by Howard Godfrey, Ph.D., CPA, University of North CarolinaCharlotte, Charlotte, NC, and member, AICPA Tax Divisions International Tax Technical Resource Panel

In 2001, William and Helen Collins prepared wills that were identical, except for the name of the testator. Helen had a son and William had three children from prior marriages. Each mutual will left all assets to the surviving spouse. On the survivors death, all assets would be distributed equally to the four children.

After William died in 2002, Helen executed a new will leaving all of her assets to her son. She died in 2003. Her son received all of her assets and all of Williams assets; Williams three children received nothing.

Was Helen obligated to leave her assets to all four children, rather than just to her son? No. The North Carolina Court of Appeals held that Helens second will was valid, because the mutual will placed no contractual obligation on her to refrain from executing a new will; see Est. of Helen J. Collins, 619 SE2d 531 (2005).

Previous Cases

In an earlier case, the North Carolina Supreme Court recognized the general principle that a mutual will may be revoked, unless made in pursuance of a contract. However, the court found that distribution according to the original wills was required when the spouses had set up a trust to receive their assets, and each will referred to the trust. The mutual wills showed the existence of a contract and the beneficiaries named in those wills were entitled to the assets; see Godwin v. Trust Co., 131 SE2d 456 (1963).

Similar results obtained when there was contractual language in a joint will. The joint will stated that it was the result of a contract and that neither party to the agreement would revoke, alter or amend the will; see Robison v. Graham, 799 P2d 610 (OK 1990). The surviving spouse executed a new will, and placed his funds in certificates of deposit that were held in joint tenancy with his new wife. Transferring the funds into joint tenancy did not defeat the terms of the earlier joint will.

Strategy

CPAs should be aware of these issues when assisting clients with blended families. Tax advisers should encourage clients to obtain good legal advice, to ensure that their children or other relatives will receive estate assets in accordance with their wishes.

Coming Soon: AICPA Practice Guide for Fiduciary (Trust) Accounting

by Lawrence H. McNamara, Jr., CPA and member, AICPA Tax Divisions Trust, Estate and Gift Tax Technical Resource Panels Trust Accounting Income Task Force

The AICPA Trust Accounting Income (TAI) Task Force was established to provide guidance in performing trust and estate accountings and related tax services. The AICPA Tax Divisions Trust, Estate and Gift Tax Technical Resource Panel (chaired by Roby Sawyers in 20042005, and Steven Thorne in 20052006) appointed and provided direction and oversight to the Task Force. The tools and best practices for preparation of a fiduciary (or trust) accounting are included in a Practice Guide (Guide) to help CPAs provide better fiduciary accounting services.

The Guide was developed specifically for CPAs, but will be a useful tool for anyone with fiduciary accounting responsibilities. It will provide members with a better understanding of this continually evolving and very technical subject.

Overview

Because the basis of fiduciary accounting is promulgated by statute (i.e., the Uniform Principal and Income Act (UPIA)), which some states have adopted or are considering adopting in whole or in part, one must review several legal sources to understand the principles of fiduciary accounting. As described in the Guide, the Uniform Trust Code (2000), as amended in 2001 and 2003, was drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) to provide the states with a comprehensive model for codifying their own Principal and Income Act. Because it would not be practical for the Guide to take into account each states individual principal and income statute, it is written based on the NCCUSLs UPIA.

In addition, the Guide will emphasize the importance of understanding these legal aspects, as well as the terms provided by the governing instrument (and amendments, if any), before a fiduciary accounting can be prepared.

There are statutory differences between fiduciary accounting income (FAI) and Federal and state taxable income. The Guide will enable a practitioner to understand these differences. Additionally, it will explain the best practices for the tax adviser undertaking an engagement with a fiduciary, while reminding practitioners of the fiduciarys responsibilities to both income and remainder beneficiaries (which the fiduciary must take into account in preparing an accounting for any given period).

The Guide will emphasize that the tax adviser must be provided with the fiduciarys computation of accounting income to properly complete Form 1041, U.S. Income Tax Return for Estates and Trusts, for the trust. In addition, the Guide will give the practitioner an understanding of some of the challenges posed when dealing with the UPIAs power to adjust and the unitrust provisions adopted by several states.

The Guide will include examples and diagrams to illustrate these responsibilities and procedures; an appendix will include examples and references. It is expected to be available to members in fall 2006, at http://tax.aicpa.org/Resources/Trust+Estate+and+Gift/.

Task Forces Composition

The TAI Task Force included Jim Calzaretta (chair), Jacqueline Patterson (editor), Byrle Abbin, Ted Batson, Barbara Bond, Carol Ann Cantrell, Barbara Jones, John Letourneau, Lewis Linn, Lawrence McNamara, Jr., Howard Niad, Frances Schafer, F. Gordon Spoor and Eileen Sherr (AICPA Tax Division Technical Manager).