Trust Distribution

[Thomas Bullock]

Alex,

Thank you for your additional information.  That helps.

Please consider these ideas:


1.      Books are kept always from the perspective of the entity whose transactions they are.  To the extent you have described what is happening, the trust is separate from your children.  Each of them is its own entity separate from the trust.



2.      For some reason (which likely is specified in the trust document establishing its legal existence)  the trust has an obligation to make regular payments to those it is obliged to pay.  The purpose of the trust document is to create a legal entity that exists separately from you in the eyes of the law (both civil and tax, if, at least, you and the trust exist in the US).



3.      The basic bookkeeping entry when the trust is established (from the moment the trust documents are signed) would be debit assets receivable ($10,000), credit trust equity ($10,000).



4.      As soon as the assets receivable is collected (say, you put some cash into the trust) , the entry is debit trust cash, credit assets receivable.   Say, you transfer $10,000 into the trust.



5.      Because the trust document sets up the obligation to make distributions to your children and it also has assets that it puts at risk in order to earn income (investments in stocks, mutual funds, bonds, etc), you will set up income accounts for the investment earnings (interest, dividend income).   Offsetting the earnings are the amounts distributed to your children.  Thus recording the income received would be debit cash, credit the various types of income accounts.



6.      At the time of recognizing the obligation to make a distribution, the entry conceptually is debit distribution expense, credit distribution liability.  This entry offsets part of the income earned in the trust income statement.



7.      When actual distributions are made (checks are cut and mailed), the distribution transactions would be booked as debit distribution liability and credit cash in the amount of the checks written.



8.      At trust year-end (the end of its 12-month cycle), the annual income statements show total earnings for the period as well as the total distributions made to that point.  Depending on trust requirements, the excess of income over expense could be reclassified to a long-term liability to the children.  That entry would be debit distribution expense, credit long-term liability.  In this option, the trust specifies that at some future point during their life-time the trust corpus is distributed to the children.



9.      Or the trust may not have the stipulation expressed in item 8.  Instead it may say that undistributed earnings are to be left in the trust.  In that event the year-end closing of the books would cause the net income to be transferred to trust retained earnings.


So, yes, the distributions are liabilities and are not to be booked directly into trust equity.  It may seem like a lot of work to take this approach.  I laid it out above so that you could follow the logical steps based in the nature of the requirements set up by the trust document.  Of course if your actual document makes different requirements, then you would have to adjust the above to match your trust document .

You might shortcut the work by setting up all monthly distributions in one annual entry at the beginning of the year and then book the monthly checks as they occur during the year.  The above approach records recognition in the books of the trust obligation and its discharge.  If you are subject to making annual reports, then you definitely want your books to show all aspects of the trust document.  These are conveniently done by being able to prepare accurate balance sheet and income statements.

If you are in the US you will be subject to IRS interests in trust entities.  Be sure you have read what it has to say about trust reporting and any tax returns required.

HTH,

Tom  Bullock



From: Alex Hill [mailto:alex_hill at arach.net.au]
Sent: Wednesday, October 13, 2010 8:44 PM
To: Thomas Bullock
Cc: gnucash-user at gnucash.org
Subject: Re: Trust Distribution

The trust is operating as a business, that is correct.

The reasons for the monthly distributions are that the beneficiaries are my children, and they both have savings accounts which require a minimum deposit each month to receive interest. The monthly distributions are only small (minimum amount to receive interest) and there should be plenty of funds left over at the end of the year (especially as the business is service based so inputs are price insensitive).

So theoretically the monthly distributions are simply advanced distributions from what they would be owed at the end of the period. Would you use liability accounts for this?

Thanks for your help.
Alex
----- Original Message -----
From: Thomas Bullock<mailto:tbullock at nd.edu>
To: Alex Hill<mailto:alex_hill at arach.net.au>
Cc: gnucash-user at gnucash.org<mailto:gnucash-user at gnucash.org>
Sent: Thursday, October 14, 2010 1:39 AM
Subject: Trust Distribution

Hi Alex,