ACCOUNTING FOR ESTATES OF A DECEASED PERSON (EXECUTORSHIP AND TRUST ACCOUNT) THE PROBATE AND ADMINISTRATION OF ESTATE ACT.

(CAP 352 R.E 2002)

The essence of this topic is to deal with the property left behind by deceased person. The deceased person is a person who has died and estate is the property left behind by a person who has died. TESTANCY, INTESTANCY AND PARTIAL INTESTANCY. These are different situations where a person dies. Testacy: Is the situation where by a person dies leaving behind a valid will. Intestacy: Is the situation where by a person dies without leaving behind a valid will. Partial Intestacy: Is the situation where by a person dies leaving behind a valid will for only part of its properties (Estates). A WILL: Is a valid declaration of mans intention on how property should be disposed off after his death. A testate is one who dies leaving a will which details the distribution of his/her property after death. Where there is no valid will the person is said to have died intestate and his/her property devolves according to law. Any valid will must be in writing and must be signed by the testator in the presence of two or more witness who must attest the testators signature. The testator must understand the effects of his will and must have animus testandi, that is the full and free intention to make it his last will and testament which will become operative on his death. A will is said to be ambulatory (capable of revocation) at any time before the death of testator and is automatically revoked on the testators subsequent marriage unless it was madly contemplation of that marriage. Executors: When a person dies the duty of administering his estate falls upon his legal personal representative (LPR). A valid will usually expressly appoints and names an executor who is then entitled to obtain probate of the will. Where an appointment is implied by requests to an individual to deal with various assets or liabilities of the testator the executor is known as an executor according to the tenor. Probate: Probate is the process of obtaining legal recognition of a will. The will itself gives the executor his/her title but cannot prove his/her title until he has obtained probate. When seven days have passed since the death of the testator the executor may apply for probate in common form (administrative) or in solemn form (judicial). Lapse of legacies:

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The vesting of a legacy presupposed the continued existence of the legatee up to the time of the testators death. The Legacy can only vest if the legatee is proved to have survived the testator but, where a legatee predeceased the testator the legacy lapses and forms part of the testators estate. However, where the predeceased legatee was the child of the testator and there are living grandchildren, the legacy is saved from lapse and the property passes to the grandchildren per stirpes. This rule extends to remoter issue of the testator, e.g. in the case a predeceased where there are living great grandchildren. Where a bequest of residue to a deceased residuary legatee lapses, the property is not divided between any other residuary legatees. It is distributed, subject to any contrary dispositions of the lapsed residue by will, according to the laws of intestacy. Ademption (Implied Revocation) A specific legacy fails or deems if the property gifted is not in the estate at death. Here Testator by his will leaves a specific item or fund to a certain person but before his death he disposes off the item in other words this is implied revocation of that part of the will. In that situation the legatee or devisee will get nothing. Legacies may also lapse or fail: a. If a condition attached to the legacy is not satisfied (unless the condition is illegal or against public interest, as for example I give 10,000,000/= to my brother if he kills my wife in which case the condition is void and the legacy does not lapse) b. If the condition is impossible and the legacy is of reality, in which case the legacy fails. This contrasts with the situation where a legacy of a personality does not because of impossible condition. c. By ademption (but note that a legacy will not be adeemed if it has changed in form in circumstances such as the replacement of the shares in the various railway companies by Transport Stock following the industrys nationalisation) d. For uncertainty of subject matter or objects. e. By disclaimer a beneficiary can always disclaim a legacy or devise, particularly I here the gift involves onerous conditions or where he wishes to increase the share of residue passing to another. Abatement: If after payment of all debts and other liabilities the testators estate is insufficient to pay all legacies in full, the legacies will abate (i.e. the legacies will terminate or diminish in value so that the legatees get either nothing at all from the testators estate or only part of their legacy). General legacies abate or reduce proportionately when the estate is not large enough to pay them in full. Residuary Legatee: Person to whom residue is left. Demonststrative Legacy: A pecuniary legacy out of a specified fund, e.g. TShs 10,000,000 payable out of my holding of TBL shares. The treatment of demonstrative legacies will depend on whether the funds are sufficient or not. If the funds specified are sufficient the relevant (all) the demonstrative legacy will be paid. If the specified fund is not sufficient the uncovered demonstrative legacy becomes a general. If the fund is non- existent the

