ch22 beams10e tb

Chapter 22 Test Bank

ESTATES and TRUSTS

Multiple Choice Questions

1. Which of the following phrases is frequently used to refer to estate or trust accounting?

a. Non-profit accounting.b. Testamentary accounting.c. Fiduciary accounting.d. All of the above phrases are used to refer to estate or

trust accounting.

2. In reference to accounting for trusts or estates, which of the following statements is correct?

a. Estates are subject to taxation, but trusts are not.b. Estates are subject to probate laws that vary widely across

the fifty states.c. Estates are subject to income taxes at the federal level,

but not at the state level.d. All of the above are correct.

3. In reference to estates, which of the following statements is correct?

a. An estate comes into existence at the death of an individual.

b. If the deceased person had a valid will at the time of death, he or she is said to have died intestate.

c. If the deceased person did not have a valid will at the time of death, he or she is said to have died testate.

d. None of the above statements is correct.

4. Under the Uniform Probate Code the term personal representative refers to which of the following?

a. An executor, but not an administrator.b. An administrator, but not an executor. c. Neither an executor nor an administrator.d. Either an executor or an administrator.

©2009 Pearson Education, Inc. publishing as Prentice Hall22-1

5. In reference to the probate process, which of the following statements is correct?

a. The personal representative of the deceased can file a petition with the appropriate probate court requesting that an existing will be probated.

b. All states have adopted the Uniform Probate Code.c. The American Bar Association was solely responsible for

writing the Uniform Probate Code. d. All of the above statements are correct.

6. Under the Uniform Probate Code, the personal representative must inform the heirs and devisees of his or her appointment and provide other selected information within how many days of the appointment?

a. 10 days.b. 20 daysc. 30 days.d. 60 days.

7. Which of the following is a gift of an object to a devisee?

a. A general devise.b. A specific devise.c. A testamentary allocation.d. An administrative devise

8.Under the amended Uniform Probate Code, if the decedent dies intestate, and if there are descendants from a prior marriage or relationship, the surviving spouse receives what?

a. $25,000 and 2/3 of the remaining intestate estate.b. $200,000 and 1/3 of the remaining intestate estate.c. $50,000 and 1/2 of the remaining intestate estate.d. $100,000 and 1/2 of the remaining intestate estate.

9. The executor or administrator of a will is required to prepare and file an inventory of property owned by the deceased within what time period?

a. One month of appointment.b. Two months of appointment.c. Three months of appointment.d. 45 days of appointment.


10. In reference to the Uniform Probate Code, which of the following statements is correct?

a. The Code entitles the surviving spouse to a homestead exemption that is exempt from, and has priority over, all claims against the estate.

b. The Code provides a homestead exemption to the surviving spouse of $15,000 in all states.

c. The Code provides a uniform entitlement of $12,500 in household furniture and other personal effects in all states.

d. All of the above are correct.

11. Under the Uniform Probate Code, the personal representative must publish for what time period a notice in a newspaper of general circulation in the county in which the decedent resided?

a. For one week.b. For two weeks.c. For three weeks.d. For five weeks.

12. If estate assets are insufficient to pay all claims in full, under the Uniform Probate Code which of the following would be paid first?

a. Reasonable funeral expenses.b. Necessary medical and hospital expenses of the last illness

of the decedent.c. Unsecured debts.d. The costs and expenses of administration of the estate.

13. Which of the following are entitled to the remainder of the estate after all other rightful claims on the estate have been satisfied?

a. Remainder beneficiaries.b. Residual beneficiaries.c. Alternate beneficiaries.d. Secondary beneficiaries.


14. In reference to estate principal and income, which of the following statements is correct?

a. A primary reason for dividing estate principal and estate income is that the beneficiaries are often different.

b. In accounting for the decedent’s estate, the receipts due but unpaid at the date of death are considered estate principal.

c. After death, earnings from income-producing property are estate income, unless the will specifically provides otherwise.


15. Under the Revised Uniform Principal and Income Act, as amended in 2006, which of the following expenses incurred in settling the decedent’s estate would be charged against the income of the estate, and not the estate’s principal?

a. Funeral expenses.b. Attorney’s fees.c. Estate taxes.d. All of the expenses would be charged against the principal

of the estate.

