Tuesday, January 29, 2008

Percentage of PA's Millionaires Rising ... Slowly

On January 9, 2008, annual survey results about American millionaires were announced by Phoenix Marketing International, in its Press Release entitled "New Jersey Has Highest Percentage of Millionaire Residents".

The Phoenix Affluent Marketing Service, a Phoenix Marketing International practice, announced today that New Jersey has become the state with the largest percent of millionaires to total households. Ranked second past two years, New Jersey vaulted past Hawaii, which fell to fourth in the 2007 rankings. Phoenix’s annual market sizing analysis and aggregate wealth rankings shows that New Jersey’s ratio of millionaires to total households rose to 7.12%, up from 6.5% in 2006.

Maryland is now in second place at 7.08%, up from 6.2% in 2006. Connecticut is third, with a ratio of 7.0%, up from 6.2% a year ago. Hawaii’s ratio of 6.7% was unchanged from a year ago.

Phoenix defines a millionaire household as one with $1 million or more in investable or liquid assets.

“Traditional East Coast concentrations of wealth have continued to outperform most of the rest of the country,” says David Thompson, Managing Director of the Phoenix Affluent Practice.

“This is a function of three factors: high levels of education; access to top paying jobs in finance and technology; and a stock market that has advanced over the past four years,” notes Thompson.

Rounding out the top ten for 2007: Massachusetts remains in fifth place; Virginia rose to sixth from seventh past Delaware, which fell one spot; Alaska leaped to eighth from fourteenth a year ago; ninth-place New Hampshire, was up from eleventh in 2006; and California came in tenth, down two spots from 2006.

The Press Release notes that complete states’ rankings for 2005 through 2007 are available online (in an Excel spreadsheet) by visiting the Phoenix site. * * *

According to these surveys, the percentage of Pennsylvanians who qualify as "millionaires" is slowly increasing, but, when compared with the other states, it remained consistently steady for all three years at No. 23.
Pennsylvania Total Households $1MM+ Ratio Millionaire to Total HH
2005 4,870,667 201,983 4.15%
2006 4,903,270 228,270 4.66%
2007 4,916,948 252,326 5.13%
The national average is increasing, too:
2005 4.30%
2006 4.80%
2007 5.25%
So, Pennsylvania remains under the national average. But are the real number of "millionaires" -- representative of high wealth -- effectively increasing, or is the bar constantly being lowered by inflation instead? See: PA EE&F Law Blog posting "Inflation, Indexing, and Millionaires" (08/31/07).

As indicated in the comparison of the ten largest states in population (see graphic above), Pennsylvania (the sixth largest state) is just above Texas and Ohio, but below the rest.

The survey does not reveal, but we might be able to determine from other statistical data, where in Pennsylvania more of those millionaires reside.

According to data posted on Wikipedia, Pennsylvania has only three of the 100 wealthiest counties in the entire country, measured by
per capita income. Those counties are:
  • Chester County (#34)
  • Montgomery County (#44)
  • Bucks County (#84)
Within all counties in the Commonwealth, wealth resides more in the sprawling, expanded suburbs than in the urban areas or in its inner-ring suburbs, according to a study by IssuesPA (an initiative of the Pennsylvania Economy League), entitled "Changing Patterns of Wealth in Pennsylvania's Communities" (April, 2004).

For more detail about wealth in Pennsylvania, measured not by assets (millionaires), but by income (earners), see the listing provided by
Wikipedia of all incorporated areas and census-designated places in Pennsylvania ranked from highest capita income to lowest per capita income.

One place really stands out, at the head of that list: Green Hills, Washington County, PA, which only has eighteen residents and seven households.

To them I would say, please don't move to New Jersey, or Maryland, or Delaware.

Update: 04/03/08:

Yahoo Finance posted an article published on March 20, 2008, in Barrons, entitled "
Are You Rich?", by Tom Sullivan, who asked: "How much of a nest egg do you need to join the true elite?"
Yes, it takes more than $10 million to be seen as rich these days. It takes more like $25 million.

