the date of death, but it is not necessary to divide the inactive bank accounts by paying to income out of them such part as represents interest and paying the balance to principal, unless there are insufficient funds in the general account to meet the amount remaining in the Income account. The final entry showing the transfer of the remainder of the assets of the estate to the trustee is made as follows, the amounts being the balances in each account: Income Estate Corpus Inventory $...... $...... There is now no balance in any account and the books should be ruled off as finally closed. The executor should present to the court vouchers showing that he has made the final distribution directed by the court and should have his executor's bond canceled. If he has been named trustee also, he assumes his duties in that capacity, entering into entirely new relations with the court and the beneficiaries under the trust. As trustee he should open a new set of books. REVIEW QUESTIONS How are 1. What must be done preliminary to closing the books? any deferred expenses reduced to their present value? 2. How is the synoptic kept in balance? 3. What subsidiary records must be balanced? 4. How is the bank account reconciled? 5. How are the closing entries best prepared? 6. How are the debits for corpus obtained? 7. How are the credits for corpus obtained? Why is the Inventory account not closed? 8. How does the realization account facilitate the preparation of the schedules? 9. What are the other corpus items for which the executor is to be credited? How are the accounts showing these credits to be closed? 10. What items make up the debit against the executor on account of income? Where are the credits obtained? 11. What reconciliations should be made? 12. If the accounting of the executor is approved by the court, what follows? 13. To what is the allowance for expense of accounting charged? What is the entry? 14. How is the executor's commission computed? How is it prorated between corpus and income? 15. When is interest allowed on legacies? Against what is it charged? 16. What is done with the balance of corpus and income in this case? What are the closing entries? What should the executor do to terminate his office? CHAPTER LXXII PRINCIPLES OF TRUSTEESHIP ACCOUNTING § 643. Preliminary Matters The first duty of a testamentary trustee on taking over the assets of an estate is to examine the accounts of the executor sufficiently to satisfy himself that he is receiving all of the assets to which he is entitled. Immediately thereafter he should have transferred to his name as trustee all registered bonds, notes, and certificates of stock. The new issues or changed record should be in the name of " Trustee." If there are two or more trustees the transfers should be to the names of all. The trustee should see that adequate insurance is carried and should make certain that all taxes assessed against the estate assets have been paid so that the carelessness of someone else may not reflect on him. It is necessary for him to study the investments of the estate, ascertaining that they are all proper investments for a trustee. It devolves upon him to be certain: first, that the investments are secure, so that the principal of the trust may be preserved safely for the remainderman, and secondly, that they are productive, so that they will yield the current rate of interest to the tenant. If there is an unnecessary amount of uninvested cash the trustee should invest it as soon as possible. He will be liable for interest on uninvested funds for any period during which he was not functioning as fully as he should have been. § 644. Trustee's Duties Less Involved Than Executor's The duties of the trustee are less varied than those of the executor. The functions of the executor include the realization of the cash value of the assets and the payment of debts owed by the decedent as well as the care of the assets and the distribution of the legacies, but the trustee's duties are in general only the care of assets and the division of income. They have already been discussed in detail. (See § 411.) Briefly they include the: power to demand, receive, and sue for the trust property, for any income accruing on it, to invest the funds and lease the real estate; to take proper measures to keep the real estate repaired and insured, to defend suits against him in respect to the property, or against him as trustee; to disburse and distribute the property.1 The general principles laid down for the accounting of administrators and executors must be followed by trustees, and this chapter will not repeat what has been said in earlier chapters, but will simply call attention to the differences resulting from the fewer complications in the activities of trustees. § 645. Principal and Income of Trusts The trustee takes over the corpus of the estate from the executor. During trusteeship this corpus is called the "principal." The same general principles apply to the division of trust funds between principal and income as have been set out in connection with the work of the administrator and executor. (See Chapter XXXV.) The problems of classification are not nearly so frequent or so difficult in the case of the trustee. § 646. Sale of Capital Assets Perhaps the most confusing of the questions which arise is that having to do with profit or loss on the sale of capital 1 Loring, A Trustee's Hand Book (3rd ed.). assets. In administratorship and executorship accounting we called these items "gain on realization" and "loss on realization." Realization is not one of the functions of the trustee, who is supposed to receive the estate from the executor fully realized except for such investments as are permitted to trustees. It will, however, at times be necessary for the trustee to sell certain of the estate assets because they have ceased to be secure investments, because they no longer yield an adequate return, or for some other reason. These sales will seldom be made for the valuation at which the assets were carried in the inventory of the estate in case they were turned over to the trustee by the executor, or for exactly their cost to the trustee if he purchased them. Gains and losses of this type are not income or a charge against income.2. The theory (see § 312) is that in the case of inventoried assets it is not a certain amount of money which makes up the principal but the assets themselves for whatever they are worth, and that in the case of assets purchased by the trustee and later resold by him, the increment or loss is an increase or decrease in the principal of the trust rather than an item of income or a reduction of income resulting from the normal course of investment. The general rule is that any unusual or extraneous gain or loss, other than the usual yearly income and charges against that income, falls to the principal of the fund. § 647. Betterments, Repairs, and Replacements Expenditures for repairs which are necessary to maintain property in its previous condition are chargeable to income, but repairs and additions which increase the usefulness or the value of property are charged to principal. This rule is not 2 In this connection it is well to remember that income from the standpoint of the division of funds between a tenant and a remainderman is not necessarily the same as income from the standpoint of the existing income tax law. (See also § 315.) |