16. What is the document prepared by the executor or administrator to show accountability for estate property received and maintained or disbursed in accordance with the will?

a. The Administrator/Executor’s Fiduciary Report.b. The charge-discharge statement.c. The Administrator/Executor’s Testamentary Report. d. The Administrator/Executor’s Principal/Income Report.

17. Which type of trust is created pursuant to a will?

a. A testamentary trust.b. A Crummey trust.c. A generation-skipping trust.d. A life estate trust.


18. In reference to the potential taxation of an estate, which of the following statements is correct?

a. An estate may be subject to taxation at both the state and federal level.

b. The taxable amount of an estate is based on the book values of all estate assets at the time of death.

c. The estate value is not reduced by such expenses as funeral expenses, bequests to qualified charities, or state-level taxes.


19. What is the current annual gift amount that can be left to an individual donee, without being subject to a potential gift tax?

a. $7,500.b. $12,000.c. $17,500.d. $20,000.

20. What is the dollar amount of the federal lifetime maximum gift tax exclusion?

a. $24,000.b. $600,000.c. $1,000,000.d. $2,000,000.


Exercise One

A client has asked you to address the ramifications of having prepared a valid will prior to death. Discuss the initial process that her survivors would face if she either has a valid will or if she dies without preparing a valid will.

Exercise Two

You are serving as the executor for the estate of Dr. John Carrell. The following transactions occur during the February, 2009. Dr. Carrell died on January 25, 2009.

1. In John’s will, he included a bequest to the American Society for the Prevention of Cruelty to Animals (ASPCA) for $125,000. After examining the assets, you determined that the estate’s assets will adequately cover all expenses and specific devises, so on February 3, you issued a check to the ASPCA for $125,000.

2. On February 11, you issued a check to pay John’s final medical expenses of $31,500.

3. On February 15, you received a check in the amount of $52,500 from First State Bank of Denton. It is the maturity value and interest from a certificate of deposit in the amount of $50,000 that was not included in the estate’s initial inventory. The CD matured on January 22, 2009.

4. On February 26, you received interest of $3,000 on Denton City bonds. Interest of $450 was earned after the date of death. The balance was earned prior to death, and had been accrued. The bonds were included in the initial inventory.

5. On February 28, you issued a check to pay John’s funeral expenses of $9,800.

Required:Prepare the necessary journal entries for the above transactions. You may ignore any estate or income taxes.


Exercise Three

Bill Barker is the executor for the estate of Ruth Johnson. Ruth owned a home worth $200,000, with a remaining mortgage amount of $80,000, personal effects worth $8,000, an investment portfolio worth $150,000 on the date of death, and approximately $7,500 in cash in various accounts. The home was left to her daughter in the valid will that Ruth had executed prior to her death.

Ruth did not have a surviving spouse, but she did have a minor daughter, who is independently wealthy after inventing a cutting-edge software program. The state in which Ruth resided, allows a $15,000 homestead allowance, and a $10,000 personal effects entitlement.

After taking an inventory, and converting all of the assets, except for the home and the personal effects, into cash, there is $159,000 for Bill to distribute to the appropriate devises, beneficiaries, and creditors.

Bill has identified the following expenses and bequests:

1. Her unpaid final medical expenses were $24,000.

2. Ruth left a bequest of $100,000 to her church.

3. The costs and expenses of administering the estate were $21,000.

4. Real estate taxes of $3,600 are past due.

5. The unpaid funeral expenses were $8,700.

Required:

Prepare a schedule that will list the disbursements of assets. Assume that the state in which Ruth resided has adopted the Uniform Probate Code.


Exercise Four

You are serving as the executor for the estate of Dr. Mary Carlson. The following transactions occur during the August 2009. Dr. Carlson died on July 30, 2009.

1. On August 6, you received interest of $6,000 on State of Colorado general revenue bonds. Interest of $1,200 was earned after the date of death. The balance was earned prior to death, and had been accrued. The bonds were not included in the estate’s initial inventory. The maturity value and fair market values of the bond are $100,000.

2. On August 11, you issued a check to pay a probate court fee of $900.

3. The estate included 20,000 shares of Baker Rudolph, International’s common stock, valued at $70 per share. On the date of her death, there were no outstanding dividends receivable. On August 14, you read that a dividend of $1.50 per share was declared.

