Deck 19: Accounting for Estates and Trusts

Question 1

If a person dies without leaving a valid will, how is the distribution of property regulated

Answer 1

A person is said to die intestate if that person has no legal will when he or she dies. In case of person who dies intestate, the state laws control and administer his or her estate. In such circumstances, real property is conveyed according to the laws of descent and personal property transfers are made according to the laws of distribution.

Question 2

What claims against an estate have priority

Answer 2

Once the creditors have filed claims against a decedent's estate, the executor has to verify the validity of these claims. He or she will place them in the order of priority. There exists the possibility that there will not be enough cash to satisfy all debts. The order of priority is listed below.
1. Expenses relating to administration of the estate.
2. Funeral expenses and the medical expenses of any last illness.
3. Debts and taxes given preference under federal and state laws.
4. All other claims, such as unsecured obligations, credit card debts, and the like.

Question 3

Sally Anne Williams died on January 1, 2014. All of her property was conveyed to several relatives on April 1, 2014. For federal estate tax purposes, the executor chose the alternate valuation date. On what date was the value of the property determined

A) January 1, 2014.
B) April 1, 2014.
C) July 1, 2014.
D) December 31, 2014.

Answer 3

The executor has the authority to declare the valuation of the estate at the date of death or can choose an alternative date of up to six (6) months later for tax reduction purposes. Hence, April 1, 2014 will be the alternative date for the\purpose. Hence, option (b) is the correct answer.
The alternative date cannot be an exact six months later but a date between the decedent's death and the six-month time frame.
Therefore the remaining answers are incorrect.

Question 4

What is the difference between a testamentary trust and an inter vivos trust

A) A testamentary trust conveys money to a charity; an inter vivos trust conveys money to individuals.
B) A testamentary trust is created by a will; an inter vivos trust is created by a living individual.
C) A testamentary trust conveys income to one party and the principal to another; an inter vivos trust conveys all monies to the same party.
D) A testamentary trust ceases after a specified period of time; an inter vivos trust is assumed to be permanent.

Question 5

The executor of Rose Shield's estate listed the following properties (at fair value):

a. Prepare journal entries to record the property held by Ms. Shield's estate and then each of the following transactions that occur in the months following the decedent's death:
(1) Claims of $80,000 are made against the estate for various debts incurred before the decedent's death
(2) Interest of $12,000 is received from bonds held by the estate. Of this amount, $5,000 had been earned prior to death.
(3) Ordinary repairs costing 56,000 are made to the rental property.
(4) All debt s ($80,000) are paid.
(5) Stocks recorded in the estate at $16,000 are sold for $19,000 cash.
(6) Rental income of $14,000 is collected. Of this amount. $2,000 had been earned prior to the decedent's death.
(7) Cash of $6,000 is distributed to Jim Arness, an income beneficiary.
(8) The proceeds from the life insurance policy are collected and the money is immediately distributed to Amanda Blake as specified in the decedent's will.
(9) Funeral expenses of $10,000 are paid.
b. Prepare in proper forma charge and discharge statement.

Question 6

A staff employee for the CPA firm of O'Brien, Leahy, and Sweeney is currently preparing Form 1041 as an income tax return for an estate. The staff employee knows that the estate is allowed a deduction for income distributions to beneficiaries up to the amount of the estate's distributable net income (DNI) for the period. However, the employee is not certain how to compute the exact amount of this deduction.
Go to the website www.irs.gov. Do a search for "Instruction 1041" to get the instruction information for estate and trust income taxes published by the IRS.
Required
Read the information provided, and write a memo to the employee explaining (in general terms) how to calculate this deduction.

Question 7

What is the homestead allowance
a. A reduction of $20,000 in estate assets prior to computing the amount of federal estate taxes.
b. The amount of property conveyed in a will to a surviving spouse.
c. An allotment from an estate to a surviving spouse and/or minor and dependent children before any claims are paid.
d. A decrease in the value of property on which state inheritance taxes are assessed. The reduction is equal to the value of property conveyed to a surviving spouse.

Question 8

What deductions are allowed in computing estate income taxes

Question 9

Why have trust funds become especially popular in recent years

Question 10

The executor of Gina Purcell's estate has recorded the following information

Debts of $17,000 still remain to be paid. The Dell shares have been conveyed to the appropriate beneficiary. Assume that Ms. Purcell's will stated that all executor fees are to be paid from principal.
Prepare an interim charge and discharge statement for this estate.