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legacy become a general legacy. This is an important distinction between a specific legacy and a demonstrative legacy. Specific Legacy: An ascertained part of the estate e.g. a Sanyo Music Centre or TShs 15,000,000 shares out of my holding of TShs 30,000,000 Twiga Investment shares Where the testator sells only part of the property bequeathed the ademption is protanto, the legatee receiving the unsold part (e.g. the unsold part of a bequeathed holding of shares. If the general legacies abate to zero and estate debts still remain unpaid, certain property specifically bequeathed may have to be sold in order to pay the debts. All specific legacies (not adeemed) rank equally and will abate proportionately Pecuniary Legacy: A general legacy expressed in money terms e.g. TShs 20,000,000 General Legacy: A gift of an unascertained part of the estate, e.g. TShs 10,000 or a Sanyo Music Centre General legacy is usually expressed in money terms (a pecuniary legacy) but may be a gift of some specific property. For example, I give a gold ring to A is treated as a general legacy even if there are several gold rings in the testators estate on his death. As no further description is given the legatee A can select a gold ring out of those in the estate. Conditional Bequest: A bequest whose vesting is subject to the fulfilment of a condition by the legatee or devisee, e.g. I leave TShs 100,000 to Jailon if he passes two A-level examinations Contingent Bequest: A bequest left to a person subject to the occurrence of a future event which may or may not happen, e.g. I leave TShs 150,000 to Ester if she reaches the age of 21 DISTRIBUTION OF ESTATES: The Legal Personal Representative (LPR) must distribute the estate having regard to the following order of priority: a. Creditors, Comprising i. Pre- preferential. ii. Preferential. iii. Unsecured. iv. Deferred. b. Beneficiaries, Comprising i. Special Legatees. ii. General Legatees. iii. Residual Legatees. If there is insufficient money to make these distributions in full, then they must abate proportionately within each class. ORDER OF PAYMENT OF DEBTS Liabilities which LPR may have to discharge include the following: a) Pre- preferential S. 109 Estate Act.

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i. ii. iii.

Funeral expenses to a reasonable amount and death bed charges and medical attendance including board and lodging for one month before death. Testamentary and administration expenses. These include costs of obtaining a grant of representation, accountancy, legal costs. Wages due for the services rendered to the decease from the work men, domestic servant etc.

b) Preferential; i. Local rates due at death and having become due and payable within the previous 12 months. ii. One years assessed taxed prior to death. iii. Social security contributions, PAYE deducted, and VAT due in the 12 months to the date of death; iv. Wages or salaries of employees for the 4 months prior to death. v. All accrued holiday remuneration of employees. c) Unsecured: all ordinary creditors stand on an equal footing and the LPR cannot arrange to settle particular debts and not others. d) Deferred; i. Interest in excess of 5% on unsecured debts (to be paid before the other deferred debts). ii. Loans to a spouse for business purposes. iii. Loans to a trader in return for a rate of interest varying with his profits. iv. Annuities or shares of profit to the vendor of goodwill. v. Future payments of money under covenants or settlements which have been set aside by the trustee in bankruptcy. A secured creditor who holds a mortgage, charge, or lien on the deceased debtors property may: a. Rely on his security if fully secured (any balance belongs to the estate). b. Surrender his security and prove for the whole debt. c. Realise his security and prove for the balance due. d. Estimate his security and prove for the balance due. Where there have been mutual credits or mutual debts between the deceased insolvent debtor and a person claiming against the estate, the sums shall be set off, only the balance being claimed or paid. ACCOUNTS TO BE MAINTANED BY EXECUTOR. Assets and liabilities at the time of death should be recorded at their probate values. These are the values stated in the inventory prepared by an executor, for the case of assets probate values should be fair values ENTRIES: All assets are debited in their respective asset accounts and credited to the account known as estate capital account (Estate account)