4. In Mary’s will, she included a bequest to the National Zoo for $175,000. After examining the assets, you determined that the estate’s assets will adequately cover all expenses and specific devises, so on August 23, you issued a check to the Zoo for $175,000.

5. On August 25, you issued a check to pay Mary’s final medical expenses of $27,500.

6. On August 28, you received a check for $30,000 for the common stock dividends paid by Baker Rudolph, International.

Required:Prepare the necessary journal entries for the above transactions. You may ignore any estate or income taxes.


Exercise 5

Byron Ratliff has been appointed to serve as the executor of the estate of Ms. Juanita Davis, who passed away at the age of 104 on April 5, 2009. Ms. Davis’s assets consisted of the following:

Asset Book Value Fair ValueCash $20,000 $20,000Money market accounts 210,000 210,000Cooper Incorporated common stock 52,000 205,530Porsche 911 Carrera 120,000 78,000Condominium in Jackson, WY 365,000 1,450,000Personal residence in Hutchinson, KS 185,000 225,000Black velvet Elvis paintings collection 19,900 92,000City of Alma, AR municipal bonds 20,000 24,000Ski boat 25,000 14,500

The probate court has ruled that any other personal effects may be excluded from Ms. Davis’s estate inventory.


Exercise Six

Norma Carrell is serving as the executrix for the estate of Dixon Cooper, who passed away on January 28, 2009, at the age of 98. Dixon’s estate consisted of Treasury bonds with a maturity value and fair market value of $1,400,000, $4,000 in his checking account, and $50,000 in a certificate of Deposit with First State Bank of Denton. Total accrued interest at the time of death was $44,000, made up of $2,000 from the CD and $42,000 from the bonds.

Dixon left a valid will, which provided that most of his estate would be inherited by his two nephews, Shelly Williams and Chuck Fuller. In addition to the bequests for his nephews, Dixon provided that $200,000 be transferred to a trust account for his faithful cats, Houdini and Maxine. Income from the trust would be used to care for Max and Houdini. Upon their passing, the remaining funds would then transfer to Operation Kindness, an organization that cares for cats and dogs.

Ms. Carrell will also serve as the fiduciary for the trust. She has determined that no state or federal inheritance taxes are due. The limited estate income is also free from any federal or state income tax. The following transactions occurred during February.

1. On February 3, Norma sold the treasury bonds for $1,452,000. $1,400,000 was for the fair market value of the bonds, $42,000 was for interest accrued to the time of Dixon’s death, and the remaining $8,000 was for accrued interest since Dixon’s death.

2. On February 11, Norma issued a check to pay Dixon’s final medical expenses of $11,900.

3. On February 15, Norma received a check in the amount of $52,000 from First State Bank of Denton. It is the maturity value and interest from a certificate of deposit in the amount of $50,000. The CD matured on January 22, 2009.

4. In Dixon’s will, he included a bequest to the American Humane Society for $150,000. After examining the assets, Norma determined that the estate’s assets will adequately cover all expenses and specific devises, so on February 3, she issued a check to the organization for $150,000.

5. On February 18, Norma transferred $200,000 to a trust account at First State Bank to fund the trust.

6. On February 25, Norma issued a check to pay Dixon’s funeral expenses of $9,800.

7. On February 26, Norma paid herself the $4,000 executor’s fee specified in Dixon’s will.


8. On February 28, Norma finalized the estate and transferred the balance of the estate’s assets equally between Dixon’s nephews, Shelly Williams and Chuck Fuller

Required:

1. Prepare an estate inventory at the time of Dixon’s death and record the necessary journal entries to create the estate.

2. Prepare journal entries to record the estate’s transactions during February.

Exercise Seven

Use the information from Exercise Six above. Assume that on February 28, 2009, Norma finalized the estate and transferred the balance of the estate assets to Dixon’s nephews, Chuck Fuller and Shelly Williams. Each received one-half of the residual estate.

Required:

1. Prepare the closing entries on February 28, 2009.

2. Prepare the charge-discharge statement for the estate of Dixon Cooper for the period January 28 through February 28, 2009.


Exercise Eight

You are the trustee for the Houdini/Max Trust from the previous Exercise. The following transactions occurred during 2009. Houdini and Max are going to live with Norma Carrell, the trustee and devoted cat lover.

