Chapter 22

ESTATES AND TRUSTS

Answers to Questions

1 No, 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. A primary reason for dividing estate
principal and income is that the beneficiaries are likely to be
different. Separation of principal and income is also important for
trusts, because often a trusts principal is to be maintained intact
until the death of the beneficiary.

3 A 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 The Uniform Probate Code entitles the surviving spouse to a homestead

allowance that is exempt from and has priority over all claims against
the estate. The 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. The family allowance is exempt from and has priority
over all claims except the homestead allowance. Allowance amounts vary
across the states.

6 Yes, 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 The taxable amount of an estate is based on fair values of all estate

assets at the date of death.

8 Yes, within certain limitations. Currently any number of annual gifts of

$12,000 each can be made, with a lifetime limit of $1,000,000.

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. Deductions and/or exemptions for estate
administration fees, charitable donations and distributions to
beneficiaries reduce taxable income. The fiduciary of the estate must
provide applicable information to the beneficiary on Schedule K-1.

10 An estate may be subject to taxation (referred to as estate or

inheritance taxes) at both the state and federal levels. Accountants 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

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22-2 Estates and Trusts

permanently repealed, estate planning services will remain critical for

larger estates subject to state level taxation.

Federal taxation of estates is currently in a period of flux. The

Economic Growth and Tax Relief Reconciliation Act of 2001 proposed
reduction of the tax, and a total repeal in 2010. However, unless
Congress acts to make the repeal permanent, the tax will return in 2011.

11 A 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. Preparation 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, estates

are also subject to federal (and possibly state) income taxes. An estate
is a taxable entity and is subject to tax on income earned from the date
of death until final settlement of the estate. The 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 E22-1
a Cash (+A) 4,500

Interest receivable - bonds (-A) 2,200

Estate income (R,+SE) 2,300

b Devise - Atlanta Animal Shelter (E,-SE) 50,000

Cash (-A) 50,000

c Funeral expenses (E,-SE) 8,200

Cash (-A) 8,200

d Cash (+A) 25,000

Interest receivable (+A) 600

Assets subsequently discovered (-A) 25,600

Cash (+A) 1,500

Interest receivable (-A) 600

Estate income (R,+SE) 900

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Chapter 22 22-3

Solution E22-2
a Cash (+A) 7,500

Interest receivable - bonds (-A) 5,800

Estate income (R,+SE) 1,700

b Devise - symphony orchestra (E,-SE) 75,000

Cash (-A) 75,000

c Probate expenses (E,-SE) 1,400

Cash (-A) 1,400

d Funeral expenses (E,-SE) 6,400

Cash (-A) 6,400

e Estate principal (-SE) 22,000

Accounts payable (+L) 22,000

Solution E22-3
a Dividend receivable (+A) 150,000

Estate income (R,+SE) 150,000

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

c Probate court expenses (E,-SE) 1,900

Cash (-A) 1,900

d Funeral expenses (E,-SE) 5,800

Cash (-A) 5,800

e Hospital fees and expenses (E,-SE) 18,500

Cash (-A) 18,500

f Cash (+A) 150,000

Dividends receivable (-A) 150,000

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22-4 Estates and Trusts

Solution E 22-4

Melanie Triciao, Testator

Inventory of Estate Assets
As of the date of Death on August 15, 2009

Description of Property Fair Value

Cash $ 118,225

Savings accounts 250,000

ViaReggio common stock 225,000

City of Roma municipal bonds 412,000

Mercedes sports car 41,000

Condominium on Italian Riviera 1,265,500

Atlanta personal residence 430,000

Collection of rare hand puppets 85,000

Fully restored Model T Ford 125,000

$2,951,725

Submitted by K. T. Tim, executor

Solution E22-5
1. Estate Inventory
Jeff Carpenter, Testator
Inventory of Estate Assets
As of the date of death on August 25, 2009
Description of Property Fair Value

Cash in Oxford National Bank $15,000

Certificates of deposit, includes $7,000 accrued 807,000
interest

Personal effects* -
$822,000

*The probate court permitted exclusion of Jeffs

personal effects from the estate inventory. Prepared by
Ms. Colleen Ryan, Executrix, Oxford National Bank

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Chapter 22 22-5

Solution E22-5 (continued)

