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In this issue:
ITA Annual Conference
Mark your calendar for 2009 MOKAN Trust Conference
Seniors by the Numbers
Reach of kiddie tax broadened to 18-year olds and students under age 24
Tax News: Knight v. Commissioner (Formerly, Rudkin v. Commissioner)

ITA Annual Conference

Team Up For Success at the annual Iowa Trust Association Conference. The event will be October 9-10 at the Marriott Hotel in West Des Moines. This year's event will be two days and will feature sessions on top trust issues. Exhibitors will also be on hand to display and discuss their products and services for trust departments.

Gain the knowledge you need to remain a leader in the trust profession. With changing regulations, an unsure economy, and the increasing need to stay current, the Iowa Trust Association is proud to offer the 2008 Annual Conference.

This year's conference features sessions in issues facing investors, land values and farm leases, life insurance policies held by corporate trustees, relationship management for administrators and much more. Noted industry speaker Jim Lethert from US Bank will be on hand to present a session on business development. Another keynote session is from Steve Goodman talking about recent malpractice cases against professional fiduciaries, exploring recent case law against attorneys, accountants and trust departments. Back from past conferences ABA's Sally Miller will present a Washington Update and talk about recent proposed and pending legislation. Also, Jeffery Maguire of Pension Builders will present a session on Behavioral Finance. Other topics covered include generation skipping tax, asset allocation, trust compliance, and advanced planning for IRAs. There are special sessions on Oct. 9 for operations personnel. Encourage your operations staff to attend!

Continuing education credit hours for CLE (7.75), CTFA (10.25) and CFP (10.0) are approved.

See the ITA website for complete information and registration materials.

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Mark your calendar for 2009 MOKAN Trust Conference


The Annual Midwest Trust and Financial Services (MOKAN) Conference will be May 6-8 at the Hyatt Regency Crown Center in Kansas City, Missouri. For more information on the event click here.

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Seniors by the Numbers

Percent of human history when life expectancy was under 18 years.... Life expectancy today.... Oldest authenticated age to which a human has lived.... Number of states that have 20% of population over age 65 today .... Number that will have 20% of population over age 65 by 2025.... Rank of persons 85 and older among fastest-growing age groups.... Number of households of people 55+ with yearly income of $100K+.... Percent of persons 65+ who own homes.... Percent of seniors who own stocks and mutual funds.... Percent of seniors with interest-earning accounts at banks.... Percent of nation’s wealth controlled by seniors.... Rank of Florida and Pennsylvania in terms of population over 65.... Factor by which 65–74 age group was larger in 2002 than in 1900.... Factor by which 85+ age group was larger in 2002 than in 1900.... Percent of nursing home admissions attributable to falls.... Rank of persons 65 and older among fastest-growing internet users.... Percentage increase in spending from 1997–2002 among 55–64 age group.... Number of persons 65 and older who are employed.... Number of grandparents caring for grandchildren.... Minimum amount baby boomers are projected to leave to heirs.... Percent of non-retired Americans who have saved more than $100K for retirement.... Amount most Americans will have to save to have a “comfortable” retirement.... Median net worth of over-65 households.... Median net worth of total population households....

99 77 122 years, 164 days 0 30 1 4 million 81 29 71 77 1,2 8 38 40 1 10 4.5 million 2.5 million $42 trillion 10 $1 million $108,885 $55,000

from the Society of Certified Senior Advisors

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Reach of kiddie tax broadened to 18-year olds and students under age 24

By William E. Massey, RIA Manager of News and Alerts

The Small Business and Work Opportunity Tax Act of 2007 (the Small Business Act) included various small business tax incentives and a number of revenue raisers. Among the latter is a significant broadening of the kiddie tax that will increase the number of taxpayers that are subject to its reach.

The new kiddie tax rules took effect for tax years beginning after May 25, 2007, which was the date of enactment of the Small Business Act. However, because most individuals use the calendar year, the full effect of the changes will be felt starting with the 2008 tax year. This article explains the broadened kiddie tax and planning that can be undertaken to blunt its impact.