February 18 The Houdini/Max Trust was established at First State Bank by depositing Dixon Cooper’s $200,000 bequest.

February 19 $195,000 was deposited into a three-year certificate of deposit earning 6% a year. Interest is paid semi-

annually. $5,000 was deposited into a money market account paying 4% annual interest. Interest is paid

on the average daily balance for the past year.

February 20 Paid $368 for cat food, cat toys, and kitty litter at Cats R Us.

February 24 Bought assorted cat DVDs for Max and Houdini. The DVDs were a combination of fish, bird, and squirrel movies. The cost of the DVDs was $182.

June 25 Bought $405 worth of cat food, toys, and kitty litter.

August 19 Deposited one-half year’s interest income of $5,850 into the money market account.

December 22 Bought cat food, cat toys, kitty litter, and Christmas presents for Houdini and Max. The cost was $722.

Required:Prepare the necessary journal entries for the above transactions. You may ignore any tax effects.


Exercise Nine

You are serving as the trustee for the Clifford Cooper testamentary income trust. The trust was created by Clifford’s will. All of his assets were transferred to the trust to cover the living expenses of his wife, Juanita. Upon her death, the assets are to be sold, with the proceeds distributed to his brother, Edward. If Edward is not alive when Juanita passes, the proceeds are to go to the Cooper Scholarship in Journalism.

The probate court has ruled that all personal effects and household items could be excluded from the estate. All taxes have been paid, and the following assets remain to be transferred to the trust:

Asset Cost Fair Market Value

Cash $260,000 $260,000

Certificates of deposit 120,000 120,000

Carter Company common stock 55,000 345,000

Trump common stock 75,000 15,000

Lake house in the Ozarks 149,000 342,000 (his share)

Personal residence 226,000 540,000 (his share)

Antique sports car 35,000 53,000

Coin collection 7,000 24,000

Required:

Prepare the journal entries for the creation of the trust.


Exercise Ten

Rufus Holt died on May 1, 2009. He left his entire estate, valued at $6,100,000 to his sole surviving family member, his daughter, Ethel.

Prior to any distribution of assets, Rufus’s estate reflected the following details:

Funeral expenses..................... $10,200

Executor’s fees ..................... 4,500

Estate liabilities................... 145,000

Final Medical expenses............... 22,100

Required:

a. Calculate the federal tax on Mr. Holt’s estate. You may ignore any state-level inheritance taxes and assume that the federal tax rate is 45%.


SOLUTIONS

Multiple Choice Questions

1. c

2. b

3. a

4. d

5. a

6. c

7. b

8. d

9. c

10. a

11. c

12. d

13. b

14. d

15. d

16. b

17. a

18. a

19. b

20.


Exercise One

When she dies, an estate will come into existence. If she has a valid will in effect at the time of death, she will have died testate. If she were to die without a valid will in force, she would die intestate.

No matter the status upon her death, typically, a probate court will appoint a personal representative to take control of the estate’s assets. If she dies testate, then her representative will be the executor of her will. In most cases, the decedent chose this person prior to her death.

If she dies intestate, the court will name the representative, who will be the administrator of the will. Contrary to popular myth, if she dies intestate a governmental entity will not receive the assets of the estate, unless she has no identifiable heirs. Her assets will eventually be distributed to her surviving heirs. However, if she dies intestate, the laws of her state will direct the distribution of assets.

Each state has its own regulations, and a party dying intestate might not have agreed with the state’s distribution ratios. For example, the state might distribute a significant percentage of the estate’s assets to the decedent’s children, when the decedent wanted the entire estate to be assigned to the spouse.

The decedent might have desired to allocate a portion of the estate to charities or outside parties not addressed by the state’s regulations. By dying intestate, the decedent has relinquished the possibility of a unique distribution allocation, and has, by default, chosen the state’s generic asset allocation.

Other issues arise when the decedent dies intestate. For example, the probate expenses faced by the estate are often higher, because of the lack of a valid will. Also, the distribution of the estate’s assets will typically take longer, because of the lack of prior decedent guidance. The court-appointed administrator often takes longer than an executor chosen by the decedent because of such factors as lack of familiarity with the decedent’s assets and devisees, and the additional documentation that often arises in a distribution plan for an intestate decedent.