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All liabilities are debited in the estate capital account and credited in their respective liabilities accounts All income earned after death are credited to the Income account. The Following Major Accounts are maintained by Executor: i) Estate capital account (Estate account) ii) Assets account iii) Separate account for each investment iv) Funeral expenses account v) Testamentary expenses account vi) Executorship expenses account vii) Debts due by the deceased account viii) Debts due to the deceased account (receivable) ix) Legacies account x) Devices account xi) Income account xii) Separate account for each annuitant and for each life tenant xiii) Separate account for each residuary legatee Estate Balance Sheet: An estate balance sheet is prepared by taking to consideration two levels a) It compares estate capital with capital values of the assets. b) It compares accumulations account with income columns of assets. Note: a) When all the assets have been disposed off and all expenses and debts have been paid. The estate capital account should remain with a zero balance. At any particular time the total balance in the Estate capital liabilities must be equal to indisposed asset. b) When all the executorship expenses and legacies and devises have been paid and the balance still remains in the assets account they should be distributed according to the rules of Intestacy. c) Where property is left on trust to provide income for a person for life (a life tenant) and then pass to another ( a remainder man) it is important to keep separately the records of the capital of the estate (trust) and the income thereon. The first part financed by Estate capital, the letter is financed by Accumulation income. d) When property is left on trust for the benefit of beneficiaries who have not yet attain the age of majority. Where necessary and where he is authorized to do so the trustee will make investments out of state capital. He will distribute income to the beneficiaries. i. Income from investments financed by the estate capital is distributed according to the sharing formula specified in the will. If no specification in the will should be equal. ii. If such income is itself re- invested then clearly the fresh investments are financed by income. Any return on it are apportioned on the basis of opening balances in the beneficiaries personal accounts. Where however accumulation income is reinvested during the course of the year the first income yielded by

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such investments should be apportioned between the beneficiaries in the ratio of their credit balances on Accumulation accounts at the date of there investment.

Example:
Mimisifi died leaving the following assets: Furniture Motor Vehicles TShs 1,000,000 2,000,000

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Jewellery 1,000,000 Cash 6,000,000 Shares in TBL 4,000,000 Farm in Kibwagogo 8,000,000 Freehold House at Kifuru 10,000,000 Mimisifi was also a trustee of TShs 20,000,000/= over which he enjoyed a general power of appointment. According to his will, he made the following bequests. To Kavuta TShs 1,000,000 To Kadiva His furniture and jewellery To Andendekisye His freehold house His shares in TBL were to be sold and the money applied in payment of his debts. His vehicles were to be given to his driver, Machichimi, subject to the payment his debts. Machonchori was to receive one half of the residual of the estate. Ngoma was appointed to the TShs 20,000,000/= under general power of appointment

Required:
State the order in which the assets would be applied to the debts of the estate.

Example:
a) Legacies may be specific, demonstrative, general or residuary Required; Write short notes on the above mentioned legacies. i) b) Mr Mazishi died on 1st April 2006 having made the following bequests To wife, Chausiku House in Masaki House in Msasani TShs 10,000,000/= out of my Bank account with Azania TShs 4,000,000 To Ukwaju My motor car at the time of my death My holding in Treasury Bills TShs 1,000,000/= payable out of my Exim Bank deposit account To Mdodo Kitururu My text books TShs 5,000,000 To daughter Zaituni TShs 10,000,000

ii)

iii)

iv)

Mr. Mazishi left the following properties; 2 Houses, one in Masaki and another in Boko. 1 Motor Car Text books Treasury Bills
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 Cash in current account with Azania Bank.

Required:
Explain how the above legacies should be treated?

Example:
Juma Pekee died on 15th July 2006 and in his will dated 2nd March 2004 he made the following bequests: i) To Baridi (his younger son) the sum of TShs 800,000/= to be paid to him on his attaining his majority ii) To Chuki (his sister) the TShs 200,000/= kept in my cash box in my bedroom iii) To Issa Pekee (His brother) a) an annuity of TShs 300,000/= to be paid out of my general estate b) My Mazda car iv) To Kiboya (his elder son): a) my freehold house b) the sum of TShs 900,000/= v) To Mshumi (his daughter) the sum of TShs 1,600,000/= vi) To Kambogho (friend) TShs 500,000/= out of my 10% Alpha Ltd Debentures vii) To Chaurembo (friend) TShs 800,000/= of my 10% Alpha Ltd Debentures viii) To Saulo (business colleague) the sum of TShs 600,000/= ix) To Maembe (cousin) TShs 600,000/= out of my Savings Account with Akiba Bank. x) To Masaza (another cousin) the residue of my estate absolutely. Juma Pekee in his will, forgave his friend Zawadi a debt of TShs 400,000/= As Juma Pekees executor you ascertain the following: a) The freehold house was valued at TShs 9,000,000/= b) There was only TShs 100,000/= in his cash box in the bedroom. c) A few months before his death, he had sold his Mazda car and bought a Toyota Pickup (value at death was TShs 800,000/=) d) Sometime in 2005, he had sold his holdings in 10% Alpha Ltd Debentures e) The capital value of the annuity to his brother is TShs 3,500,000/= f) The value of the house hold goods and chattels (excluding Toyota Pickup) was TShs 700,000/= g) There was only TShs 500,000/= in his Savings Account with Akiba Bank. h) There was TShs 6,000,000/= on Savings Account in BOA bank. After debts, funeral expenses and administrative costs had been paid, the balance of Juma Pekees estate (before satisfying any of the bequests under the will) totalled TShs 14,900,000.