Question 11

What is the purpose of the laws of distribution
a. To guide the distribution of personal property when an individual dies without a will.
b. To verify the legality of a will, especially an oral will.
c. To guide the distribution of real property when an individual dies without a will.
d. To outline the functions of the executor of an estate.

Question 12

What are homestead and family allowances

Question 13

Wilson Waltman died on January 1, 2014. All of his property was conveyed to beneficiaries on October 1, 2014. For federal estate tax purposes, the executor chose the alternate valuation date. On what date was the value of the property determined

A) January 1, 2014.
B) July 1, 2014.
C) October 1, 2014.
D) December 31, 2014.

Question 14

Which of the following is a charitable lead trust

A) The income of the trust fund goes to an individual until death, at which time the principal is conveyed to a charitable organization.
B) Charitable gifts are placed into the trust until a certain dollar amount is achieved and is then transferred to a specified charitable organization.
C) The income of a trust fund goes to a charitable organization for a specified time with the principal then being conveyed to a different beneficiary.
D) A charity conveys money to a trust that generates income for the charity's use in its various projects.

Question 15

Jerry Tasch's will has the following provisions:
• $150,000 in cash goes to Thomas Thorne.
• All shares of Coca-Cola go to Cindy Phillips.
• Residence goes to Kevin Simmons.
• All other estate assets are to be liquidated with the resulting cash going to the First Church of Freedom, Missouri.
Prepare journal entries for the following transactions:
a. Discovered the following assets(at fair value):

b. Collected interest of $7,000.
c. Paid funeral expenses of $20,000.
d. Discovered debts of $40,000.
e. Located an additional savings account of $ 12,000.
f. Conveyed title to the residence to Kevin Simmons,
g. Collected life insurance policy.
h. Discovered additional debts of $60,000. Paid debts totaling $100,000.
i Conveyed cash of SI5O,ooo to appropriate beneficiary.
j. Sold the shares of Polaroid for $112,000.
k. Paid administrative expenses of $10,000.

Question 16

What are probate laws

Question 17

Which of the following is a specific legacy
a. The gift of all remaining estate property to a charity.
b. The gift of $44,000 cash from a specified source.
c. The gift of $44,000 cash.
d. The gift of 1,000 shares of stock in IBM.

Question 18

Other than financial considerations, why should individuals consider preparing a valid will

Question 19

What is an inter vivos trust

Question 20

After the death of Lennie Pope. His will was read. It contained the following provisions:
• $110,000 in cash goes to decedent's brother, Ned Pope.
• Residence and other personal property go to his sister, Sue Pope.
• Proceeds from the sale of Ford stock go to uncle, Harwood Pope.
• $300,000goesinto a charitable remainder trust.
• All other estate assets are to be liquidated with the cash going to Victoria Jones.
a. Prepare journal entries for the following transactions that subsequently occur:
(1) Discovered the following assets (at fair value):

(2) Collected life insurance policy.
(3) Collected dividends of $4,000.
(4) Discovered debts of $71,000.
(5) Conveyed title to the residence 10 Sue Pope along with the decedent's personal effects.
(6) Discovered title to land valued at $15,000.
(7) Discovered additional debts of $37,000. Paid all of the debts totaling.$108,000.
(8) Paid funeral expenses of $31,000.
(9) Conveyed cash of $110,000 to Ned Pope.
(10) Sold the shares of Ford for $81,000.
(11) Paid administrative expenses of $16,000.
(12) Made the appropriate payment to Harwood Pope.
b. Prepare a charge and discharge statement.

Question 21

A client, Beth yoga, asks for advice. She tells you that her grandmother, a widowed resident of Montana, has no will. She asks whether any portion of her grandmother's estate will pass to her (Beth's) cousins, whom her grandmother despises.
Required
Use an Internet search engine to locate the Montana version of the Uniform Probate Code. Then briefly advise Ms. Voga, answering her specific question. Also advise her on the necessity of a will for her grandmother.

Question 22

What are the differences among a devise, a legacy, and a bequest

Question 23

Which of the following is not true concerning gift taxes

A) Gift taxes are not abolished but a lifetime exclusion of $5.25 million is available in 2013.
B) The American Taxpayer Relief Act of 2012 will eventually eliminate the federal gift tax.
C) Historically, gift taxes and estate taxes have been linked through a unified transfer credit.
D) Gift taxes are different from generation-skipping taxes.

