9. What are the other corpus items for which the executor is to be credited? How are the accounts showing these credits to be closed?

10. What items make up the debit against the executor on account of income? Where are the credits obtained?

11. What reconciliations should be made?

12. If the accounting of the executor is approved by the court, what follows?

13. To what is the allowance for expense of accounting charged? What is the entry?

14. How is the executor's commission computed? How is it prorated between corpus and income?

15. When is interest allowed on legacies? Against what is it charged? 16. What is done with the balance of corpus and income in this case? What are the closing entries? What should the executor do to terminate his office?

CHAPTER LXXII

PRINCIPLES OF TRUSTEESHIP ACCOUNTING

§ 643. Preliminary Matters

The first duty of a testamentary trustee on taking over the assets of an estate is to examine the accounts of the executor sufficiently to satisfy himself that he is receiving all of the assets to which he is entitled. Immediately thereafter he should have transferred to his name as trustee all registered bonds, notes, and certificates of stock. The new issues or changed record should be in the name of ".

Trustee." If there are two or more trustees the transfers should be to the names of all.

The trustee should see that adequate insurance is carried and should make certain that all taxes assessed against the estate assets have been paid so that the carelessness of someone else may not reflect on him.

It is necessary for him to study the investments of the estate, ascertaining that they are all proper investments for a trustee. It devolves upon him to be certain: first, that the investments are secure, so that the principal of the trust may be preserved safely for the remainderman, and secondly, that they are productive, so that they will yield the current rate of interest to the tenant.

If there is an unnecessary amount of uninvested cash the trustee should invest it as soon as possible. He will be liable for interest on uninvested funds for any period during which he was not functioning as fully as he should have been

§ 644. Trustee's Duties Less Involved Than Executor's

The duties of the trustee are less varied than those of the executor. The functions of the executor include the realization of the cash value of the assets and the payment of debts owed by the decedent as well as the care of the assets and the distribution of the legacies, but the trustee's duties are in general only the care of assets and the division of income. They have already been discussed in detail. (See § 411.) Briefly they include the:

power to demand, receive, and sue for the trust property, for any income accruing on it, to invest the funds and lease the real estate; to take proper measures to keep the real estate repaired and insured, to defend suits against him in respect to the property, or against him as trustee; to disburse and distribute the property.1

The general principles laid down for the accounting of administrators and executors must be followed by trustees, and this chapter will not repeat what has been said in earlier chapters, but will simply call attention to the differences resulting from the fewer complications in the activities of trustees.

§ 645. Principal and Income of Trusts

The trustee takes over the corpus of the estate from the executor. During trusteeship this corpus is called the "principal." The same general principles apply to the division of trust funds between principal and income as have been set out in connection with the work of the administrator and executor. (See Chapter XXXV.) The problems of classification are not nearly so frequent or so difficult in the case of the trustee.

§ 646. Sale of Capital Assets

Perhaps the most confusing of the questions which arise is that having to do with profit or loss on the sale of capital

Loring, A Trustee's Hand Book (3rd ed.).

assets. In administratorship and executorship accounting we called these items "gain on realization" and "loss on realization." Realization is not one of the functions of the trustee, who is supposed to receive the estate from the executor fully realized except for such investments as are permitted to trustees.

It will, however, at times be necessary for the trustee to sell certain of the estate assets because they have ceased to be secure investments, because they no longer yield an adequate return, or for some other reason. These sales will seldom be made for the valuation at which the assets were carried in the inventory of the estate in case they were turned over to the trustee by the executor, or for exactly their cost to the trustee if he purchased them. Gains and losses of this type are not income or a charge against income.2

The theory (see § 312) is that in the case of inventoried assets it is not a certain amount of money which makes up the principal but the assets themselves for whatever they are worth, and that in the case of assets purchased by the trustee and later resold by him, the increment or loss is an increase or decrease in the principal of the trust rather than an item of income or a reduction of income resulting from the normal course of investment. The general rule is that any unusual or extraneous gain or loss, other than the usual yearly income and charges against that income, falls to the principal of the fund.

§ 647. Betterments, Repairs, and Replacements

Expenditures for repairs which are necessary to maintain property in its previous condition are chargeable to income, but repairs and additions which increase the usefulness or the value of property are charged to principal. This rule is not

2 In this connection it is well to remember that income from the standpoint of the division of funds between a tenant and a remainderman is not necessarily the same as income from the standpoint of the existing income tax law. (See also § 315.)

3

always easy to apply, but it has been interpreted as meaning that "where repairs improve the property to the extent of their cost, they are chargeable to principal and are a judicious investment of the trust funds." In other words, any cost which actually adds to value-which is for a real improvement or addition rather than for merely a repair or a replacement-is a proper charge against the principal.

§ 648. Paying Off Encumbrances

Just as the trustee does not have the duty of realizing on the estate assets but will, under certain circumstances, sell some of these assets, so there are exceptions to the rule that he does not ordinarily have the duty of paying debts of the decedent, which is one of the principal functions of the executor. Some of the property turned over to the trustee may have been pledged or mortgaged and it may eventually devolve upon the trustee to discharge this debt. Such a payment is a charge against the principal, but all interest on the mortgage is chargeable to income.

If the trustee is required to discharge an involuntary encumbrance, such as an assessment for street improvements, the cost is divided between income and principal. Sometimes the entire amount is charged to principal at the time of payment and income is charged with interest thereon annually thereafter. Sometimes the interest is funded and charged to income in a lump. If the tenant and remainderman are beneficiaries of the same fund the principal is paid out of the corpus, the life tenant losing the interest and the remainderman the principal. (See also § 314.)

§ 649. Expenses

Taxes are chargeable against income with the exception that in some states taxes assessed on vacant land are charged

Loring, A Trustee's Hand Book (3rd ed.).