Trust and estate accounting and financial reporting
What the exam tests
Accounting and financial reporting tests whether you can keep trust and estate accounts that distinguish income from capital, prepare a distribution account and report to beneficiaries and tax authorities. The exam often uses a life tenant and remainderman to test apportionment.
Core records and statements
Trustees must keep accurate records of assets, liabilities, receipts and payments, and must account to beneficiaries. A typical annual account shows income receipts, expenses, distributions and the capital statement of assets and liabilities. The trust deed governs what is income and what is capital; statute and case law fill gaps. Apportionment rules include Allhusen v Whittell (apportioning income to pay debts and legacies), Howe v Dartmouth (conversion of wasting or reversionary assets for a life tenant) and Re Earl of Chesterfield (apportioning delayed receipts). Charitable trusts may follow the Charities SORP. Estates require an estate account and clearance before final distribution.
Worked example
A trust holds shares and a life tenant is entitled to income. A dividend of £12,000 is received, but £2,000 relates to a period before the trust began. The £2,000 is capital, not income; only £10,000 is distributable to the life tenant. If the trustees sell the shares at a gain, the gain is capital and belongs to the remainderman, not the life tenant.
Traps
Paying capital profits to the life tenant; ignoring the trust deed's definition of income; failing to record distributions against the right beneficiary; and preparing accounts only for tax, not for the trustees' duty to account. Do not assume an audit is always required.