Exercise Two

1. Devise – ASPCA (E, -SE)................. 125,000

Cash (-A)........................ 125,000

2. Medical Expenses (E, -SE)............... 31,500

Cash (-A)........................ 31,500

3. Cash – Principal (+A)................... 52,500

Assets subsequently discovered (-A) 52,500

4. Cash (+A)............................... 3,000

Interest receivable (-A)......... 2,550

Estate Income (R, +SE)........... 450

5. Funeral Expenses (E, -SE)............... 9,800

Cash (-A)........................ 9,800


Exercise Three

Remaining balance

Beginning cash balance $159,000

1. The Uniform Probate Code (UPC) provides a homestead allowance that takes priorityover all other claims. In Ruth’s state, it is $15,000, so the first $15,000 in cash goes to her minor daughter, since there wasno surviving spouse. The daughter also receives $8,000 in personal effects, since this also takes precedence over any other claims.

$144,000

2. After the homestead allowance and the entitlement for personal effects, the next item to be paid is the costs andexpenses of the estate’s administration, which were $21,000 123,000

3. After the costs and expenses of the estate’s administration, the next itemsto be paid are the expenses of the funeraland the final medical expenses, which were$32,700 ($8,700 + $24,000). 90,300

4. After the expenses of the funeral and the final medical bills, the next category would be debts and taxes with preference under either state or federal law. In Ruth’scase, this would be the $3,600 in past-duereal estate taxes. 86,700

5. After past-due real estate taxes, Ruth does nothave any other outstanding debts. Since no provisions were made to pay off the mortgage, and since Ruth’s daughter appears to be financially secure, the title to the home is transferred to her daughter with the remaining $80,000 mortgage unpaid. If the daughter sells the home, the sales proceeds will be reduced by the funds necessary to pay off the loan.

The remaining $86,700 would be distributed to Ruth’s church, which would then deplete the estate’s funds. The church would not receive the $13,300 difference between the $100,000 bequest and the actual distribution of $86,700. $0


Exercise Four

1. Bond Receivable (+A)................... 100,000

Interest receivable (+A)................ 4,800

Assets subsequently discovered (-A) 104,800

Cash (+A)............................... 6,000


Estate Income (R, +SE)........... 1,200

2. Probate court expenses (E, -SE)......... 900

Cash (-A)........................ 900

3. Dividends receivable (+A)............... 30,000

Estate income (R, +SE)........... 30,000

4. Devise – National Zoo (E, -SE).......... 175,000

Cash (-A)........................ 175,000

5. Medical expenses (E, -SE)............... 27,500

Cash (-A)........................ 27,500

6. Cash (+A)............................... 30,000

Dividends Receivable (-A)........ 30,000


Exercise Five

Juanita Davis, TestatorInventory of Estate Assets

As of the date of Death on April 5, 2009

Description of Property Fair Value

Cash $20,000

Money market accounts 210,000

Cooper Incorporated common stock

205,530

Porsche 911 Carerra 78,000

Condominium in Jackson, WY 1,450,000

Personal residence in Hutchinson, KS

225,000

Black velvet Elvis paintings collection

92,000

City of Alma, AR municipal bonds

24,000

Ski boat 14,500

$2,319,030

Submitted by Byron Ratliff, executor


Exercise Six

1. Estate Inventory

Dixon Cooper, TestatorInventory of Estate AssetsAs of the date of death on January 28, 2009

Description of Property Fair Value

Cash in First State Bank of Denton $4,000

Certificates of deposit, includes $2,000 accrued interest

52,000

Treasury bonds 1,400,000

Interest receivable-treasury bonds 42,000

Personal effects* -

$1,498,000

*The probate court permitted exclusion of Dixon’s personal effects from the estate inventory. Prepared by Ms. Norma Carrell, Executrix, Denton, TX

Journal entries to record inventory

Cash-principal (+A).............. 4,000

Certificate of deposit(+A)....... 50,000

Treasury bonds receivable (+A). . . 1,400,000Due July 1, 2016.

