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The Principal and Income Act rules that govern fiduciary accountings are not intutitive. They require an expertise in both accounting principles and the law. Below are some typical issues that arise in fiduciary accountings. if you are an attorney advising clients on fiduciary accounts, and don't know the answer to the questions these issues raise, you might want to employ our services. The answers appear after the quiz.
1. Facts: (P&I): H died. He was survived by his second wife, W, and two children from his first marriage.
It took one year to probate H's estate. During that year, H's estate had the following income and expenses:
Income:
Interest Income $20,000
Rent Income $40,000
Expenses:
Administration Expenses $10,000
Depreciation $20,000
Upon completing probate, the Executor distributed H's assets as follows:
i) $10,000 -- to H's uncle
ii) H's apartment building -- to H's brother
iii) The residuary in trust; the trust provides 25% to H's children outright; 75% to a QTIP testamentary trust
The testamentary trust provides for a typical QTIP arrangement: all trust income goes to W. On W's death, the remainder goes to H's children from his first marriage.
Query: What is the estate's taxable income (assume no distribution deduction; disregard exemption)?
2. Same facts as above.
Query: What is the estate's "net income" for principal and income ("P&I") purposes?
3. Same facts as above.
Query: When the estate distributes $10,000 to H's uncle, must the estate pay the uncle (i) $10,000 or (ii) $10,000 plus the interest earned on $10,000 during the one year of probate administration? Would your answer be different if the $10,000 were distributed more than one year after H's death? P.C. §12003.
4. Instead of funding a $10,000 specific gift to H's uncle, H's will provides for a pecuniary formula lead bypass trust of $2,000,000. The estate funds the $2,000,000 pecuniary lead bypass trust two years after H's DOD.
Query: Is interest owed on the $2,000,000 allocated to the bypass trust?
5. Same facts as above.
Query: What rate of interest must the estate pay? P.C. §12001.
6. Same facts as above. Assume it takes two years to distribute the apartment building specific gift to H's brother.
Query: Must the estate also distribute to the brother interest on the value of the apartment building for the final year of the two year probate delay? P.C. §12002(a).
7. Same facts as above.
Query: When the apartment building is distributed to H's brother, must the estate also distribute to the brother the rental income earned during probate administration? P.C. §12002(b).
8.
Prior to distributing the apartment building to H's brother, during the probate period, the fiduciary
(a) received (i) $10,000 of gross apartment rent income, and (ii) $8,000 of dividend income from the balance of the estate's securities;
(b) paid (i) $3,000 of expenses directly related to the apartment building, and (ii) $4,000 of general estate expenses, i.e. legal and accounting fees, fiduciary fees, etc.
Assume the apartment building represented 25% of the total value of all probate assets. The 75% balance of the probate assets took the form of NYSE securities.
Query: When the fiduciary distributes the apartment building to H's brother, how much additional income does the fiduciary distribute to the brother:
(a) $6K [i.e. $10K minus the $3K of apartment expenses, plus $1K (i.e. ¼ of the $4K of general estate expenses]; or
(b) $7K (i.e. $10K minus just the apartments direct expenses of $3K)?
In other words, for P&I accounting purposes, does the fiduciary charge a portion of the estate's general administration expenses against the income of specifically gifted assets? P.C. §16340(a)(2).
9. Same facts as above, except the apartment expenses exceeded the apartment gross rent income, by $5,000.
Query: Did the fiduciary (a) have to pay the $5,000 of expenses that exceeded the building's income, or (b) could the fiduciary have insisted that H's brother who will inherit the apartment building, pay the $5,000 of expenses not covered by the rent income? P.C. §12002(c)
10.
Same facts as above.
Query: If the fiduciary distributed the apartment building to H's brother within one year of H's death, how would you account for the $5,000 of expenses that exceeded the building's rent income? P.C. §12002(c).
11. Same facts as above.
Query: If the fiduciary distributed the apartment building to H's brother more than one year after H's death, how would you account for the $5,000 of expenses that exceeded the building's rent income? P.C. §12002(c).
12.
Facts: At the time H died, $5,000 of rent was accrued but unpaid on the apartment building. The $5,000 was received by H's estate 120 days after H died.
Query: Is the $5,000 cash rent received (a) principal, or (b) income?
13. Same facts as above.
Query: Does the $5,000 pre-death rent accrual go to (a) H's brother, the beneficiary of the specifically gifted apartment building, or (b) to the residuary trust established for H's children and H's wife? §16340(a)(1) and §12002(b).
14.
Facts. Following H's death, during the probate (or during the "administrative trust" period if H had a living trust), the fiduciary paid (a) $100 of legal fees, (b) $200 of CPA fees, (c) $300 of fiduciary fees, (d) $400 of other administration expenses, (e) $500 of interest on unpaid estate taxes.
Query: Does the fiduciary charge any portion of the above expenses against the income or principal of the apartment building specifically gift to H's brother? §16340(a)(2).
15 Same facts as above.
Query: Does the fiduciary charge any portion of the above expenses against the $10,000 pecuniary amount gift to the uncle? §16340(b).
