Estate ACCOUNTING

BUHIA | BLANCA | CARASCO

CHUA| DELA ROSA | EVITE
PAZ | SALONGA
 Estate Accounting System
accounting records of the fiduciary
should be designed to reflect a
complete record of assets controlled by
the fiduciary and their subsequent
disposition
fiduciary accounting records should
provide financial information that allows
fiduciaries to administer the trust or
estate
 the fiduciary should be able to
obtain information about the assets
on hand, income received, amounts
available for distribution to
beneficiaries, etc. at any point in time
prepare accounting for the courts,
beneficiaries, and other accounting
parties
prepare estate and fiduciary tax
returns
Principal vs. Income
Principal
increases and decreases resulting from sales
of estate or trust assets and charges against
the entity

Income
includes the regular periodic earnings from
assets of the estate or trust less associated
 there are typically two owners
remainder beneficiary
income beneficiary
the existence of different classes of
beneficiaries makes it necessary for the
accounting records to differentiate
between principal and income
separate general ledgers accounts or
separate worksheet or ledger columns
for principal and income transactions
are maintained
Why should principal and income
transactions be distinguished?

for tax purposes

determination of fiduciary
accounting
preparation of tax returns
when one or more beneficiaries
and remaindermen are designated
in a will
Complexity of Accounting
Records
depends on the size, composition, and
complexity of the estate or trust
other factors that affect the complexity
of the system include:
use of the cash or accrual method
incorporation into the fiduciary accounting
system of books of a business owned by
the estate or trust
need to separate principal and income
Illustrative Chart of Accounts for an Estate or
Trust
 Accounting for an Estate
The books of an estate are generally not maintained
until after the personal representative has completed
the estate inventory.

The inventory of assets is filed with the probate court

in most jurisdictions.
 Opening Entry
The opening entry to the estate books records the estate
inventory.

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 sum of the debits is offset by a single credit to an

account titled Estate Principal (or Estate Corpus). This
credit amount reflects the fiduciary's accountability at
that date, and is sometimes referred to as the fiduciary
accountability account.
 Opening Entry
Jointly owned property
Acquired using the decedent's
funds
recorded by debiting an asset
account and recording the
subsequent distribution to the
survivor owner
Community property
Gross method - reflected at its
gross value with a contra
account for the surviving
spouse's equity
Net method - reflected at its
net (decedent's equity in
community property)
 Opening Entry
Jointly owned property Community property

Acquired using the Gross method

decedent's funds (recommended)

facilitates reconciling
recorded by debiting an balances recorded to other
asset account and documents (e.g., bank
recording the subsequent statements, loan
distribution to the survivor agreements, etc.)
owner
provides more detailed
information, without
affecting the amount of the
executor's accountability.
 Nonprobate Assets
Assets not included in estate's inventory filed by the
executor/personal representative with the probate court.

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.

However, this would not necessarily be true of records

and financial statements prepared on the income tax
basis of accounting. The executor has involvement with
all assets in the estate, and is responsible for paying the
tax on transfers of assets outside the probate estate,
prudence suggests the executor maintain a listing of
nonprobate assets.
 Liabilities of the Decedent
Liabilities of the decedent existing at the date of death are generally not
recorded on books in the opening entry. Instead, the executor should
record these items when they are paid (by transferring cash or another
asset of the estate).

Reasons why estates liabilities are not recognized until they are paid:

records reflect the fiduciary's accountability for assets

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.

Many accountants are uncomfortable with this and encourage the

executor to record such liabilities.

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.
Payment of the debt would be treated similar to debt
of a commercial enterprise, except payment would
be made from Income Cash.
Accounting Entries
during Administration
Payment of Debts of the
Decedent
Payment of liabilities existing at the time of the decedent's
death should be treated on a cash basis.
Debit: Debt of the Decedent
Credit: Principal Cash
The Debt of the Decedent account is not an expense account.
This will be a charge to the Estate Principal account.
Accounting Entries
during Administration
Funeral and Administrative
Expenses
The level of detail used to record funeral and administrative
expenses may vary depending on:
Personal representative's desire for detail
Required level of reporting by the local
jurisdiction
It may be grouped or recorded individually.
Debits to the funeral and administrative expense account(s) are
charges against Estate Principal in most jurisdictions, and are not an
expense.
Accounting Entries
during Administration
Distributions to Beneficiaries
Debit: Distributions of Principal for principal
beneficiaries or Distributions to Income
Beneficiaries for income beneficiaries
Credit: Asset Account (e.g., principal cash, income
cash, personal property, etc.)
Accounting Entries
during Administration
Other Transactions

