against the principal. Insurance premiums are generally chargeable against income by the terms of the trust instrument, and this practice is usually followed where there are no definite provisions. But recoveries on account of fire losses are principal. In the case of a partial loss they are generally used in meeting the expense of repairs. If there is a total loss, the fund is invested either in rebuilding or in some other proper manner. The trustee's commission is usually a percentage of the gross income collected and is charged against income. Additional allowances where extra work is necessary, as for example in the sale of real estate, are charged to the principal when such services are primarily beneficial to the fund, or they may be apportioned equitably. A broker's commission in the purchase or sale of real estate is considered part of the purchase price or a deduction from the sale price, and is consequently a charge against principal. The same reasoning would seem to apply to the purchase of stocks and bonds, [but] broker's commissions on change of investments, where it was expressly provided that all expenses were to be charged to income, were properly classed as expenses and charged to income.* Entries Nos. 5, 6 and 7 on Form 29 show the entering of commissions as a reduction of the selling price and as an addition to the cost. § 650. Fewer Accounts Needed by Trustees The accounts used by the executor were: Cash Inventory Assets Not in Inventory Gain on Realization Loring, A Trustee's Hand Book (3rd ed.). Loss on Realization Funeral and Administration Expenses Debts of Decedent Specific Legacies Distributed General and Demonstrative Legacies Distributed Estate Corpus Income Loss on Income Expense, Income Payments of Income to Trustee Of these we see at a glance that we may eliminate a number. We shall no longer need the accounts for the distribution of legacies and payments to the trustee. Any encumbrances which exist against the estate property and are paid off by the trustee will be so few in number that there will be no use in opening an account with Debts of Decedent for them. These payments may be charged directly to Principal. In the same way, any gain or loss realized on sales of estate assets, instead of being first entered to Gain on Realization account or Loss on Realization account, may be entered directly to the credit (if a gain) or to the debit (if a loss) of Principal. Should it happen that any estate assets not included in the property administered come into the hands of the trustee, they also might be credited directly to Principal instead of being carried through Assets Not in Inventory. Since the expenses against income will be comparatively few, it is not considered necessary to open a separate account for this purpose. Such expenses and items of loss on income are charged directly to the Income account; charges of the same nature which apply against the principal are charged directly to Principal. When the books of the executor were closed the assets were included in the two accounts of Cash and Inventory. (See § 642.) These were offset by the two net worth accounts of Income and Corpus, the amount of income cash being represented by the balance of the Income account and the sum of the corpus cash and other corpus assets by the balance of the Estate Corpus account. These four accounts are all of the executor's accounts which we have not eliminated as being unnecessary for the trustee. In other words, the accounts of the trustee are generally kept without the use of analytical income and expense accounts. But in the accounts of trust companies as opposed to individual trustees, because of the great number of assets of each kind handled, the handling of the asset accounts is simplified if they are somewhat broken up. (See Chapter LXXV.) The ordinary subdivisions are Cash, Notes and Mortgages, Stock and Bonds, Real Estate, and other assets. The same subdivision is made in the trust ledgers. (See § 656, "Form of Records.") §651. Must Account Separately for Each Trust It is necessary for the trustee to account separately for each of the various trusts for which he acts. This does not mean for the various estates alone, as in one estate there may be several trusts. A will may provide for any number of the different kinds of trusts outlined in § 306. There may be a trust fund of a certain sum the income from which is to be paid to one or more persons for a period of years or until the happening of a certain contingency, such as the marriage or death of the tenant or some other person. It may be provided that at the expiration of the trust the principal shall be given to the tenant (except, of course, if the trust terminates with the death of the tenant), or to some other person, or that it shall be divided among several persons in a specified proportion, or revert to the general principal of the estate. Each amount of money or other property set aside constitutes a separate trust. §652. Supposititious Case Let us suppose that the will of James C. Dawson creates the following trusts: 1. Income from $40,000 for a period of twenty years to be paid to the trustees of Butler University for certain uses set forth; principal at the end of that time to revert to the undivided estate. 2. Income from $100,000 to be paid to donor's sister, Mrs. Janet Dawson Reeves, donee, during her life; principal to be paid over to grantees as directed by her will. 3. Income from $100,000, said payments of income not to exceed $5,000 in any year, to be given to donor's sister-in-law, Mrs. Mary Allen Dawson, during her life, any excess in income above $5,000 in each year to become a part of the principal of the undivided estate; the principal of this trust fund to pass upon her death to her children by donor's brother per stirpes. 4. "I instruct my executors and trustees to pay to my cousin, Henry G. Dawson, annually during his natural life, but not for longer than twenty years, the sum of $2,400 from the income of my undivided estate, in such instalments as shall seem to them desirable." Strictly speaking, this provision does not create a trust because no definite amount is set aside to produce the specified annuity. 5. Income from balance of estate to be accumulated in trust for twenty years, trustee to disburse such sums as are necessary to maintain and educate donor's children during that time and at the end of that time the principal and income to be divided between them per stirpes. The manner of handling the transactions for these five trusts will be discussed in the next chapter. § 653. Trustee's Reports to the Court The statutes of practically all of the states require a testamentary trustee to file an inventory soon after his appointment. Further reports are required at intervals thereafter, most states requiring them annually. They must accomplish the same purpose as the accounting rendered by the administrator or executor. To this end they consist of a general statement of all transactions, fully supplemented by detailed schedules. These reports are discussed in detail in Chapter LXXIV. The courts of the different states use various methods of satisfying themselves of the accuracy of the trustee's reports before they are allowed. Should they contain errors which are not discovered, or should they be latently obscure, the trustee will in all probability be the loser. The beneficiary is always given the benefit of the doubt. § 654. When Executor Is Also Trustee Writers differ somewhat as to the advisability of keeping separate sets of books where one person is both executor and trustee. One of them prescribes a two-column cash book for the purpose of separating executor's cash from trustee's cash, but states that "it is useless trouble for the executor to keep a separate set of books for the trusteeship." The consensus of opinion is that because the utmost care should be exercised to preserve intact the trust funds and to keep distinct the trust transactions, and because usually the executorship is concluded before any substantial transactions on account of the trusteeship occur, it would seem advisable to open a separate set of books for the trusteeship, even though this course might necessitate the running of two sets of books during a small part of the time. There is, of course, no objection to carrying the trustee's accounts in another part of the same book with the executor's if the ruling will serve the purpose, nor to using the same loose-leaf binder when that system is employed. |