Question 24

The estate of Nancy Hanks reports the following information:

What is the taxable estate value

A) $70,000.
B) $100,000.
C) $180,000.
D) $420,000.

Question 25

James Albemarle created a trust fund at the beginning of 2014. The income from this fund will go to his son Edward. When Edward reaches the age of 25, the principal of the fund will be conveyed to United Charities of Cleveland. Mr. Albemarle specified that 75 percent of trustee fees are to be paid from principal. Terry Jones, CPA, is the trustee.
Prepare all necessary journal entries for the trust to record the following transactions:
a. James Albemarle transferred cash of $300,000, stocks worth $200,000, and rental property valued at $150,000 to the trustee of this fund.
b. Immediately invested cash of $260,000 in bonds issued by the U.S. government. Commissions of $3,000 are paid on this transaction.
c. Incurred permanent repairs of $7,000 so that the property can be rented. Payment is made immediately.
d. Received dividends of $4,000. Of this amount, $1,000 had been declared prior to the creation of the trust fund.
e. Paid insurance expense of $2,000 on the rental property.
f. Received rental income of $8,000.
g. Paid $4,000 from the trust for trustee services rendered.
h. Conveyed cash of $5,000 to Edward Albemarle.

Question 26

A deceased individual owned a bond. Which of the following is included in the estate principal
a. All interest collected prior to distributing the bonds to a beneficiary is considered part of the estate principal.
b. Only the first cash payment after death is included in the estate principal.
c. Interest that was not collected prior to death is excluded from the estate principal.
d. Interest earned prior to death is considered part of the estate principal even if received after death.

Question 27

A will has the following statement: "I leave $20,000 cash from my savings account in the Central Fidelity Bank to my sister, Angela." This gift is an example of
a. A residual legacy.
b. A general legacy.
c. A demonstrative legacy.
d. A specific legacy.

Question 28

In accounting for an estate or trust, how is the distinction between principal and income determined

Question 29

What is a testamentary trust

Question 30

Henry O'Donnell created an inter vivos trust fund. He owns a large department store in Higgins. Utah. He also owns a tract of land adjacent to the store used as an extra parking lot when the store is having a sale and during the Christmas season. O'Donnell expects the land to appreciate in value and eventually be sold for an office complex or additional stores.
O'Donnell places this land into a charitable lead trust, which will hold the land for 10years until O'Donnell's son is 21.At that time, title will transfer to the son. The store will pay rent to use the land during the interim. The income generated each year from this usage will be given to a local church. The land is currently valued at $320,000.
During the first year of this arrangement, the trustee records the following cash transactions:

Prepare all journal entries for this trust fund including the entry to create the trust.

Question 31

What are the objectives of probate laws

Question 32

Describe the four types of legacies, and give examples of each.

Question 33

A married couple has written a will that leaves part of their money to a trust fund. The income from this trust will benefit the surviving spouse until death, with the principal then going to their children. Why was the trust fund created

A) To reduce the estate of the surviving spouse and, thus, decrease the total amount of estate taxes to be paid by the couple.
B) To ensure that the surviving spouse is protected from lawsuits filed by the couple's children.
C) To give the surviving spouse discretion over the ultimate use of these funds.
D) To maximize the earning potential of the money because trust funds generate more income than other investments.

Question 34

An estate has the following income:

The interest income was immediately conveyed to the appropriate beneficiary. The dividends were given to charity as per the decedent's will. What is the taxable income of the estate

A) $4,400.
B) $5,000.
C) $8,000.
D) $8,400.

Question 35

Which of the following is not a goal of probate laws
a. To gather and preserve all of the decedent's property.
b. To ensure that each individual produces a valid will.
c. To discover the decedent's intent for property held at death and then to follow those wishes.
d. To carry out an orderly and fair settlement of all debts and distribution of property.

Question 36

What is the objective of the process of abatement
a. To give legal structure to the reductions that must be made if an estate has insufficient assets to satisfy all legacies.
b. To ensure that all property distributions take place in a timely manner.
c. To provide adequate compensation for the estate executor and any appraisers or other experts that must be hired.
d. To ensure that all legacies are distributed to the appropriate party as specified by the decedent's will or state laws.

