Chapter 23
ESTATES AND TRUSTS
Answers to Questions
1 A fiduciary is a person or an entity authorized to take possession and administer property of others. The
fiduciary will take possession of someone else or other entity’s properties and manage them in the best
interest of the beneficiaries. Administering the properties includes taking account for any transactions
related to the property for any income, expense, gains or losses, hence the need of estate and trust
accounting. This usually happens if the original owner of the properties died.
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 trust’s 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 The executor would record inventories of all estate assets in a self-balancing set of accounts that shows:
(1) the property for which responsibility has been assumed, and (2) the manner in which the
responsibility is subsequently discharged. The executor do not have the responsibility to record any
obligations and any claims against the estate until paid.
5 A document prepared by the fiduciary to show accountability for estate property received and maintained
or disbursed in accordance to the will. It shows the progress of the estate administration and the
termination of responsibility when the will has been fully administered. It consists of two major elements:
(1) estate principals, and (2) estate income.
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 $14,000 each can be made, with
a lifetime limit of $5,250,000.
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 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.
11 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.
Copyright © 2015 Pearson Education Limited
,23-2 Estates and Trusts
SOLUTIONS TO EXERCISES
Solution E23-1
1 Mortgage claim of Secured Claim – other claims
$5,000 on the summer
palace
2 Hospital bills of Secured Claim - reasonable and necessary
$1,000 medical and hospital expenses of the last
illness of the decedent
Hospital expenses $1,000
Mortgage payable 5,000
Cash – principal $6,000
To record payment for hospital expenses and mortgage payable.
Copyright © 2015 Pearson Education Limited
, Chapter 23 23-3
Solution E23-2
a Cash (+A) 15,000
Interest receivable - bonds (-A) 11,600
Estate income (R,+SE) 3,400
b Devise - symphony orchestra (E,-SE) 150,000
Cash (-A) 150,000
c Probate expenses (E,-SE) 2,800
Cash (-A) 2,800
d Funeral expenses (E,-SE) 12,800
Cash (-A) 12,800
e Hospital expense (-SE) 44,000
Debt of decedent (+L) 44,000
Solution E23-3
1 January 2014 Cash $500,000
Trust fund principal $500,000
3 January 2014 Certificate depossit 250,000
Cash 250,000
15 January 2014 Stosck mutual fund 50,000
Cash 50,000
25 January 2014 Trust fund expenses 500
Cash 500
1 February 2014 Trust fund expenses 200
Cash 200
2 February 2014 Cash 1,042
Trust fund incosme 1,042
20 February 2014 Trust fund expenses 500
Cash 500
25 February 2014 Trust fund expenses 600
Cash 600
28 February 2014 Trust fund expenses 250
Cash 250
28 February 2014 Cash 934.2
Copyright © 2015 Pearson Education Limited
ESTATES AND TRUSTS
Answers to Questions
1 A fiduciary is a person or an entity authorized to take possession and administer property of others. The
fiduciary will take possession of someone else or other entity’s properties and manage them in the best
interest of the beneficiaries. Administering the properties includes taking account for any transactions
related to the property for any income, expense, gains or losses, hence the need of estate and trust
accounting. This usually happens if the original owner of the properties died.
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 trust’s 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 The executor would record inventories of all estate assets in a self-balancing set of accounts that shows:
(1) the property for which responsibility has been assumed, and (2) the manner in which the
responsibility is subsequently discharged. The executor do not have the responsibility to record any
obligations and any claims against the estate until paid.
5 A document prepared by the fiduciary to show accountability for estate property received and maintained
or disbursed in accordance to the will. It shows the progress of the estate administration and the
termination of responsibility when the will has been fully administered. It consists of two major elements:
(1) estate principals, and (2) estate income.
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 $14,000 each can be made, with
a lifetime limit of $5,250,000.
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 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.
11 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.
Copyright © 2015 Pearson Education Limited
,23-2 Estates and Trusts
SOLUTIONS TO EXERCISES
Solution E23-1
1 Mortgage claim of Secured Claim – other claims
$5,000 on the summer
palace
2 Hospital bills of Secured Claim - reasonable and necessary
$1,000 medical and hospital expenses of the last
illness of the decedent
Hospital expenses $1,000
Mortgage payable 5,000
Cash – principal $6,000
To record payment for hospital expenses and mortgage payable.
Copyright © 2015 Pearson Education Limited
, Chapter 23 23-3
Solution E23-2
a Cash (+A) 15,000
Interest receivable - bonds (-A) 11,600
Estate income (R,+SE) 3,400
b Devise - symphony orchestra (E,-SE) 150,000
Cash (-A) 150,000
c Probate expenses (E,-SE) 2,800
Cash (-A) 2,800
d Funeral expenses (E,-SE) 12,800
Cash (-A) 12,800
e Hospital expense (-SE) 44,000
Debt of decedent (+L) 44,000
Solution E23-3
1 January 2014 Cash $500,000
Trust fund principal $500,000
3 January 2014 Certificate depossit 250,000
Cash 250,000
15 January 2014 Stosck mutual fund 50,000
Cash 50,000
25 January 2014 Trust fund expenses 500
Cash 500
1 February 2014 Trust fund expenses 200
Cash 200
2 February 2014 Cash 1,042
Trust fund incosme 1,042
20 February 2014 Trust fund expenses 500
Cash 500
25 February 2014 Trust fund expenses 600
Cash 600
28 February 2014 Trust fund expenses 250
Cash 250
28 February 2014 Cash 934.2
Copyright © 2015 Pearson Education Limited
