Risk Management in Estate Accounts
Any practitioner dealing with estate administration needs effective procedures in place to facilitate easy and efficient record-keeping and accounting. There is a variety of estate accounting software now for practitioners to use but, ultimately, these programs rely on the diligence of the user for their effectiveness as a tool.
Software or manual production?
Firms need to decide whether to invest in the cost of a suitable estate accounting program (including staff training and support costs), and how to pass that cost on to clients. Will it be cheaper than having staff prepare accounts manually on an hourly rate basis? Of course, the staff concerned have to understand accounting and be confident in the production of accounts which, in reality, is not true of everyone who practises in trusts and estates! Even when relying on software that automatically produces accounts on request, the practitioner must understand the principles of accounting in order to review and ensure that the account makes sense, and manually adjust as necessary. (A problem with many computerised systems is that they lack the flexibility to cope with unusual situations.)
Using a specialist firm
If you struggle with estate accounting, a third option is to engage a third estate accounts production to a specialist firm with the experience and expertise to do the work far more quickly - the cost incurred can justifiably be passed on to the estate as a testamentary expense. Moreover, an independent review of the file may prove helpful in identifying outstanding matters. A good accounting firm will also, as part and parcel of the job, check that all tax liabilities have been calculated and allocated correctly, prepare any outstanding tax returns, advise on any amounts to be paid, or reclaimed if overpaid, calculate the beneficiaries’ shares of income for their own tax purposes and prepare the relevant tax certificates.
Risk management – choosing the right firm
In theory any firm of chartered or certified accountants ought to possess the required level of expertise to prepare estate accounts but in reality many do not. The rules relating to accounting for estates (and trusts) differ from those for businesses in a number of respects, and the correct distinction must be made between capital and income funds. For example, while income accrued to the date of death is treated as capital for inheritance tax purposes, for income tax purposes it is included as part of the administration period income (subject to statutory apportionment, if applicable). The arcane rules of statutory and equitable apportionment are not widely understood outside the trusts and estates community but anyone preparing estate or trust accounts must know them. The correct accounting treatment of accrued income sold and purchased is another area full of pitfalls for the practitioner who does not understand the peculiar distinctions that are made between capital and income for accounting and distribution purposes and those made for taxation purposes.
Best practice
While it often makes economic sense for firms to engage an outside firm for their accounts production, it is essential that they choose an accountant suitably qualified for that work. Membership of the Society of Trust and Estate Practitioners (STEP) is an obvious “best practice” thing to look for together with an assurance that the accounts they produce meet the standards laid down in the STEP Accounting Guidelines. It is also worth asking for some (suitably anonymised) examples of trust and estate accounts.
Costs
Once you are satisfied that the chosen firm has the requisite level of expertise and experience, cost is the next consideration. Many accounting firms will be pleased to supply a firm quote on receipt of all relevant information, while others may give an estimate that will vary depending on the outcome. Hourly rates vary from one part of the country to another and, although an indication, they are by no means the best yardstick with which to make a comparison.
Do you want the accounts to appear in your own house-style, bound with your firm’s covers, in order to give the impression of having been produced in-house? Some firms will oblige while others may not, so, if this is important to you, do check.
Estate administration is essentially about dealing with money and money’s worth and involves a lot of figure-work. Accurate accounting is essential to ensure that everything has been accounted for, all taxes have been paid and each beneficiary has received his or her true entitlement. It makes sense to ensure that the right skills are deployed on what is fundamental to the effective administration of any estate.
Jonathan Cooke is a partner with Humphrey & Co, Chartered Accountants, based in Hove. He provides accountancy and taxation support to the legal profession and he writes and lectures on accounting and taxation for trusts and estates.
He is the author of the STEP Accounting Guidelines.
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