2. Cash (+A) 11,500
a

Interest receivable - bonds (-A) 7,000

Estate income (R,+SE) 4,500

b Cash (+A) 800,000

Certificates of deposit (-A) 800,000

c Devise- Sooner XXV trust account (E,-SE) 100,000

Cash (-A) 100,000

d Funeral expenses (E,-SE) 7,200

Cash (-A) 7,200

e Executrix expenses (E,-SE) 2,500

Cash (-A) 2,500

Devise - J.J. Kara (E,-SE) 716,800

Cash (-A) 716,800

3. Closing Entries

Estate principal (-SE) 822,000

Estate income (-R,-SE) 4,500

Funeral expenses (-E,+SE) 7,200

Executrix expenses (-E,+SE) 2,500

Devise - Sooner XXV trust (-E,+SE) 100,000

Devise - J.J. Kara (-E,+SE) 716,800

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22-6 Estates and Trusts

Solution E22-5 (continued)

4. Charge-Discharge Statement
Estate of Jeff Carpenter
Charge-Discharge Statement
For the period of estate administration,
August 25 to September 28, 2009
Estate principal

I charge myself for:

Assets included in estate inventory - total estate $822,000

principal charge

I credit myself for:

Funeral expenses paid $ 7,200

Executrix expenses paid 2,500

Devise paid in cash to Sooner XXV trust account 100,000

Devise paid in cash to J.J. Kara 712,300

Total estate principal discharge $822,000

Estate income

I charge myself for:

Estate income received during estate administration $4,500

I credit myself for:

Payment of estate income to J.J. Kara $4,500

Respectfully submitted, Colleen Ryan, Estate Executrix, September

28, 2009.

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Chapter 22 22-7

Solution E22-6

9/15 Cash (+A) 100,000

Trust fund principal (+SE) 100,000

9/16 Money market investment (+A) 100,000

Cash (-A) 100,000

10/16 Cash (+A) 417

Trust fund income (R,+SE) 417

10/19 Trust fund expenses (E,-SE) 300

Cash (-A) 300

10/27 Trust fund expenses (E,-SE) 22

Cash (-A) 22

11/16 Cash (+A) 417

Trust fund income (R,+SE) 417

11/22 Trust fund expenses (E,-SE) 300

Cash (-A) 300

12/16 Cash (+A) 417

Trust fund income (R,+SE) 417

12/28 Trust fund expenses (E,-SE) 700

Cash (-A) 700

12/31 Trust fund expenses (E,-SE) 100

Cash (-A) 100

12/31 Interest receivable (+A) 208

Trust fund income (R,+SE) 208

- Accrued interest for last month.

12/31 Trust fund principal (-SE) 100,000

Trust fund income (-R,-SE) 1,459

Trust fund expenses (-E,+SE) 1,422

Interest receivable (-A) 208

Money market investment (-A) 100,000

Cash (-A) 37

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22-8 Estates and Trusts

Solution E22-7

Sooner XXV Trust

Charge-Discharge Statement
For the period of trust administration,
September 15 to December 31, 2009
Trust principal

I charge myself for:

Assets included in trust - total estate principal $100,000

charge

I credit myself for:

Transfer of money market investment to J.J. Kara $100,000

Trust income

I charge myself for:

Trust income received during trust administration $1,459

I credit myself for:

Funeral expenses paid $ 700

Trust administration fee paid 100

Payments to Puppy Paradise 622

Total trust income discharge $1,422

Payment of remaining trust income to J.J. Kara $ 37

Respectfully submitted, Colleen Ryan, Trust Officer, December 31,

2009.

Solution E22-8
6/1 Cash (+A) 1,000,000

Trust fund principal (+SE) 1,000,000

6/2 Investment in certificate of deposit (+A) 500,000

Cash (-A) 500,000

6/2 Investment in stock mutual fund (+A) 500,000

500,000
Cash (-A)

7/2 Cash (+A) 2,500

Trust fund income (R,+SE) 2,500

($500,000 x 6% x 1/12 year)

7/3 Trust fund expenses (E,-SE) 41

Cash (-A) 41

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Chapter 22 22-9

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22-10 Estates and Trusts

Solution E 22-9
Cash (+A) 218,220

Savings accounts (+A) 300,000

Microsystems common stock (+A) 400,000

Big Casino common stock (+A) 120,000

Vintage sports car (+A) 31,000

Mountain cottage (+A) 114,500

Personal residence (+A) 457,500

Trust fund principal (+SE) 1,641,220

- To record receipt of property transferred from executor.

