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Income and capital (Trustees of a trust are responsible for ensuring…
Income and capital
Trustees of a trust are responsible for ensuring accounting records are maintained and financial statements are prepared. The annual accounts for a trust typically include
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The balance sheet of a life interest trust is a snapshot of the trust's financial position showing its assets and liabilities at a specific point in time for example
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Trust capital represents the cash and non-cash assets initially settled on trust as well as capital subsequently settled on trust.
Capital is viewed as the money spent to enhance the value of an asset. Capital expenditure might be money spent building an extension to trust property to enhance its value and increase its future earnings potential by making it a more attractive property to rent out
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Income arising on a trust might include bank deposit interest, dividends from shares held or property rental income
Revenue expenses typically include professional fees (eg legal fees, accountancy fees, registered office fees, company secretarial fees, trustee fees), bank charges and income distributed to the life tenant during the year
By splitting out income and capital and ensuring capital is not eroded by only paying income and not capital to the life tenant the trustees can ensure that the capital value of the trust fund is preserved for the surviving children
Difficulties can arise when large expenses such as trustee or legal fees, arise in respect of the trust. If expenses are incurred in connectionwith income payments to the life tenant, for example, the remaindermen may expect to see the trustees paying such costs from the income of the trust fund and not from capital.
The balance due to the life tenant is included as an item within the income account and is shown in the balance sheet as a current liability
The income account is mostly likely to show interest on bank deposits, property rental income and dividends received from investments. It will also show expenses paid out which are of an income nature such as bank charges, overdraft interest, legal fees, accountancy fees, administration and other professional fees
Any income distributions will also appear on the income statement. With life interest trusts the income due to the life tenant is shown in the life tenants account
The capital account shows the cash and non cash assets initially settled on trust as well as additional settled funds. It also shows the increase in capital from investments, including gains and losses on realisation and items of capital expenditures such as capital gains tax and inheritance tax. Certain professional fees may also be charged to capital if they relate to expenditure of a capital nature for example fees incurred in relation to the administration of an estate
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If a trust has separate funds (eg one for each beneficiary), the capital account should clearly show the capital balances by fund
The statement of financial position shows fixed and current assets held by the trust including investments, property, bank balances and any debtors owing money to the trust. It also shows liabilities such as a bank overdraft, creditors and in the case of a life interest trust, the amount due to the life tenant
The schedule of assets typically lists quoted and other investments, the amounts of shares held, the book value and market value of those shares, additions, disposals and gains and losses on disposal of the shares