Question 37

What transactions are normally viewed as changes in the principal of an estate What transactions are normally viewed as changes in the income of an estate

Question 38

What are QTIP trusts, GRATs, and charitable remainder trusts

Question 39

What are the responsibilities of the executor of an estate

Question 40

What is the purpose of the process of abatement How does the executor of an estate utilize this process

Question 41

The executor of an estate is filing an income tax return for the current period. Revenues of $25,000 have been earned. Which of the following is not a deduction allowed in computing taxable income

A) Income distributed to a beneficiary.
B) Funeral expenses.
C) A personal exemption.
D) Charitable donations.

Question 42

Define each of the following terms:
a. Will.
b. Estate.
c. Intestate.
d. Probate laws.
e. Trust.
f. Inter vivos trust.
g. Charitable remainder trust.
h. Remainderman.
i. Executor.
j. Homestead allowance.

Question 43

How are claims against a decedent's estate discovered by an executor
a. Public notice must be printed in an appropriate newspaper to alert all possible claimants.
b. The executor waits for nine months until all possible bills have been received.
c. The executor directly contacts all companies that the decedent did business with.
d. Claims the estate is to pay are limited to all of the bills received but not paid prior to the date of death.

Question 44

For estate tax purposes, what date is used for valuation purposes
a. Property is always valued at the date of death.
b. Property is always valued at the date of distribution.
c. Property is valued at the date of death unless the alternate date, which is the date of distribution or six months after death, whichever comes first, is selected.
d. Property is valued at the date of death although a reduction is allowed if the value declines within one year of death.

Question 45

What is the alternate date for valuing the assets of an estate When should this alternate date be used

Question 46

Why is the distinction between principal and income so important in accounting for most trusts

Question 47

Use an Internet search engine to locate an explanation of the benefits of a grantor retained annuity trust.
Required
Write a memo describing the circumstances that would make this type of trust most advantageous.

Question 48

At what value are the assets within an estate reported

Question 49

How is the federal estate tax computed

Question 50

What is a remainderman

A) A beneficiary that receives the principal left in an estate or trust after a specified time.
B) The beneficiary of the decedent's life insurance policy.
C) An executor or administrator after an estate has been completely settled.
D) If a legacy is given to a group of people, the remainderman is the last of the individuals to die.

Question 51

Answer each of the following questions:
a. What are the objectives of probate laws
b. What tasks does the executor of an estate perform
c. What assets are normally included as estate properties
d. What claims have priority to the distributions made by an estate

Question 52

Which of the following is not a true statement
a. Testate refers to a person having a valid will.
b. The laws of descent convey personal property if an individual dies without a valid will.
c. Intestate refers to a person having no valid will.
d. A specific legacy is a gift of personal property that is specifically identified.

Question 53

Why are claims against an estate put into an order of priority
a. To help the executor determine the due date for each claim.
b. To determine which claims are to be paid if funds are insufficient to pay all claims.
c. To assist in determining which specific assets are to be used to satisfy these claims.
d. To list the claims in order of age so that the oldest can be paid first.

Question 54

Which of the following is true concerning the American Taxpayer Relief Act of 2012

A) This tax law leads to the immediate elimination of the federal estate tax.
B) This tax law leads to the immediate elimination of the federal gift tax.
C) This tax law provides for a $5.25 million tax-free exemption, as a result of indexing, for estates created in 2013.
D) This tax law leads to the immediate elimination of the generation-skipping tax.

Question 55

In the initial accounting for an estate, why does the executor record only the assets

Question 56

The will of Josh O'Brien has the following stipulations:
Antique collection goes to Ilsa Lunn.
All money in the First Savings Bank goes to Richard Blaine.
Cash of $9,000 goes to Nelson Tucker.
All remaining assets are put into a trust fund with the income going to Lucy Van Jones. At her death, the principal is to be conveyed to Howard Amadeus.
Identify the following:
a. Remainderman.
b. Trustor.
c. Demonstrative legacy.
d. General legacy.
e. Specific legacy.
f. Life tenant.
g. Testator.

Question 57

Distinguish between testate and intestate.

Question 58

If an asset of an estate has no readily ascertainable fair value, how should it be presented/valued on the charge/discharge statement

Question 59

What was the impact of the American Taxpayer Relief Act of 2012 on the conveyance of property

Question 60

In an estate, which of the following is charged to income rather than to principal

A) Funeral expenses.
B) Investment costs.
C) Property taxes.
D) Losses on the sale of investments.