Solution E 22-10
a.
Fair value of gross estate $5,300,000

2009 Tax Exempt Estate (3,500,000)

Taxable estate $1,800,000

45% Estate Tax Due $810,000

Balance inherited by Emily $4,490,000

b. There were many estate planning options for Mr. Dogbert. For 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 the federal tax
threshold, it would have left a zero inheritance tax. However, all of
these options expired with Dogberts demise.

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Chapter 22 22-11

Solution E 22-11
Fair value of gross estate $3,600,000

2009 Tax Exempt Estate (3,500,000)

Taxable estate $100,000

45% Estate Tax Due $45,000

$3,555,000
Balance inherited by Emily, Laura and Tom

Solution E 22-12
Fair value of gross estate $23,400,000

2009 Tax Exempt Estate (3,500,000)

Taxable estate $19,900,000

45% Estate Tax Due $8,955,000

Balance inherited by Maggie $14,445,000

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22-12 Estates and Trusts

Solution P 22-1
Part 1 Cash (+A) 15,000

June 22 Interest receivable (-A) 5,000

Estate income (R,+SE) 10,000

June 24 Cash (+A) 12,000

Dividends receivable (-A) 12,000

June 30 Estate expense (E,-SE) 250

Cash (-A) 250

July 4 Estate expense (E,-SE) 4,900

Cash (-A) 4,900

July 12 Cash (+A) 501,300

Certificate of deposit (-A) 500,000

Estate income (R,+SE) 1,300

July 15 Cash (+A) 750,000

Certificate of deposit (+A) 500,000

Interest receivable (+A) 5,000

Common stocks (+A) 460,000

Dividend receivable (+A) 12,000

Lake Michigan cottage (+A) 40,000

2005 Corvette (+A) 35,000

Estate principal (+SE) 1,802,000

July 20 Devise - 2005 Corvette - Clark Olson (E,- 35,000

SE)

Devise- Lake cottage - Kent Olson (E,-SE) 40,000

Devise - stocks - Clark Olson (E,-SE) 230,000

Devise - stocks - Kent Olson (E,-SE) 230,000

Lake Michigan cottage (-A) 40,000

2005 Corvette (-A) 35,000

Common stocks (-A) 460,000

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Chapter 22 22-13

Solution P 22-1 (continued)

July 21 Devise - cash fees - Clark Olson (E,-SE) 5,000

Devise - Lana Lang (E,-SE) 200,000

Devise - Jimmys church (E,-SE) 50,000

Devise - Metropolis Symphony (E,-SE) 50,000

Cash (-A) 305,000

Part 2 Closing Entries

July 22 Estate income (-R,-SE) 11,300

Estate expenses (-E,+SE) 5,150

Cash (-A) 6,150

- Close estate income and expenses and
distribute estate net income to Lois

Estate principal (-SE) 840,000

Devise- 2005 Corvette - Clark Olson 35,000

(-E,+SE)

Devise - Lake cottage - Kent Olson (- 40,000

E,+SE)

Devise - stocks - Clark Olson (-E, 230,000

+SE)

Devise - stocks - Kent Olson (-E, 230,000

+SE)

Devise - cash fees - Clark Olson (-E, 5,000

+SE)

Devise - Lana Lang (-E,+SE) 200,000

Devise - Jimmys church (-E,+SE) 50,000

Devise - Metropolis Symphony (E,-SE) 50,000

- Close devise distributions

Estate principal (-SE) 962,000

Cash (-A) 962,000

- Close estate and transfer remaining
cash balance to Trust

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22-14 Estates and Trusts

Solution P 22-1 (continued)

Part 3

Estate of Jimmy Olson

Charge-Discharge Statement
For the Period of Estate Administration
June 15 to July 22, 2009

Estate Principal

I charge myself for:

Assets included in estate inventory $1,802,000

I credit myself for:

Devises paid in cash to:

Clark Olson $ 5,000

Lana Lang 200,000

Jimmys church 50,000

Metropolis Symphony Orchestra 50,000 305,000

Devises distributed in kind to:

Clark Olson 265,000

Kent Olson 270,000 535,000

Transferred to Trust account for Lois

Olson:

Cash 962,000

Total estate principal discharge $1,802,000

Estate Income

I charge myself for:

Estate income received during estate $11,300

administration

I credit myself for:

Funeral expenses paid $4,900

Cottage repairs paid 250 $ 5,150

Payment of estate net income to Lois 6,150

Olson

Total estate income discharge $11,300

Respectfully submitted: Clark Olson, Estate Executor, July 22, 2009

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Chapter 22 22-15

Solution P 22-2
Date Accounts Debit Credit

July 22 Cash (+A) 962,000

Trust fund principal (+SE) 962,000

July 23 Certificate of deposit (+A) 300,000

Cash (-A) 300,000

July 25 Super Stock Mutual Fund (+A) 500,000

Cash (-A) 500,000

July 31 Smallville Municipal Bonds (+A) 100,000

Cash (-A) 100,000

August 22 Cash (+A) 1,500

Trust income (R,+SE) 1,500

August 23 Cash (+A) 305

Trust income (R,+SE) 405

Trust fund expenses (E,-SE) 100

August 31 Trust fund expenses (E,-SE) 3,700

Cash (-A) 3,700

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Solution P 22-3

Date Accounts Debit Credit

March 15 Cash (+A) 66,500

Dividends receivable (+A) 400

Interest receivable (+A) 2,400

Life insurance receivable (+A) 500,000

Personal residence (+A) 325,000

Household furnishings and personal 76,000

effects (+A)

Automobile (+A) 21,000

Investments in stocks (+A) 25,000

Investments in bonds (+A) 200,000

Estate principal (+SE) 1,216,300

- Record estate inventory at fair

values.

March 25 Funeral expenses (E,-SE) 2,800

Cash (-A) 2,800

March 30 Cash (+A) 500,000

Life insurance receivable (-A) 500,000

April 9 Land (+A) 10,000

Assets subsequently discovered (-A) 10,000

- Record lakefront property at cost, awaiting an

appraisal.

April 15 Cash (+A) 3,000

Interest receivable (-A) 2,400

Estate income (R,+SE) 600

April 19 Land (+A) 18,000

Assets subsequently discovered (-A) 18,000

- Adjust lakefront property to appraisal.

April 28 Debts of decedent paid (E,-SE) 13,250

Cash (-A) 13,250

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Chapter 22 22-17

Solution P 22-3 (continued)

April 29 Cash (+A) 500

Dividends receivable (-A) 400

Estate income (R,+SE) 100

April 30 Devise - Helen Wilson (Home, furnishings 401,000

and personal effects) (E,-SE)

Devise Helen (cash) (E,-SE) 66,500

Personal residence (-A) 325,000

Household furnishings and personal 76,000

effects (-A)

Cash (-A) 66,500

- Transfer cash and property to Helen

Devise (stocks)- Denise (E,-SE) 25,000

Devise (automobile) - Dennis (E,-SE) 21,000

Devise (cash) - Denise (E,-SE) 700

Automobile (-A) 21,000

Investments in stocks (-A) 25,000

Cash (-A) (Estate Income) 700

- Transfer property to Denise & Dennis

April 30 Assets subsequently discovered (+A) 28,000

Estate principal (-SE) 501,550

Devise - Helen Wilson (-E,+SE) 467,500

Devise - Denise (-E,+SE) 25,700

Devise - Dennis (-E,+SE) 21,000

Debts of decedent paid (-E,+SE) 13,250

Funeral expenses (-E,+SE) 2,800

Estate income (-R,-SE) 700

- Closing entries

April 30 Estate principal (-SE) 714,750

Cash (-A) 486,750

Investment in bonds (-A) 200,000

Land (-A) 28,000

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22-18 Estates and Trusts

- Transfer estate property to Wilson Family Trust.

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Chapter 22 22-19

Solution P 22-4
Estate of George Wilson
Charge-Discharge Statement
For the period of estate administration,
March 1 to April 30, 2009
Estate principal

I charge myself for:

Assets included in estate inventory $1,216,300

Assets subsequently discovered 28,00

0

Assets included in estate inventory - total estate $1,244,300

principal charge

I credit myself for:

Funeral expenses paid $ 2,800

Estate debts paid 13,250

Devise - transfer cash, residence & furnishings to 467,500

Helen

Devise - Transferred automobile to Dennis 21,000

Devise - Transferred stocks to Denise 25,000

Transferred bond investments to Wilson Family Trust 200,000

Transferred Land to Wilson Family Trust 28,000

Transferred cash to Wilson Family Trust 486,750

Total estate principal discharge $1,244,300

Estate income

I charge myself for:

Estate income received during estate administration $700

I credit myself for:

Payment of estate income to Denise Wilson $700

Respectfully submitted, Estate Executrix, April 30, 2009.

Required: Prepare the entry to record the creation of the Wilson Family
Trust on April 30. Prepare all required entries to account for
trust activities through June 30.