Not only is that the minimum for the red-carpet treatment at a growing number of banks, it is also, in the view of many experts, the sum needed for a truly cushy retirement, one free of financial worry. * * *

Monday, January 28, 2008

"Coming of Age" in PA to be Replicated

On January 23, 2008, The Philadelphia Inquirer noted Philadelphia's successful Coming of Age initiative, in an article entitled "A growing search for wisdom of the elders -- Grant exports a Temple program across nation", by Lini S. Kadaba.

According to its website, "Coming of Age is Greater Philadelphia’s initiative to promote 50+ civic engagement, lifelong learning and community leadership."

Coming of Age initiative is based at Temple University, on North Broad Street, in Philadelphia, PA. It was created in 2002 as a partnership of Temple University's Center for Intergenerational Learning, AARP Pennsylvania, the United Way of Southeastern Pennsylvania, and WHYY-TV.

A one-page "
Fact Sheet" (copied above) explains in bullet points its mission, composition, audience, programs, & opportunities, all aimed at the fifty plus crowd.

I have read COA's weekly email updates ever since I subscribed online -- around the time I posted an entry on this Blog entitled "
Philly's "Coming of Age" Profiles & Project" (02/26/07) -- and I have learned much.

For example, COA turned me onto the rock band "The Zimmers", which I noted in a Blog entry entitled
Zimmers "Talkin' 'Bout My Generation" (04/24/07). So, I describe COA in superlative terms.

Others recognize its excellence & effectiveness, too, according to the Inquirer's recent article. It reported that COA will be replicated & exported through grant funds:

For several years, a local initiative based at Temple University has captured the energy and expertise of many of the area's elders by connecting them to nonprofits.

Now, a $1.8 million grant over three years will allow Coming of Age to take its model on the road and replicate it around the country.

"There's a recognition that people age 50-plus are a tremendous resource for our nation, our communities," Dick Goldberg, director of the initiative, said yesterday as he announced the grant.

It is from the Atlantic Philanthropies, an international foundation based in Bermuda that billionaire American philanthropist Charles Feeney began.

The grant will allow Coming of Age to bring programs to eight communities (still to be chosen) around the country - programs such as Boomervision!, a series of community dialogues held at PBS station WHYY's studios since 2005, and Learning Lab, which has brought nonprofits together to share strategies to tap retirees.

The money also will help broaden the initiative's reach into Asian and Hispanic communities in this area. * * * [Links added.]
The recognition for this program, begun in Pennsylvania, is both national & international.
Coming of Age has boosted the number of those 50-plus who contribute time, either unpaid or paid, to community organizations, and it has expanded the types of opportunities available to older baby boomers and others, Stacey Easterling, program executive for the U.S. Aging Team of the philanthropy, said from New York."

They're engaging together unlikely partners to develop a community effort," Easterling said. "They've really developed some best practices."
How did I learn about COA's planned expansion? By reading an announcement in its most recent email newsletter.

Coming of Age To Go National
Why are Philadelphians Sol and Judy Levy, familiar to many from the Coming of Age home page, smiling? They've heard the good news: our initiative is going national!

Coming of Age
recently was awarded a three-year, $1.8 million grant from The Atlantic Philanthropies to pilot more innovative activities promoting age 50+ connection and contribution in diverse local communities and replicate our work in at least eight communities throughout the United States. * * *
To sign up for such email announcements, newsletters, or updates from Coming of Age in Philadelphia, click here.
"I love Philadelphia. I was shocked at what a great city this is.
For me, it is the cat's pajamas. I love everything about it.
I love where I live. I love the people.
I have been met with such kindness and affection here.

