Accounting Concepts and Definitions - Hull on Estate and Succession Planning #121
This week on Hull on Estate and Succession Planning, Ian and Suzana talk about accounting concepts and definitions after receiving requests from listeners to outline a more general framework for estate administration.
Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.
Accounting Concepts and Definitions - Hull on Estate and Succession Planning Podcast #121
Posted on July 16, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #121 of our podcast on July 15th, 2008.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.
Ian Hull: Hi, Suzana.
Suzana Popovic-Montag: Hi there, Ian, how are you today?
Ian Hull: I’m great. Just want to remind everyone to please feel free to give us a call on our call-in line, 206-457-1985.
Suzana Popovic-Montag: And the number of course, is also in our show notes along with our e-mail address which is hullandhull@gmail.com. And of course you can visit our blog at estatelaw.hullandhull.com as well.
Ian Hull: So we’ve been having some great responses from our feedback line, both by the phone and by the e-mail, and we try to answer as many, well we always answer every single one of the inquiries, it’s just a question of how fast we get to it. This week I just wanted to start off with a response to a general inquiry we got on the e-mail about the whole series that we’ve been doing on the accounts. The comment that was made is, is that we are going through what are technical legal issues and they weren’t complaining in the e-mail but they wanted us to maybe recap a little bit in terms of the general framework of estate accounts, and in particular, maybe drill down on some of the core concepts and definitions, more from a definitional standpoint. So, as we started off in our podcasts in this little mini-series, we reminded everyone to first go to the Will or the trust itself. That’s an important starting point.
Suzana Popovic-Montag: And then you want to also of course, check whether there are any Court Orders that have been made, somehow interpreting either the Will or the trust documents so that it may mean something a little different than the black and white that’s actually contained in the document itself.
Ian Hull: And then backing down, of course, drilling down on the main documents and that is if there are prior accounts in the past or prior judgments.
Suzana Popovic-Montag: And then you’re going to look at starting with an original list of the assets that comprise the trust and how they were actually broken down in terms of 1iquidity and the nature of the assets that are in there.
Ian Hull: So the best typical page we see in a formal pass of accounts are the summary pages itself and that’s an important document within the document itself, but the next core listings are what are typically known as the capital receipts.
Suzana Popovic-Montag: And that of course, is followed by the capital disbursements.
Ian Hull: And again, we’re focusing on definitions today, and receipts, of course generally, are both capital, whether it’s both capital and income beneficiaries, you’re going to see capital receipts and disbursements. And with respect to that you’re going to see revenue receipts and disbursements in terms of a format of the accounts. But a capital receipt…
Suzana Popovic-Montag: A capital receipt itself will include all of the monies that have been realized on the realization of original assets in the trust or the Will and the profits on the sale of any investments that have been made by the executors or trustees.
Ian Hull: Now, with regard to staying with definitions and receipts, we turn to, of course, the concept of revenue receipts.
Suzana Popovic-Montag: And just to be clear, then Ian, that’s the distinction between a capital receipt when there’s both a capital and income beneficiaries in a trust and that’s really the only situation where a trustee or an executor has to break that down, otherwise we will just see receipts and disbursements.
Ian Hull: And so the revenue receipt itself, it’s really just a statement of revenue, money coming in and includes income that’s been received on the original assets, on investments that have been made by the executors. And these type of receipts are generally interest and dividends and the entries usually need to contain sufficient information so you can find out where the receipt comes from, what asset it has been generated from, whether it’s capital or whether it’s from the investment account.
The next thing that we talk about is, of course, we’ve talked about the general assets that are there, that’s like the inventory so to speak. Then we’ve talked about the capital receipts. Then we’ve talked about revenue receipts. The other thing, of course, is what goes out, and that’s disbursements.
Suzana Popovic-Montag: And the disbursement account should typically show to whom the money was paid out and on what account it was paid, with enough detail in there to make the item self-explanatory and, of course, indicate the amount that was ultimately paid.
Ian Hull: So all vouchers are typically numbered and so when you see formal accounts, you’ll see a numbering system so every single entry is actually numbered itself.
Suzana Popovic-Montag: And then in terms of the definition for the capital disbursement account, that’s a statement of all the disbursements that have been made including the payment of debts or funeral expenses, legacies that are provided for in the Will or the trust, and expenses that are related to things like appraisals and valuations for those assets, as well as solicitor’s fees and other disbursements that relate to the actual initial administration of the estate.