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22-20 Estates and Trusts

Solution P 22-5
Date Accounts Debit Credit

April 30 Cash (+A) 486,750

Land (+A) 28,000

Investment in Bonds (+A) 200,000

Trust fund principal (+SE) 714,750

May 3 Certificate of deposit (+A) 450,000

Cash (-A) 450,000

May 25 Cash (+A) 31,300

Land (-A) 28,000

Trust income (R,+SE) 3,300

May 31 Trust income (E,-SE) 165

Cash (-A) 165

June 3 Cash (+A) 2,250

Trust income (R,+SE) 2,250

June 15 Trust income (E,-SE) 8,700

Cash (-A) 8,700

June 30 Trust income (E,-SE) 165

Cash (-A) 165

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Chapter 22 22-21

Solution P 22-6
Date Accounts Debit Credit

May 31 Dividends receivable (+A) 1,200

Interest receivable (+A) 6,750

Life insurance receivable (+A) 750,000

Automobile (+A) 2,600

Investments in stocks (+A) 52,000

Investments in bonds (+A) 400,000

Estate principal (+SE) 1,212,550

- Record estate inventory at fair

values.

June 5 Government bonds (+A) 200,000

Life insurance receivable (+A) 50,000

Assets subsequently discovered (-A) 250,000

June 15 Cash (+A) 750,000

Life insurance receivable (-A) 750,000

June 16 Cash (+A) 8,000

Interest receivable (-A) 6,750

Estate income (R,+SE) 1,250

June 18 Funeral expenses (E,-SE) 4,300

Cash (-A) 4,300

June 22 Interest receivable (+A) 15,000

Assets subsequently discovered (-A) 15,000

Cash (+A) 215,000

Government bonds (-A) 200,000

Interest receivable (-A) 15,000

June 23 Cash (+A) 50,000

Life insurance receivable (-A) 50,000

June 24 Debts of decedent paid (E,-SE) 18,250

Cash (-A) 18,250

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Solution P 22-6 (continued)

June 28 Cash (+A) 1,600

Dividends receivable (-A) 1,200

Estate income (R,+SE) 400

June 30 Devise (stocks) - Sue (E,-SE) 52,000

Devise (automobile) - Pat (E,-SE) 2,600

Executrix fees (E,-SE) 2,500

Devise - Humane society (E,-SE) 1,650

Automobile (-A) 2,600

Investments in stocks (-A) 52,000

Cash (-A) 4,150

June 30 Assets subsequently discovered (+A) 265,000

Estate principal (-SE) 185,350

Devise - Sue (-E,+SE) 52,000

Devise - Pat (-E,+SE) 2,600

Devise - Humane society (-E,+SE) 1,650

Debts of decedent paid (-E,+SE) 18,250

Executrix fees (-E,+SE) 2,500

Funeral expenses (-E,+SE) 4,300

Estate income (-R,-SE) 1,650

- Closing entries

June 30 Estate principal (-SE) 1,397,900

Cash (-A) 997,900

Investment in bonds (-A) 400,000

- Transfer estate property to Josephson Family Trust.

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Chapter 22 22-23

Solution P 22-7
Estate of Tom Josephson
Charge-Discharge Statement
For the period of estate administration,
May 16 to June 30, 2009
Estate principal

I charge myself for:

Assets included in estate inventory $1,212,550

Assets subsequently discovered 265,0

00

Assets included in estate inventory - total estate $1,477,550

principal charge

I credit myself for:

Funeral expenses paid $ 4,300

Estate debts paid 18,250

Executrix fees paid 2,500

Devise - Transferred automobile to Pat 2,600

Devise - Transferred stocks to Sue 52,000

Transferred bond investments to Josephson Family 400,000

Trust

Transferred cash to Josephson Family Trust 997,900

Total estate principal discharge $1,477,550

Estate income

I charge myself for:

Estate income received during estate administration $1,650

I credit myself for:

Payment of estate income to Humane Society $1,650

Respectfully submitted, Estate Executrix, June 30, 2009.

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22-24 Estates and Trusts

Solution P 22-8
Date Accounts Debit Credit

June 30 Cash (+A) 997,900

Investment in Bonds (+A) 400,000

Trust fund principal (+SE) 1,397,900

July 5 Certificate of deposit (+A) 750,000

Cash (-A) 750,000

July 31 Trust income (E,-SE) 275

Cash (-A) 275

August 5 Cash (+A) 3,750

Trust income (R,+SE) 3,750

August 19 Trust income (E,-SE) 15,000

Cash (-A) 15,000

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