Question 61

Marie Hardy's will has the following provisions:
"I leave the cash balance deposited in the First National Bank (up to a total of $50,000) to Jack Abrams. I leave $18,000 cash to Suzanne Benton. I leave 1,000 shares of Coca-Cola Company stock to Cindy Cheng. I leave my house to Dennis Davis. I leave all of my other assets and properties to Wilbur N. Ed."
a. Assume that the estate has the following assets: $41,000 cash in the First National Bank, $16,000 cash in the New Hampshire Savings and Loan, 800 shares of Coca-Cola stock, 1,100 shares of Xerox stock, a house, and other property valued at $13,000, What distributions will be made from this estate
b. Assume that the estate has the following assets: $55,000 cash in the First National Bank, $6,000 cash in the New Hampshire Savings and Loan, 1,200 shares of Coca-Cola stock, 600 shares of Xerox stock, and other property valued at $22,000. What distributions will be made from this estate

Question 62

The CPA firm of Simon, Winslow, and Tate has been approached by a client who is interested in information about the possibility of establishing a minor's Section 2503(c) trust.
Go to the website http://www.finaid.org/smings2503ctrust.phtml. Alternatively, use an Inter-net search engine to and other analyses of a Section 2503(c) trust.
Required
Based on the results of this search, write a memo for the client outlining the requirements, design, advantages, and disadvantages of a minor's Section 2503(c) trust so the client can make an informed decision.

Question 63

Which of the following claims against an estate does not have priority
a. Funeral expenses because the amounts incurred are usually at the discretion of family members.
b. Medical expenses associated with the decedent's last illness.
c. The costs of administering the estate.
d. Unpaid rent on the decedent's home if not paid for the three months immediately prior to death.

Question 64

In computing federal estate taxes, deductions from an estate's value are allowed for all of the following except

A) Charitable bequests.
B) Losses on the disposal of investments.
C) Funeral expenses.
D) Debts of the decedent.

Question 65

What is the purpose of the charge and discharge statement that the executor of an estate issues

Question 66

Zac Peterson's estate reports the following information:


What is the taxable estate value

Question 67

A law firm is preparing to file a federal estate tax return (Form 706). The estate's executor has elected to use the alternate valuation date. The partner in charge of filing this return is not certain about all of the ramifications of having chosen to use this alternate date.
Go to the website www.irs.gov. Do a search for "Instruction 706" to get the instruction information published by the IRS for federal estate taxes.
Required
Read the information provided, and write a memo to the partner outlining the information the IRS provides as to the significance of the alternate valuation date.

Question 68

How does an executor discover the claims against an estate

Question 69

What is a taxable gift

Question 70

In recording the transactions of an estate, when are liabilities recorded

A) When incurred.
B) At the date of death.
C) When the executor takes responsibility for the estate.
D) When paid.

Question 71

Donna Stober's estate has the following assets (all figures approximate fair value):

The house, cash, and other assets are left to the decedent's spouse. The investment land is contributed to a charitable organization. The automobiles are to be given to the decedent's brother. The investments in stocks and bond s are to be put into a trust fund. The income generated by this trust will go to the decedent's spouse annually until all of the couple's children have reached the age of 25. At that time, the trust will be divided evenly among the children.
The following amounts are paid prior to distribution and settlement of the estate: funeral expenses of $20,000 and estate administration expenses of $10,000.
a. What value is to be reported as the taxable estate for federal estate tax purposes
b. How does the year in which an individual dies affect the estate tax computation For example, what is the impact of dying on December 30, 2010, versus January 2, 2011

Question 72

Why might real estate be omitted from an inventory of estate property
a. Real estate is subject to a separate inheritance tax.
b. State laws prohibit real property from being conveyed by an estate.
c. State laws require a separate listing of all real estate.
d. In some states, depending on the ownership, real estate is considered to be conveyed directly to a beneficiary at the time of death.

Question 73

How does a devise differ from a legacy
a. A devise is a gift of money and a legacy is a nonmonetary gift.
b. A devise is a gift to an individual and a legacy is a gift to a charity or other organization.
c. A devise is a gift of real property and a legacy is a gift of personal property.
d. A devise is a gift made prior to death and a legacy is a gift made at death.

Question 74

Why is the establishment of a credit shelter trust fund considered a good estate planning technique

Question 75

What is a trust fund

Question 76

During 2014, an estate generated income of $20,000:

The interest income is conveyed immediately to the beneficiary stated in the decedent's will. The dividends are given to the decedent's church. What is the taxable income of the estate