How to Classify Estate Distributions?

[rsbrux at yahoo.com]

.
Message: 3
Date: Thu, 23 Sep 2010 15:55:51 -0400
From: Thomas Bullock <tbullock at nd.edu>
Subject: RE: How to Classify Estate Distributions
To: "gnucash-user at gnucash.org" <gnucash-user at gnucash.org>
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    <525991A370787847B99131C6690E08492A2535A2CF at ICE-MBX-1.ice.nd.edu>
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Date: Thu, 23 Sep 2010 03:28:55 -0700 (PDT)

From: "rsbrux at yahoo.com" <rsbrux at yahoo.com>

Subject: How to Classify Estate Distributions?

To: gnucash-user at gnucash.org

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Please excuse my posting this here.? It is really more a question about accounting rather than one about GnuCash, but I have searched the web diligently without finding an answer and hope that another GC user can give me a tip.

I am preparing the accounting for my mother's estate using GC 2.29 and can't figure out what to do with the distributions to beneficiaries.? The forms I have found online treat distributions as a top level account.? However, even if I do that (violating the oft-cited advice that one should create sub-accounts instead of adding to GC's default top level accounts) I still have to give the account a type.? There are 3 possibilities in the drop-down list which seem as though they might apply:

- Expense

- Liability

- Account Payable

but none seem quite right.

What has anyone confronted with a similar situation done?

TIA!



[<Tom:>]





[<Tom:>]



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

Message: 4
Date: Thu, 23 Sep 2010 16:34:37 -0400
From: Thomas Bullock <tbullock at nd.edu>
Subject: RE: How to Classify Estate Distributions?
To: "gnucash-user at gnucash.org" <gnucash-user at gnucash.org>
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    <525991A370787847B99131C6690E08492A2535A387 at ICE-MBX-1.ice.nd.edu>
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Hi rsbrux,

Your statement below leaves unclear what your perspective is from the standpoint of GnuCash.  Are you using/managing the estate using a separate set of books just for the estate?  Or are you recording the estate you are managing into some other copy of GC, such as perhaps your own?

As an accountant I would caution you not to commingle the estate with any other entities!  Depending on the governmental jurisdiction you are required to report to and the kinds of reports required, keeping the estate in its own set of books seems to me to be by far the prudent course to follow.  Also, in many cases estates can take from 1 to 2 or more years to wind down.

Assuming that you do have a separate set of books for the estate, then at what point in the estate settlement are your questions being asked?  When you say distributions are you talking about settling debts of the estate?  That is, are you talking about paying estate liabilities?  Or are you at the end of the process and now are asking about dividing up the estate corpus and settling an amount on each heir based on the terms of a will?

An executor generally has at least 3 phases to deal with:

1.      Discovery of assets and their proper valuation at time of death (what were the holdings of the estate, where located, what appraisals are needed);  discovery of liabilities (what did the estate owe to whom, make public notice to enable creditors to submit timely claims in legally required ways);

2.      Reduction of the balance sheet of the estate to just net assets (pay all legal debts, which may involve liquidation of non-liquid assets to enable debt payment);

3.      Distribution of net assets (done only after completion of steps 1 and 2, and not infrequently only after a court has approved the work done in steps 1 and 2).

I will understand better the thrust of your question when you can state them in the context of what phase of the process you are presently asking them from.  If you are in phase 1, you don't want to be making any payments to anyone, except as directed by court authority.

When in phase 2, if liabilities exceed assets, then payments have to be made,  but only on a prorated basis.  That is because there are hierarchies in claims and it may be that some creditors are preferred over others.  So a court likely will guide the payment of assets per the documents you supply to the court.  Especially where liabilities exceed assets you want the protection of the court that its approval of distribution amounts affords you.

Once phase 2 has been properly completed, then you have to follow the terms of the will or other instrument guiding distribution of assets.  In this case the term "distribution" usually means final awarding to the heirs the portion of the estate each is entitled to per the terms of the authorizing document.  In phase 2 "distribution" is a general term that could mean simply paying a vendor the amount owed him.

If you are in phase 3 and phases 1 and 2 have been completed properly, then the remaining assets are reflected in the accounting equation:  Assets equal Equity.  There are no more liabilities.  Whatever you named the Equity segment of the balance sheet (Equity, Estate Corpus, Residual Assets, etc), you simply write checks (assuming all assets have been reduced to cash) from the Estate bank account to each of the heirs.  The entry then would be: Debit Estate Corpus (decrease), Credit Cash (decrease).   When all checks have cleared, Assets = zero and Estate Corpus equals zero.

HTH

Tom Bullock


Many thanks to all who responded!

The tip to record the distributions as reductions in equity was what I needed.

Tom, I am now in phase 3 of your description.  The debts are paid, I am 
referring to what you call "distribution of net assets".  And yes, I 
have a GnuCash file dedicated strictly to the estate books.

Regards,
Roger