Kiddie tax broadened. A child subject to the kiddie tax pays tax at his or her parents' highest marginal rate on the child's unearned income over an inflation-adjusted amount ($1,800 for 2008), if that tax is higher than the tax the child would otherwise pay on it. (Code Sec. 1(g)(1))

Under prior law, a child was subject to the kiddie tax if he or she hadn't attained age 18 before the close of the tax year, either parent of the child was alive at the end of the tax year, and the child didn't file a joint return for the tax year.

The Small Business Act didn't change the kiddie tax rules for children who are under age 18. However, for tax years beginning after May 25, 2007, the Small Business Act expanded the kiddie tax so that it also applies to children age 18, and children over age 18 but under age 24 who are full-time students-if their earned income doesn't exceed one-half of the amount of their support. (Code Sec. 1(g)(2)(A))

Thus, the kiddie tax has been expanded to apply where:

• the child turns age 18, or turns age 19-23 if a full-time student, before the close of the tax year;
• the child's earned income for the tax year doesn't exceed one-half of his or her support;
• the child has more than the inflation-adjusted prescribed amount of unearned income (i.e., $1,800, as further adjusted for inflation for the applicable tax year);
• the child has at least one living parent at the close of the tax year; and
• the child doesn't file a joint return for the tax year. (Code Sec. 1(g)(2))

William E. Massey, Esq., is senior tax analyst at Thomson Tax & Accounting.

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Tax News: Knight v. Commissioner (Formerly, Rudkin v. Commissioner)

What is the Knight case about?
More than 20 years ago, as part of the Tax Reform Act of 1986, Congress enacted a new limitation on the deductibility of "miscellaneous itemized deductions." This limitation is known as the 2% floor, because it permits miscellaneous itemized deductions -including investment advisory fees-only to the extent they exceed 2% of the taxpayer's adjusted gross income.
Example:
AGI = $200,000
2% of AGI = $4,000
investment advisory fees = $25,000
deduction = $21,000

The Knight case is about the application of the 2% floor to third party investment advisory fees paid by Michael Knight, a Connecticut lawyer, in his role as sole trustee of an irrevocable trust. Mr. Knight took the position that third party investment fees paid by the trust were fully deductible. The Internal Revenue Service disagreed, successfully arguing that the deduction was subject to the 2% floor.
But isn't there a special exception to the 2% floor for irrevocable trusts and estates?
A narrow statutory exception to the 2% rule applies to irrevocable trusts and estates. It allows a full deduction for expenses incurred in connection with the administration of an irrevocable trust or an estate-but only if the expenses "would not have been incurred" if the property were not held in a trust or estate.

Is there a special exception to the 2% floor for investment management fees paid by individuals and revocable trusts?
No. Investment management fees paid by these taxpayers continue to be subject to the 2% floor.

How broadly has the Internal Revenue Service interpreted the 2% rule?
Over the years, the Internal Revenue Service has challenged irrevocable trusts that claimed full deductions for third-party investment advisory fees. The Service's primary argument has been that such fees, because they are also customarily incurred by individual investors, plainly "would have been incurred" if the property were not held in trust--and therefore are subject to the 2% floor.

Have the courts generally agreed with the IRS position?
Yes. In the very first court case on this issue, O'Neill v. Commissioner, the taxpayer-an individual trustee-won. (The trustee's winning argument was that the Ohio prudent investor rule-which applies to trustees but not individuals-- required the trustee to seek investment advice from a third-party provider.) But in three subsequent cases, the Internal Revenue Service prevailed.

How did the Knight case get to the Supreme Court?
Both the Tax Court and the Second Circuit Court of Appeals ruled against the taxpayer in Knight, concluding that investment management fees incurred by an individual trustee were subject to the 2% floor because they "could have been" incurred by an individual investor. Refusing to give up, the trustee asked the U.S. Supreme Court to review the decision. The American Bankers Association filed a friend of the court brief supporting Mr. Knight's position.

What exactly did the Supreme Court say in Knight?
On January 16, 2008, the Justices rendered their opinion, 9-0, in favor of the government, holding that investment advisory fees are subject to the 2% floor. Significantly, the Court :

• Rejected the prudent investor rule argument that prevailed in O'Neill.
• Rejected the Second Circuit's reading of the statute, pointing out that "would" does not mean "could."
• Conceded that, in some circumstances, an incremental portion of investment advisory fees might be "trust-related" and therefore fully deductible.
• Limited its analysis to investment advisory fees and did not address the deductibility of trustee fees.

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