Required:
Prepare a statement of distribution (with brief explanations) showing how the legacies and devise should be dealt with.

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Example:
In addition to the details in Example one above, you are informed that Testamentary and Executorship expenses to TShs 800,000/= and that estate creditors amounted to TShs 7,000,000/=. The executor duly pays his expenses, pays estate creditors, and discharges his obligations to beneficiaries.

Required:
Show the relevant accounts for the payment of expenses, debts and beneficiaries.

Example:
Mr Kifo died on 31st January 2005 leaving the following properties and a will. The terms of the will together with valuations for probate are given below: TShs i) Car left to widow absolutely 4,000,000/= ii) Cash Gift to Watoto wa Mitaani Charity Fund 16,000,000/= iii) Cash to Sister in law out of the estate 10,000,000/= iv) The balance of the estate to his wife for life and then to his only son Kaghokoro The estate apart from the car mentioned above consisted of the following: TShs a) Block of Flats at Kigamboni 300,000,000/= b) Cash 6,000,000/= c) Bank Balance 32,000,000/= d) 10% TShs 72,000,000/= Debentures 64,000,000/= Executor did the following: Sent Cash to the Bank immediately. Collected TShs 24,000,000/= rent from the flats for entire year of 2005 (in line with the existing tenancy agreement): Paid TShs 2,400,000/= to Kinondoni Municipal Council, being 2005 rates for Mbezi beach plot. Sold TShs 16,000,000/= 10% Debenture at 89. Paid funeral expenses amounting to TShs 4,000,000/= Paid 2004 income tax TShs 6,000,000/= Paid remaining estate debts amounting to TShs 11,800,000/= Assume that the executor will hand over the income without further deduction of income tax to the widow.

Required:
Prepare the necessary accounts up to 31st December 2005 and the Balance Sheet as at that date.

Example:

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Chief Mfumwa died on 31st December, 2006 at Ngujini Village in Bwambo, Kilimanjaro region after a long illness. Fortunately the late Chief Mfumwa who had 4 children left a will. In his will he instructed that his properties be kept under a trust for his children who were still minors. His children were: Wanaumwa 17 years Allen 11 years Kisinda 8 years Michael 5 years
On 1st April, 2007 the following accounts were extracted from the books of the trustee

Estate Capital Beneficiaries Maintenance Expense Accounts: Wanaumwa Allen Kisinda Michael Estate income account (credit) Accumulated Income Account (credit) Estate Capital Investments at cost Accumulated Accounts Investments at cost Beneficiaries Accumulated Accounts at the beginning of the year 1st April 2006 (all credit): Wanaumwa Allen Kisinda Michael Cash at Bank

TShs 158,770 980 1,085 770 730 12,500 1,000 158,770 17,600 1,760 2,640 3,520 9,680 9,935

The late Chief Mfumwa had indicated in his will that his children Wanaumwa, Allan, Kisinda and Michael were to share the estate and the estate trust income in the proportion of 8:6:6:5 respectively.

Required:
c) Prepare a statement in columnar form showing the beneficiaries accumulations accounts for the period up to 1st April 2007. d) Prepare a balance sheet as at 1st April 2007.

