Trust Distribution

Thu Oct 14 09:19:57 EDT 2010

Wow, Thanks Tom! I appreciate the time it took to write that reply.

The trust, and kids are located in Australia and is considered a discretionary trust. Basically the only obligation is to distribute income to the beneficiaries at the end of the year. There is no obligation to make the monthly distribution, but not doing it on a monthly basis will miss out on 10% interest on savings for the kids. As the sole trustee (and also a beneficiary) I have full discretion over distributions there are no problems with doing it this way. And I think the way things work in Aus are that cash not distributed to the beneficiaries are taxed at the marginal rate of the trustee (me).

So in terms of the distributions we can miss the liability step as there is never a true liability, except I held a meeting of trustees (ie me) wher I proclaimed that the monthly payments would occur. I just do the bank transfer and if I miss a payment due to lack of funds, I hold a trustee's meeting with myself and proclaim that months payment not to happen, so not a problem at all in that sense. And the settling amount for the trust was $10, pretty much negligible. All distributions are made from profits.

So in this case you show the distributions as an expense? Should the trading books be seperate to the trust books? I would like to be able to see the profit of the business without distributions in there as an expense.

Thanks again

----- Original Message ----- 
  From: Thomas Bullock 
  To: Alex Hill 
  Cc: gnucash-user at gnucash.org 
  Sent: Thursday, October 14, 2010 8:34 PM
  Subject: RE: Trust Distribution

  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 

    To: Alex Hill 

    Cc: gnucash-user at gnucash.org 

    Sent: Thursday, October 14, 2010 1:39 AM

    Subject: Trust Distribution

    Hi Alex,

    From what you say in your email (below the dash line), it seems to me you are managing an ongoing activity in which you have to make distributions to recipients (beneficiaries) on a regular basis, because funds are owed them.  You also mention an income/expense activity which suggests either a business or a liquidation of assets of an estate.  

    What is unknown is the basis/reason dictating why you are distributing assets on a monthly basis.  The reply to your question is an accounting one.  But that accounting question activity is shaped by what dictates what you are doing.  In my experience if it is an estate that is being disbursed, that usually is not done until all liabilities to non-beneficiaries have been determined in amount and paid to those claimants.  What is left after paying creditors are net assets, of which the beneficiaries are the owners.  In that arrangement,  your notion of debiting equity and crediting cash works.  What is unknown to this list (and therefore suggests a note of risk) is why you distribute before the funds are on hand (you say they are dependent upon income, which always is problematical in advance of receipt).

    If you are administering a trust, then the terms of the trust must be specified in order to know what you are supposed to do when.  If income is coming in from the trust's activities, then it suggests that in the short run the trust is an ongoing activity and the amounts owed  beneficiaries are really liabilities of the trust.  If that is the reality, then you would have liabilities offsetting trust assets.

    If you supply a clear statement of your situation, it will be easier to determine the proper way to record the transactions you describe.

    HTH,

    Tom Bullock

    -----------------------------------------------------------------------------------------------------------------------------------------------------------------

    Date: Wed, 13 Oct 2010 08:53:13 +0800

    From: "Alex Hill" <alex_hill at arach.net.au>

    Subject: Trust Distributions

    To: <gnucash-user at gnucash.org>

    Message-ID: <4FEAACFA00154A3FAB1544ED20FC1CA2 at ToshibaLaptop>

    Content-Type: text/plain;     charset="iso-8859-1"

    I sent this last night but I didnt see it come through the mailing list, so my apologies is people receive it a second time.

    This is more of an accounting Question then a specific GnuCash question, but could do with some info on how to structure it in GnuCash anyway.

    I have a trust and am making monthly distributions to beneficiaries. Would I be right in doing the following:

    Equity (Beneficiary 1)        Dr       x

    Equity (Beneficiary 2)        Dr       y

    Cash                                Cr                 x+y

    (or seperate transactions for each distribution).

    So in this this situation the equity accounts with have a Dr balance (shown as a negative in gnucash) during the year. Then at the end of the year I would offset these accounts against the P&L Summary when closing the books like so:

    P&L Summary (temporary account used in closure)      Dr       x + y

    Equity (Beneficiary 1)                                                 Cr                     x

    Equity (Beneficiary 2)                                                 Cr                     y

    Then any residual in the P&L summary account would be distributed in a similar fashion?

    I think this is right, but am not quite sure.

    Thanks,

    Alex