Ian Hull: So in terms of the out and we’ve talked about the in and part of the out, the other part of the out is, of course, revenue disbursements. And that is the statement of the income where money goes out, reflecting payments out of income such as income tax, that’s an easy example. Or taxes payable on capital gains on the date of death when you file your terminal return, that’s typically a central tax that is paid and dealt with. And in our last podcast, of course, we talked about the investment account itself and the form of it.
Alright, now we’ve wanted to sort of go through this analysis and this sort of definitional approach today because we are coming to, nearing the end of our discussions on how we are to account as executors. And one of the fundamental things that we’ve talked about throughout is an important question and that is, do the accounts balance?
Suzana Popovic-Montag: And when you say that, Ian, I guess you’re suggesting or questioning whether the total of the capital in the revenue receipts, less the total of all the capital in the revenue disbursements will actually equal the investments on hand and the balance in the bank account. And that’s the formula to make sure that the accounts do, in fact, balance.
Ian Hull: I’m a bit mathematically challenged, let’s break that down just one more time. So we take, to make sure (a) we need the accounts to balance, as best we can. That’s the first thing a judge looks to when they pass accounts, and actually beneficiaries do. So if I’m trying to balance the account, I take the total of what we’ve called the capital, that’s a total of what came in, and take all of the capital receipts plus all of the revenue receipts. And then what do I do? So I’ve got those two items added up.
Suzana Popovic-Montag: And again, if you don’t have a distinction between income and capital beneficiaries, if you have an outright distribution, then you’re really just looking at the receipts. So capital receipts and revenue receipts, less the total of capital and revenue disbursements, so everything that’s come in, minus everything that’s come out, should equal what you have invested on hand, together with the balance in the bank account.
Ian Hull: Alright, so that is really, I mean, we can’t overemphasize the importance of that because really the minimum expectation of the parties is to do that.
Suzana Popovic-Montag: And that, I guess, then takes us to the actual reason that most trustees or executors will in fact prepare formal accounts in addition to, of course, getting the Court’s stamp of approval, and that is the heading of compensation.
Ian Hull: And that’s really, I guess that’s the second last thing we want to talk about in this series is compensation. We’re going to talk about and continue to talk about compensation throughout our various podcasts, because it is such a central part of, there’s the obligation to account and there is the reality that people want to get paid to account. So, but when we’re looking at accounts, let’s talk a little bit about what we’re looking for in the context of compensation.
Suzana Popovic-Montag: Well the easiest starting point, of course, is to compare the totals in the accounts to the figures on the statement of compensation. And what we mean by that is, because we’ve talked about on previous podcasts the fact that there is a sort of rule of thumb in terms of an entitlement to compensation based on the value of the estate. And when you do the calculation, you want to apply the right percentages to the right total amounts in order to break down the compensation and then be able to justify it at the end of the day.
Ian Hull: Alright, so just in general terms, we’ve talked about this in the past, but in general terms, you are expected to be paid approximately 5% for your hard work throughout the administration of the estate. And how is that generally broken down?
Suzana Popovic-Montag: In terms of the big picture, Ian, it’s 2½ % on all of the assets that have come into the estate and then 2½% on all of the assets that are paid out of the estate.
Ian Hull: Alright. And that figure itself, the actual percentage figure, is that something that’s fixed or how do I work with that number?
Suzana Popovic-Montag: It really is just a rule of thumb and the cases will indicate as much. And so when you’re looking at accounts, and you’re sort of sitting back on the other side, from the beneficiary’s perspective and wanting to ensure that the trustee is entitled to the amount that they’re claiming, or want to submit that they’re not entitled to as much, you’re going to make the arguments that you need to, to suggest that reduced percentages should apply. And we can discuss some of those situations where we might want to say that less than perhaps 2½ % is what the trustee is entitled to.
Ian Hull: Alright, well I think we really need to talk a little bit about, we now have the general rule. And as with law and life, every rule is made to be broken. So I think in our next podcast, we should spend some time just talking about what will typically be looked at in terms of deductions from compensation, the changes to the general rule, whether up or down. And most of the time it’s down but we can also talk about some of the developments in respect of the compensation being increased up. So why don’t we save that for our next podcast?
Suzana Popovic-Montag: Okay, Ian, that sounds good. Just a reminder of our call-in number to anyone who’d like to call in, 206-457-1985.
Ian Hull: And please keep the e-mails coming and go to our webpage at hullandhull.com and drill through all of the various source documents we have. We have a ton of work that we’ve done and put on the web for passing accounts materials, but feel free to e-mail us at hullandhull@gmail.com.
Suzana Popovic-Montag: Thanks very much, Ian.
You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.
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