Example
Ali, Baraka and Chiku are minors and each is entitled to one- third of the capital of trust. Ali comes of age on 31st January 2006, and it is desired to prepare a scheme of appropriation of capital and income accumulations. The accounts have been taken yearly on 30th September. The values of the investment at 31st January 2007 are to be as follows: 5% general Tyre Debentures 70 7% CRDB Debentures 99 Ruaha Tower Ltd Ordinary Shares 75
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4% Bamboo Ltd Debentures 15% KCC Ltd Preference Shares 8% Treasury Bills 7% Impala Hotel Debentures

102 380 98 96

The following formula was agreed for those investments which could not be transferred exactly: Ruaha Tower Ltd Ordinary Shares 1400 shares to be taken by Ali. 7% CRDB Debentures of which Ali is to take debentures with a normal value of TShs 500,000/= 15% KCC Ltd Preference Shares 100 shares to be taken by Ali The DCC Mortgage is repayable in two years and is to be retained by the trustees on behalf of Baraka and Chiku. On September, 2006 the Trial Balance was as shown below Normal Value Debit Credit TShs TShs TShs Investment on Capital Account 5% General Tyre Debentures 2,400,000 2,160,000 7% CRDB Debentures 1,600,000 1,524,000 4,000 Ruaha Towers Ltd Ordinary Shares 160,000 268,800 4% Bamboo Ltd Debentures 60,000 60,000 Estate Capital Account 4,012,800 Investment on Accumulations Account 8% Treasury Bill 528,000 496,320 7% Impala Hotel Debentures 600,000 480,000 292 TShs 400 15% KCC Ltd Preference Shares 116,800 116,800 DDC Loan on Mortgage 240,000 240,000 Cash at Bank 202,880 Ali: Accumulation Account 384,000 Baraka: Accumulation Account 576,000 Chiku: Accumulation Account --576,000 5,548,800 5,548,800 In the case of capital the differences were to be adjusted in the General Tyre Debentures, and in the case of accumulations in cash. The amount standing to the credit of the Estate Income Account at 31st January 2004 amounted to TShs 86,400/= and TShs 31,200/= stood to the credit of the Accumulations Income Account at the same date, being amounts received in respect of income and deposited on current account.

Required:
Show the entries relating to the above in the books of the trust and produce a Balance Sheet showing the position after the distributions to Ali have taken place..

Example:
Kitua died on 31st March 2006. Before his death, he paid off all his liabilities. He left behind the following property: One house at Jitengeni which was being rented by Khalid {Value: 10,000,000/=}
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One house at Kaghokoro (in which Mzee Kitua was living with his wife Monica and their son Kihoko) {Value: TShs 15,000,000} 1,000 TShs 1,000 ordinary shares in CRDB {Valued at TShs 1,800 a share}. Current account in NBC- Balance TShs 6,000,000/= TShs 100,000 12% Debentures in Kopesha Ltd {Valued at TShs 135,000/=} TShs 200,000 15% Cumulative Preference Shares in Nice Biscuits Ltd {Valued at TShs 250,000/=}. TShs 50,000 18% Cumulative Preference Shares in ABC Ltd {Valued at TShs 60,000} Khalid pays rent quarterly in arrears, rent for each quarter being paid on the first day of the subsequent Quarter. On 1st April 2006 Khalid as usual deposited the rent due, TShs 200,000/= in Kituas bank account. It is agreed by the parties concerned that Khalid, being a reliable tenant, continues to stay in the Jitengeni premises. He continues to pay rent promptly as before. Kitua appointed you as executor and trustee. His estate was bequeathed to his wife Monica for life and thereafter to his son Kihoko. On 15% March, 2006, Kitua had received an interim dividend of 10% from CRDB in respect of the companys year ended 30th June 2006. On 15th September, CRDB paid a 15% final dividend for the year ending 30th June 2006. On 31st December 2006 Kopesha Ltd duly paid the years interest on its 12% Debentures. On 5th February 2007, Nice Biscuits which had not declared any dividends since the end of 1999, paid the ordinary dividend for 2006. All the Nice Biscuits dividends were debited to profit and loss account for the year ending 31st December, 2006. Monica the widow continues to teach at Puplick Primary School and to maintain her son from her own resources, having agreed with you that the estate should left undisturbed for a couple of years.

Required:
Show hoe you would record the above transactions up to the 1st anniversary of Kituas death on which date you are to prepare a balance sheet for the estate

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