Accounting for Trusts and Estates (Portfolio 5202)

Alan Acker

Of Counsel

Carlile Patchen & Murphy LLP

At a glance

I. Introduction
II. History of the trust and its enforcement
III. Defining the problem
IV. Duties of the fiduciary
V. Defining income and principal
VI. Uniform prinicipal and income acts
VII. When the right to income begins
VIII. When the right to income ends
IX. Allocation of receipts to principal and income
X. Allocation of disbursements to principal and income
XI. Transfers between principal and income
XII. Trustee's power to adjust under the 1997 uniform principal and income act
XIII. Trustee's power to convert to unitrust
XIV. Presentation of fiduciary accounts
XV. Uniform prudent investor act


Portfolio 5202, Accounting for Trusts and Estates, 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 is designed to serve the needs of primarily two categories of persons: fiduciaries (trustees and executors) and their accountants. 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. The 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, the 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. The Portfolio also suggests how to present fiduciary financial information based on guidance from the National Committee on National Fiduciary Accounting Standards. Finally, the Portfolio discusses transfers between income and principal from investments under the Uniform Prudent Investor Act.

The 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. However, the Portfolio does not discuss tax rules in detail. Readers seeking more information on tax aspects of the topic should consult Acker, 852-2nd T.M., Income Taxation of Trusts and Estates, in the Estates, Gifts, and Trusts Series of Tax Management Portfolios.

This Portfolio may be cited as Bloomberg Tax Portfolio 5202, Acker, Accounting for Trusts and Estates (Accounting Policy and Practice Series).

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