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Accounting for Trusts and Estates (Portfolio 5202)

Product Code: TPOR45
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Accounting for Trusts and Estates, written by Alan S. Acker, CPA, J.D., explains how to account for income and principal of an estate or trust. Income and principal must be determined for a number of reasons. Receipts and disbursements properly must be allocated to income or principal as the case may be. Under the terms of trusts and wills, amounts distributable to beneficiaries and the timing of distribution often depend on whether an item is classified as income or principal. A fiduciary (trustee or executor) must properly account to beneficiaries. Correct income tax returns must be prepared.

This Portfolio focuses on how income and principal are determined for accounting purposes, which determination helps ensure that proper distributions are made and also affects the proper preparation of income tax returns. 

Accounting for Trusts and Estates is designed to serve the needs of primarily two categories of persons: fiduciaries (trustees and executors) and their accountants.  

As an accountant you will be asked to prepare income tax returns for estates and trusts.  

You also will have opportunities as an accountant to help your clients who act as trustees and executors with the proper determination of accounting income and principal and appropriate record keeping. Additionally, you can help your clients who act as trustees and executors prepare appropriate accountings for courts and for beneficiaries. 

A primary purpose of this Portfolio is to aid the professional who acts as a trustee or an executor, or who advises such persons, by suggesting principles, approaches, and examples regarding the allocation of receipts and charging of expenditures between income and principal. This Portfolio not only suggests broad principles providing general guidance but also illustrates how to allocate particular receipts and disbursements to income and principal, respectively. 

This Portfolio will help you understand the myriad laws and rules governing the allocation of receipts and expenditures between principal and income, including when the right to income begins and ends, and also will show you how financial information can be presented in accountings. The accountant who understands fiduciary trust accounting can better help clients who act as trustees or executors and can offer more services.

However, the contents of the Portfolio will interest anyone who wants or needs to know how to determine the accounting income and principal of a trust or an estate. This Portfolio not only suggests guiding principles but also illustrates how to allocate particular amounts between principal and income.

After briefly surveying the history of trusts, the Portfolio defines “income” and “principal.” The various iterations of the Uniform Principal and Income Act (1997) are described and differentiated.  

After explaining when the right to income begins and ends, this Portfolio illustrates how to allocate receipts and disbursements to principal and income, as the case may be. It also discusses complementary topics such as transfers between principal and income and trustees powers that may affect whether a particular item is characterized as principal or income.  

Accounting for Trusts and Estates also suggests how to present fiduciary financial information based on guidance from the National Committee on National Fiduciary Accounting Standards.  

Finally, this Portfolio discusses transfers between income and principal from investments under the Uniform Prudent Investor Act. 

This Portfolio identifies differences between fiduciary accounting rules and tax rules concerning principal and income. The point is made that the accounting definitions must be understood in order to properly determine taxable income of a trust or an estate.

Accounting for Trusts and Estates allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios.

 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. INTRODUCTION

II. HISTORY OF THE TRUST AND ITS ENFORCEMENT

III. DEFINING THE PROBLEM

IV. DUTIES OF THE FIDUCIARY

Introductory Material

A. Duty to Account

B. Duty to Separate Income from Principal

V. DEFINING INCOME AND PRINCIPAL

A. Hierarchy of Guidance

1. Governing Instrument

2. State Law

3. Best Judgment

B. Income Under State Law

C. Principal

D. The Governing Instrument

1. Relationship to State Law

2. Fiduciary Discretion

E. Federal Tax Law

1. Income for Tax Purposes

2. Definition of Income for Taxable Years Ending Before January 3, 2004

3. Definition of Income for Taxable Years Ending After January 2, 2004

4. Determining Character of Distributions

VI. UNIFORM PRINCIPAL AND INCOME ACTS

Introductory Material

A. Similarities

1. Provisions are Default Provisions

2. Identity of Parties

3. Meaning of Income and Principal

4. Broad Areas of Certain Transactions

B. Differences

C. Trustee's Power to Adjust

VII. WHEN THE RIGHT TO INCOME BEGINS

Introductory Material

A. Probate Estates

1. Bequest of Specific Property

2. Pecuniary Bequest

B. Trusts

VIII. WHEN THE RIGHT TO INCOME ENDS

IX. ALLOCATION OF RECEIPTS TO PRINCIPAL AND INCOME

Introductory Material

A. Categories of Receipts

B. Special Rules for Estates and Terminating Income Interests

C. Receipts from Entities

1. Definition of Entities

2. General Rules for Allocation of Receipts from Entities

a. Receipt of Money from Entities

(1) Dividend Reinvestment Plans

(2) Mutual Funds

b. Receipt of Property from Entities

(1) Partnerships

(a) The 1962 Uniform Principal and Income Act.