16. Same facts as above.
Query: Does the fiduciary charge any portion of the above expenses against the residuary gift to the testamentary trust? §16340(c).
17.
Facts: H died and after paying all administration expenses, and applying the marital deduction fractional share formula clause, using date of death values, the trustee's "target" for (a) the QTIP trust is $9,000,000, and (b) for the Bypass Trust is $1,000,000. The QTIP benefits W#2. The Bypass Trust benefits H's children from his first marriage. W#2 and her stepchildren do not get along. During the administration period, the trust produces net fiduciary income of $100,000. Both trusts are "simple" trusts that require the trustee to distribute all income currently. Assume QTIP Trust and the Bypass Trust had the following values:
A B I&A/DOD Values At H's Death C Values 15 Months Later When Adm done & Trustee Plans To Distribute $100,000 Income
1 Bypass Trust 1,000,000 3,000,000
2 QTIP Trust 9,000,000 7,000,000
Query: Fifteen months after the DOD, the trustee distributes the $100,000 of fiduciary income. Does the trustee distribute the $100,000 of fiduciary income (a) 10% to the Bypass Trust and 90% to the QTIP Trust; or (b) 30% to the Bypass Trust and 70% to the QTIP Trust? §16341(a) and (c).
16. Facts: Same facts as above, except the Trust owned Blackacre and Whiteacre. At DOD, Blackacre had an equity of $1,000,000. Whiteacre had a $9,000,000 equity. Per the formula clause, using DOD values, the Bypass Trust target amount equals $1,000,000 and the QTIP Trust's target amount is $9,000,000. See Column B in the below table. Fifteen months after the DOD, the fiduciary having completed the post death trust administration, funds the Bypass Trust and the QTIP Trust as shown in Column C in the below table.
A B I&A/DOD Values At H's Death C Values 15 Months Later When Adm done & Trustee Plans To Distribute $100,000 Income
1 Bypass Trust 1,000,000 3,000,000 Equity ($9M FMV minus $6M TD)
2 QTIP Trust 9,000,000 7,000,000 Equity ($13M FMV minus $6M TD)
Query: Does the trustee distribute the $100,000 of fiduciary income (a) 10% to the Bypass Trust and 90% to the QTIP Trust, using DOD values; or (b) 30% to Bypass Trust and 90% to QTIP Trust, using net date of distribution values? or (c) 9/22 to the Bypass Trust and 13/22 to the QTIP Trust, using gross date of distribution values? §16341(a).
17. Same facts as above.
Query: On the distribution date 15 months after the DOD, the fiduciary retains $20,000 of the $100,000 of fiduciary income. Twelve months later, when the gross values of the assets have changed, does the fiduciary distribute the retained $20,000 per (a) the assets FMV on the date the $80,000 was distributed, i.e. 15 months after DOD per Column C in the above table, or (b) the assets' FMV 27 months after the DOD when the fiduciary makes the second distribution of the $20,000 of fiduciary income previously retained? §16341(b).
P&I Area #2
[When an income interest in a trust BEGINS or ENDS, what property is principal that goes to the remaindermen, and what is income? PC §16346 and §16347]
Facts (Apportionment When Decedent Dies Or Income Interest Begins; §16346): H dies on January 5, 2006. W#2 is the beneficiary of her deceased H's estate plan that provides her with a typical mandatory income distributions Bypass/QTIP trust arrangement. W#2 was H's second wife. The remainder beneficiaries are H's children from his first marriage. H's children get the principal of the Bypass and QTIP trusts when W#2, their stepmother, dies. W's estate plan leaves everything to her children from her first marriage. H and W's children despise one another.
(a) H is owed unpaid periodic rent of $100,000 due on January 1, 2006. The $100,000 of rent is paid on January 10, 2006, five days after H's DOD. See diagram at end of materials.
(b) H owned IBM stock, which had declared a dividend prior to H's DOD, to shareholders of record prior to H's DOD, but which is payable after H's DOD; H's IBM dividend is $30,000.
(c) H is owed a big tax refund plus $50,000 of interest from the IRS. $20,000 of the interest had accrued at H's DOD. The IRS pays the $50,000 interest after H died.
Query: According to California's P&I statute, is "rent" an "income receipt"? PC §16356.
18. Same facts as above.
Query: Is the $100,000 "income receipt" of rent due on January 1, prior to H's death, but received after his death on January 10, (a) "principal" which will ultimately go to H's children as remaindermen, or (b) "income" due W#2, which will go to her children according to the terms of her will? §16346(a)
Query: Is the IBM dividend (a) an income receipt, or (b) a principal receipt? §16350(b).
19. Same facts as above.
Query: Is the IBM dividend received after H's death, but which had a record date prior to H's death, (a) "principal" which will ultimately go to H's children as remaindermen, or (b) "income" due W#2, which will go to her children according to the terms of her will? §16346(b) & (c).
20 Same facts as above.
Query: Is "interest" received (a) an income receipt, or (b) a principal receipt? §16357(a).
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