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The asset accounts are debited for the amounts indicated on the
inventory list. The amount that should be debited for each asset
is the inventory value at the date of the decedent's death. This
value is based on the fair market value at that date.
The probate estate consists of only real and personal property titled in the
name of the decedent on the date of death. The probate estate is often
significantly different from what is referred to as the gross estate for estate
tax purposes.
Assets that are not a part of the probate estate include assets passing by
operation of law in a joint tenancy with right of survivorship, or those
passing by contract to individual beneficiaries of insurance policies or
individual retirement accounts.
Nonprobate Assets
These assets are generally excluded from the accounting records
and any financial statements of the estate because the fiduciary
has no management and control, either through contracted
arrangement, operation of law, or lack of exercise of
management and control.
Reasons why estates liabilities are not recognized until they are paid:
Total assets for which the fiduciary is responsible is not reduced until
assets are used to satisfy the liability
Liabilities of the Decedent
many of the debts of the decedent are paid from estate assets within a
relatively short time
e.g. when the assets of an estate include a home or other real estate with
related mortgage debt
The accounting records should disclose the current value of the home but
not the related mortgage debt.
In most cases, the accountant will disclose the debt in a note and in some
local jurisdictions, this may be required.
Accounting Entries during
Administration
Estate Principal
Changes reflects increase and decrease
Accounts other than the ESTATE
PRINCIPAL ACCOUNT
Makes it easier to:
prepare
Reconcile the accounting records
Report filed by the executor
Accounting Entries during
Administration
Assets Not Inventoried
After preparation, it is common for additional
assets to be discovered. This includes:
Note
Mortgage debt
not on hand at the time the inventory was
prepared
an asset may have been discovered and liquidated
after filing the return.
Accounting Entries during
Administration
Assets Not Inventoried
brought to light by receipt of income or principal
payments.
should be reported in a supplementary inventory
recorded at fair value at the date of the
Assets Subsequently Discovered/Assets Not
Inventoried/ Supplemental Inventory.
Previous estate account should not be credited since that
account should reflect the value of the original inventory.
should report the original inventory separate from assets
subsequently discovered.
Accounting Entries during
Administration
Depreciation/Depletion
based on the requirements of the governing
document and state law.
governing document or state law requires
that assets be depreciated or depleted.
Depreciation expense
a credit to an allowance or reserve account (contraasset)
debit to depreciation/depletion expense as a charge against
(a) estate principal
(b) an expense account that is closed to estate income, depending on the
governing document or state law
Accounting Entries during
Administration
Depreciation/Depletion
value of depreciable assets included in the estate
inventory
GAAP for commercial business enterprises is
usually appropriate in terms of useful life, salvage
value, and depreciation/ depletion methods.
amount of accounting depreciation might be
different from allowable tax depreciation.
Accounting Entries during
Administration
Unusual Charges against Income
charges against income are unusually large.
may choose to use a reserve approach"
trustee must anticipate and estimate expected unusual
charges before they are incurred.
Charges are then made against income over a reasonable
period of time prior to their incurrence, resulting in the
buildup of a reserve," or estimated liability.
deferred charge
Accounting Entries during
Administration
Debts of the Estate
If the estate itself borrows money during the
administration period, the resulting liability a should
be recorded.
EXPENSES
Series: 800
Accounts are closed to the 500 series,
Estate (or Trust) Income, at the end of the
period.
Annual Closing Entry
At the end of the accounting period, all
estate income accounts are closed to
the Estate Income account by debiting
all income accounts, crediting all
expense accounts, and either debiting
or crediting the Estate Income account.
Final Closing Entries
Several entries are necessary to close the estate,
including entries to:
Close the income and expense accounts to the Estate
Income Account (same as annual closing entry).
Debit the appropriate Distribution of Principal or
Distribution of Income account to record all
distributions of principal and income assets.
Debit the Estate Principal and Estate Income
accounts and credit the appropriate distribution
accounts to close the estate.
Accruals
Commercial Business Enterprises vs. Fiduciary
Accounting Process
The dates that impact how transactions are
recorded as either income or principal are:
The date of death (DOD) of the testator.
The date when the tenancy (rights of the
income beneficiary) terminates and the
remaindermen (principal beneficiaries) receive
the corpus, or principal.
Accruals
Income/Expenses Arising Prior to DOD.
Accrued Income- estate or trust assets or activity prior to the
date of death belongs to the principal of the estate or trust, even
though it is not collected until after death.
Accrued Expenses- transactions that occurred prior to death
are also payable from principal cash.
Income/Expenses Arising after the DOD.
Accrued Income- after the date of death and before the
termination of tenancy belongs to the income beneficiary.
Accrued Expenses- payable from income cash, after
termination of tenancy, any income and expenses accrue to the
remaindermen, or principal beneficiaries.
Transfers to Trusts
The distribution is made to the trust.
The trust assets will be managed by the trustee
pursuant to the terms of the will and trust agreement.
The personal representative may transfer the trust
assets to the trustee
Before the personal representative transfers any assets,
they should ensure that the trust has obtained an
Employer Identification Number (EIN).
* Most wills that pour over" into a living trust created by
the decedent will already have a EIN.
Transfers to Trusts
In the accounting records of the estate, the assets being
placed in trust are transferred to a separate assets
account (of the estate) in the name of the trustee, as
follows:
His business should be left in trust to his son, John, age 23 for a period of three years,
after which it will become the son's property. John and First National Bank are
cotrustees.
His coin collection should be given to his sister, Rose.
The automobiles and household furnishings are to be given to Jerry's wife (Mrs.
Rivers).
A bequest of $10,000 should be given to State University to establish a scholarship in
Jerry's name.
The remainder of the estate, after the above bequests and after payment of taxes and
expenses, is to given to his widow. Jerry also provided that his executor distribute
$1,300 per month to his widow during the period of the estate's administration.
Upon reviewing Jerry's tax returns, Mark noted that Jerry had given $18,000 in cash to
his son on May 10, 2001. A gift tax return was filed for this gift, but no gift tax was
payable on it.
Mark filed the following inventory with the court on March 28, 2002.
This represents Jerry's known property interests for probate purposes.
The chart of accounts has been designed to facilitate the recording of
activity in Jerry's estate and to allow the accountant to prepare the
necessary reports to the court and to the beneficiaries, as well as the
tax return.
Opening Entry. The opening entry to record the beginning of Mark's
administration of Jerry's estate follows:
Annual Closing Entry. The accountant has determined that no
adjusting entries are necessary. The annual closing entry will close
the balances of the income and expense accounts into the Estate
Income account.
Trial Balance
December 31, 2003.
In his role as the
estate's executor, Mark
had the accountant
prepare the trial
balance from the
estate's general ledger.
The trial balance will
be used to assist in
preparation of the
annual closing entry
and any necessary
adjusting entries.
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