(b) The 1997 Uniform Principal and Income Act

3. Receipts from Another Trust or Estate

a. Trapping Distributions

b. Items of Income in Respect of a Decedent

c. Receivables

d. Purchased Interest in a Trust

e. Governing Instruments and Conflicts

4. Business and Other Activities Conducted by the Fiduciary

a. The 1931 Uniform Principal and Income Act

b. The 1962 Uniform Principal and Income Act

c. The 1997 Uniform Principal and Income Act

d. Activities for Which a Trustee May Maintain Separate Accounting Records

D. Receipts Not Normally Apportioned Between Principal and Income

1. Principal Receipts

2. Rental Property

3. Obligation to Pay Money

4. Insurance Policies and Similar Contracts

E. Receipts Normally Apportioned Between Principal and Income

1. Insubstantial Allocations not Required

2. Deferred Compensation, Annuities, and Similar Payments

3. Liquidating Assets

4. Minerals, Water, and Other Natural Resources

5. Timber

6. Property Not Productive of Income

7. Derivatives

8. Options

9. Asset-Backed Securities

10. Other Receipts

X. ALLOCATION OF DISBURSEMENTS TO PRINCIPAL AND INCOME

Introductory Material

A. 1931 Uniform Principal and Income Act

B. 1962 Uniform Principal and Income Act

C. 1997 Uniform Principal and Income Act

XI. TRANSFERS BETWEEN PRINCIPAL AND INCOME

Introductory Material

A. Property Subject to Depreciation

B. Property Subject to Depreciation - Exceptions

C. Transfers from Income to Reimburse Principal

D. Transfers from Principal to Reimburse Income

E. Adjustments Between Principal and Income Because of Taxes

XII. TRUSTEE'S POWER TO ADJUST UNDER THE 1997 UNIFORM PRINCIPAL AND INCOME ACT

Introductory Material

A. Conditions Precedent to the Power to Adjust

1. Investing and Managing Trust Assets as a Prudent Investor

2. Distributions Referring to Trust Income

3. Unable to Administer Trust or Estate Impartially

B. Factors to Consider When Exercising the Power to Adjust

C. Situations When the Trustee Cannot Exercise the Power to Adjust

D. Examples of Powers to Adjust

E. Judicial Control of the Power to Adjust

XIII. TRUSTEE'S POWER TO CONVERT TO UNITRUST

A. Rules

B. Examples

XIV. PRESENTATION OF FIDUCIARY ACCOUNTS

Introductory Material

A. National Fiduciary Accounting Standards

B. Information to Be Presented in An Accounting

1. Informal Accounts

2. Formal Accounts

a. Format for Presenting Executors' or Trustees' Accounts:

(1) General Format

(2) Title of the Account

(3) The Period Covered by the Account and Other Information Considered Helpful by the Executor

(4) Statement of Purpose of the Account

(5) A Table of Contents for or a Summary of Account

(6) Principal on Hand at the Beginning of the Account Period

(7) Receipts of Principal During the Account Period

(8) Gains or Losses on Sales or Other Dispositions - Principal

(9) Expenditures of Principal

(10) Distributions of Principal to Beneficiaries

(11) Principal on Hand at the End of the Account Period

(12) Information Schedules

(13) Income on Hand at the Beginning of the Account Period

(14) Receipts of Income

(15) Expenditures of Income

(16) Distributions of Income to Beneficiaries

(17) Proposed Distribution to Beneficiaries

(18) Income on Hand at the End of the Account Period

C. Reporting Values

1. Acquisition, Carrying, or Inventory Values

a. Determining Carrying Values

(1) Assets Received by an Estate from a Decedent

(2) Assets Received by a Trust from the Grantor of a Living Trust

(3) Assets Received by a Trust from an Estate

(4) Assets Purchased by a Fiduciary

(a) Purchase of Options

(5) Assets Received by a Successor Fiduciary

b. Adjustments to Carrying Values

(1) Cash Distribution Allocated to Principal

(2) Stock Dividends Received and Treated as Principal

(3) Stock Dividends Received and Treated as Income

(4) Other non-cash distributions received

(a) Actual Allocation of Value

(b) Proportionate Allocation of Value

2. Current Values

a. Marketable Assets

b. Non-Marketable Assets

XV. UNIFORM PRUDENT INVESTOR ACT

Introductory Material

A. Traditional Standard of Care Concerning Trust Investments

B. Revised Standard of Care

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 General Rules Regarding the Allocation of Receipts to Income and Principal Under the 1997 Uniform Principal and Income Act

Worksheet 2 General Rules Regarding the Charging of Disbursements to Income and Principal Under the 1997 Uniform Principal and Income Act

Worksheet 3 When the Right to Income Begins

Worksheet 4 Uniform Principal and Income Act (1997)

Worksheet 5 Uniform Prudent Investor Act

Worksheet 6 Selected Provisions of the Internal Revenue Code of 1986 and Treasury Regulations

Worksheet 7 List of Significant Accounting Pronouncements Principally Discussed

Bibliography

OFFICIAL

FASB Financial Accounting Standards

FASB Exposure Drafts

Cases:

Statutes:

Regulations:

UNOFFICIAL

Articles:

Portfolios:

Treatises:

Other:

Alan S. Acker
Alan S. Acker, University of Illinois (B.S. 1974), Illinois Institute of Technology, Chicago-Kent School of Law (J.D. 1977); member, Ohio, Illinois, and Virginia Bars; member, American Institute of Certified Public Accountants and Ohio CPA Society; Fellow, American College of Trusts and Estates Counsel; adjunct professor of law at Capital University Law and Graduate Center, Columbus, Ohio; contributor to Tax Management Estates, Gifts and Trusts Journal, Estate Planning, and other legal publications; lecturer at various tax seminars.