Expenses chargeable to principal should be recorded

in the appropriate expenses/distributions of principal
account (charges against Estate Principal).
Income transactions should be reflected in the
appropriate income accounts (closed to Estate
Income).
 Treatment Of Transactions Within The Different
Accounting Categories
(activity in series of accounts)
ASSETS
Series: 100
Accounts represent all property the fiduciary is
initially charged with.
Accounts needed for administration of
trust/estate (e.g., allowance for depreciation).
Number and level of detail determined by
fiduciary/accountant.
 Treatment Of Transactions Within The Different
Accounting Categories (activity in series of
accounts)
LIABILITIES
Series: 200
Liability accounts rarely used since liabilities
at date of death are not recorded by fiduciary.
Accounts needed if fiduciary enters into
liability obligations during administration
period.
 Treatment Of Transactions Within The Different
Accounting Categories (activity in series of
accounts)
NET WORTH (ESTATE OR TRUST PRINCIPAL)
Series: 300
Equity account, similar to investment or capital stock
account of a business enterprise.
Account is credited with initial inventory amount of
the estate or trust property.
Balance represents the amount the fiduciary is
responsible or accountable for, as shown by the
inventory.
 Treatment Of Transactions Within The Different
Accounting Categories (activity in series of
accounts)
EXPENSES AND DISTRIBUTIONS ALLOCABLE TO PRINCIPAL
Series: 400
Changes in principal (i.e., changes for which the fiduciary is responsible) are
recorded in the 400 series.
Accounts include:
All expenses that are chargeable to principal.
Corrections and adjustments to the original balance.
Distributions of principal.
Periodically, accounts are closed into Estate (orTrust) Principal account.
Usually remains open until final settlement occurs.
After final distribution of assets, 400 series accounts are closed into Estate
(or Trust) Principal [which should reduce Estate (or Trust) Principal to zero].
Treatment Of Transactions Within The Different
Accounting Categories (activity in series of
accounts)
Anytime prior to the final closing of the
books, the sum of the 300 and 400
series of accounts equals the amount
for which the fiduciary is responsible to
the principal beneficiaries. This net
credit amount should equal the net
assets relating to principal.
 Treatment Of Transactions Within The Different
Accounting Categories (activity in series of
accounts)
NET WORTH (ESTATE OR TRUST INCOME)
Series: 500
Equity account for income beneficiaries.
Account will never have a beginning balance
(no activity until income is earned).
Income (700 series) and expenses (800 series)
applicable to income are closed into Estate (or
Trust) Income at the end of the period.
 Treatment Of Transactions Within The Different
Accounting Categories (activity in series of
accounts)
DISTRIBUTIONS OF INCOME
Series: 600
Account is debited when there are
distributions to income beneficiaries.
Account remains open until final
settlement occurs.
Treatment Of Transactions Within The Different
Accounting Categories (activity in series of
accounts)
Anytime prior to the final closing of the
books, the balance of Estate (or Trust)
Income (500 series) less Distributions of
Income (600 series) equals the
undistributed income for which the
fiduciary is responsible to the income
beneficiaries.
 Treatment Of Transactions Within The Different
Accounting Categories (activity in series of
accounts)
INCOME
Series: 700

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:

Trust Assets XYZ Trustee XX,XXX

Estate Assets XX,XXX
 Transfers to Trusts
When preparing the final accounting, the personal
representative reflects a principal distribution of the trust
assets, as follows:

Distribution of Principal XX,XXX

Trust Assets XX,XXX
Estate Accounting
Case Study
 Jerry Rivers died on February 1, 2002,
leaving a will naming Mark Clark as
executor, without bond. Mark agrees to
serve as executor of Jerry's estate. Mark
engages an accountant to establish and
maintain the accounting system for his
administration and to prepare the necessary
reports to the court and to the beneficiaries.
At the date of Jerry's death, as the decedent, his estate
consisted of the following assets, as appraised by the
courtappointed appraisers:
 Jerry's will provided 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.
BUHIA | BLANCA | CARASCO
CHUA| DELA ROSA | EVITE
PAZ | SALONGA