ount$ +eit C!e*it

7uly 66 'ash 92 :


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Solution 23-3


Carch 1= 'ash 92

'ash )2 6,>

Carch + 'ash 92 =,

Aife insurance receivable )2 =,

pril : Aand 92 1,

ssets subsequently discovered )2 1,

- $ecord la%efront property at cost' a!aiting an

appraisal,

pril 1= 'ash 92 +,

Interest receivable )2 6,;

Estate income 5,9"E2 ,

ssets subsequently discovered )2 1>,

- d.ust la%efront property to appraisal,

pril 6> -ebts of decedent paid E,)"E2 1+,6=

'ash )2 1+,6=



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Chapter 23 23-17


pril 6: 'ash 92 =

-ividends receivable )2 ;

Estate income 5,9"E2 1

pril + -evise ) @elen Kilson @ome,

furnishings and personal effects2 E,)

"E2

;1,

-evise ) @elen cash2 E,)"E2 ,

Estate principal )"E2 =1,==

-evise ) @elen Kilson )E,9"E2 ;

Estate income )5,)"E2 8

- Closing entries

pril + Estate principal )"E2 81;,8=

'ash )2 ;>,



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- Transfer estate property to 3ilson Family Trust,



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Chapter 23 23-19

Solution 23-4

E$tte o' eo!,e il$on



M!") 1 to (.!il 30# 2011

E$tte .!in"i.l


ssets included in estate inventory *1,61,

ssets included in estate inventory ) total estate

principal charge

*1,6;;,+


3uneral expenses paid * 6,>

Estate debts paid 1+,6=

-evise ) transfer cash, residence L furnishings to

@elen

;,

$ransferred cash to Kilson 3amily $rust ;>


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Solution 23-5


pril + 'ash 92 ;>,

Investment in onds 92 6,

$rust fund principal 9"E2 81;,8=

Cay + 'ertificate of deposit 92 ;=,

'ash )2 ;=,

Cay 6= 'ash 92 +1,+

Aand )2 6>,

$rust income 5,9"E2 +,+

Cay +1 $rust fund expensesE,)"E2 1,8

'ash )2 >,8

7une + $rust fund expenses E,)"E2 1


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Chapter 23 23-21

Solution 23-6


Cay +1 -ividends receivable 92 1,6

Interest receivable 92 3uneral expenses E,)"E2 ;,+

'ash )2 ;,+

7une 66 Interest receivable 92 1=,

ssets subsequently discovered )2 1=,

'ash 92 61=,

4overnment bonds )2 6,

Interest receivable )2 1=,

7une 6+ 'ash 92 =,

Aife insurance receivable )2 =,

7une 6; -ebts of decedent paid E,)"E2 1>,6=

'ash )2 1>,6=



22/24



7une 6> 'ash 92 1,


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Chapter 23 23-23

Solution 23-7

E$tte o' To/ o$e.)$on



M& 16 to une 30# 2011

E$tte .!in"i.l


ssets included in estate inventory *1,616,==

ssets subsequently discovered 6,6=

Executrix fees paid 6,=

-evise ) $ransferred automobile to &at 6,


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Solution 23-8


7une + 'ash 92 ::8,:

Investment in onds 92 ;,

$rust fund principal 9"E2 1,+:8,:

7uly = 'ertificate of deposit 92 8=,

'ash )2 8=,

7uly +1 $rust fund expenses E,)"E2 68=

'ash )2 68=

ugust = 'ash 92 +,8=

$rust income 5,9"E2 +,8=

ugust 1: $rust fund expenses E,)"E2 1=,

'ash )2 1=,

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