Interest receivable-certificate of deposit 2,000

Interest receivable-treasury bonds 42,000

Estate Principal........... 1,498,000


2. Journal entries to record February activities

1. Cash (+A)............................... 1,460,000

Interest receivable-treasury bonds (-A).............. 42,000

Estate Income (R, +SE)........... 18,000

Treasury bonds receivable (-A). . . 1,400,000

2. Medical Expenses (E, -SE)............... 11,900

Cash (-A)........................ 11,900

3. Cash – Principal (+A)................... 52,000


Certificate of deposit (-A)...... 50,000

4. Devise – Am. Humane Soc. (E, -SE)....... 150,000

Cash (-A)........................ 150,000

5. Devise-Houdini/Max trust account (E, -SE) 200,000

Cash (-A)........................ 200,000

6. Funeral Expenses (E, -SE)............... 9,800

Cash (-A)........................ 9,800

7. Executrix expenses (E, -SE)............. 4,000

Cash (-A)........................ 4,000

8. Devise-Shelly Williams (E, -SE)......... 570,150

Devise-Chuck Fuller (E, -SE)............ 570,150

Cash (-A)........................ 1,140,300


Exercise Seven

1. Closing Entries

Estate principal (-SE) 1,498,000

Estate income (-R,-SE) 18,000

Funeral expenses (-E,+SE) 9,800

Executrix expenses (-E,+SE) 4,000

Medical expenses (-E, +SE) 11,900

Devise – Houdini/Maxine Trust

(-E,+SE)

200,000

Devise – American Humane Society

(-E,+SE)

150,000

Devise – Shelly Williams

(-E,+SE)

570,150

Devise – Chuck Fuller

(-E,+SE)

570,150


2. Charge-Discharge Statement

Estate of Dixon CooperCharge-Discharge Statement

For the period of estate administration,January 28 to February 28, 2009

Estate principal

I charge myself for:

Assets included in estate inventory - total estate principal charge

$1,498,000

I credit myself for:

Funeral expenses paid $ 9,800

Executrix expenses paid 4,000

Medical expenses paid 11,900

Devise paid in cash to Houdini/Maxine Trust 200,000

Devise paid to American Humane Society 150,000

Devise paid in cash to Shelly Williams 561,150

Devise paid in cash to Chuck Fuller 561,150

Total estate principal discharge $1,498,000

Estate income

I charge myself for:

Estate income received during estate administration

$18,000

I credit myself for:

Payment of estate income to Shelly Williams 9,000

Payment of estate income to Chuck Fuller 9,000

$18,000

Respectfully submitted, Norma Carrell, Estate Executrix, February 28, 2009.


Exercise Eight

2/18 Cash (+A)............................ 200,000

Trust fund principal (+SE)....... 200,000

2/19 Money market account (+A)............ 5,000

Certificate of deposit (+A).......... 195,000

Cash (-A)........................ 200,000

2/20 Trust fund expenses (E, -SE)......... 368

Cash (-A)........................ 368

2/24 Trust fund expenses (E, -SE)........ 182

Cash (-A)........................ 368


Cash (-A)........................ 405

8/19 Cash (-A)........................... 5,850

Trust fund income................ 5,850


Cash (-A)........................ 722


Exercise Nine

AssetCash (+A) 260,000

Certificates of deposit (+A) 120,000

Carter Company common stock (+A) 345,000

Trumpe common stock (+A) 15,000

Lake house in the Ozarks (+A) 342,000 (his share)

Personal residence (+A) 540,000 (his share)

Antique sports car (+A) 53,000

Coin collection (+A) 24,000

Trust fund principal (+SE) 1,699,000

To record receipt of property transferred from executor.


Exercise Ten

Funeral expenses..................... $10,200

Executor’s fees ..................... 4,500

Estate liabilities................... 145,000

Final Medical expenses............... 22,100

Required:

a. Calculate the federal tax Mr. Holt’s estate. You may ignore any state-level inheritance taxes and assume that the federal tax rate is 45%.

Fair value of gross estate............ $6,100,000

Executor’s fees....................... 4,500

Funeral expenses...................... (10,200)

Estate liabilities.................... (145,000)

Final medical expenses................ (22,100)

Estate tax exemption.................. (3,500,000 )

Taxable value of estate............... $2,418,200

Estate tax due (45% of $2,422,700).... $1,088,190

Ethel’s net inheritance............... $5,011,810


ch22 beams10e tb

Documents

amended uniform probate

following statements

remaining intestate

days of appointment

probate process

probate laws

following phrases

uniform entitlement