-- George Dzundza, American actor

Friday, January 25, 2008

PA Aging Plan "Discussion Guide" Now Available

The PA Department of Aging recently posted its "Discussion Guide" (PDF, 9 pages) as an agenda for the public conversations about the next four-year State Plan on Aging to occur during the seven "Town Meetings" scheduled around the Commonwealth, beginning January 31st & concluding March 28th.

For background about the 2008-2012 PA State Plan on Aging and the Town Meetings scheduled to discuss it, view the PA DoA's web page, which contains an explanation, resources, and further links. See also: PA EE&F Law Blog posting
Town Meetings for PA's "Plan on Aging" (12/28/07).

The Discussion Guide lists four central "goals", each with "key items for discussion". These goals are:

  1. Empower older Pennsylvanians and their families, including those from diverse communities, to make informed decisions on their health care and long-term living options.
  2. Enable older Pennsylvanians, including those from diverse communities, to remain in the setting of their choice, improve their quality of life, and to take individual economic responsibility via the development of needed infrastructure and provision of home and community-based services, including supports for family caregivers.
  3. Empower older Pennsylvanians, including those from diverse communities, to stay active and healthy.
  4. Ensure older Pennsylvanians, including those from diverse communities, are free from abuse, neglect, exploitation and abandonment. [Emphasis added.]
"Key items for discussion" are listed under each goal:
  • Goal #1 Issues:
1. Health care options
2. Long-term living options
3. Health insurance
4. Public awareness
5. Cultural inclusion
6. Advance Directives
  • Goal #2 Issues:
1. Ability to live where you choose
2. Quality of life
3. Individual economic responsibility
4. Infrastructure (transportation, housing, etc)
5. Home & community based services
6. Family caregivers
7. Developmental disabilities
8. Cultural barriers
  • Goal #3 Issues:
1. Healthy living, exercise & fitness
2. Volunteerism/Civic Engagement
3. Socialization/Senior Centers
4. Senior Employment
5. Healthy Brain Aging
  • Goal #4 Issues:
1. Abuse
2. Neglect
3. Exploitation
4. Abandonment
5. Behavioral Health
6. Suicide
7. Emergency planning
8. Supports for family caregivers
9. Grandparents raising grandchildren
To prime the pump for discussion, the Discussion Guide provides information in three subsections:
  • Facts
  • Did you know?
  • What we have already heard about this goal
Then under each goal are seven or eight stated "Questions for discussion".

This "
Discussion Guide" is a basic list of aging & elder law topics, viewed both from an individual & the collective viewpoints. It should be read by all who are involved with senior citizens, even if you won't attend a Town Meeting.

In a Press Release, dated January 24, 2008, entitled "
Department of Aging to Host Town Meeting in Elizabethtown to Gather Public Input for its State Plan on Aging", the PA DoA urged attendance at the first Town Meeting session, to be held on January 31, 2008, from 9:00 a.m. to noon, at the Deike Auditorium, in the Freemason's Cultural Center, Masonic Village, Elizabethtown, Lancaster County, PA:
“I invite older adults and their advocates to share ideas that will help us to develop new services and enhance existing programs for older Pennsylvanians,” said Secretary of Aging Nora Dowd Eisenhower.

“We are seeking input to make sure our priorities accurately reflect needs.” * * *

“Public participation is absolutely essential to the success of our town meetings,” Dowd Eisenhower said. “We are encouraging organizations involved in our statewide aging network to spread the word and encourage their members to make their voices heard.” * * *
The Press Release concludes by offering alternative means for offering public comment on the developing State Plan of Aging:
  • Written comments may be submitted to the Department of Aging, c/o the Division of Systems Planning and Consultation, 555 Walnut St., 5th Floor, Harrisburg, PA 17101;
  • Via www.aging.state.pa.us. Click on the link to the State Plan on Aging and then click on the link to the State Plan on Aging Opinion Survey to provide the department with instant feedback regarding State Plan issues; or
  • By contacting your local Area Agency on Aging.

Thursday, January 24, 2008

USLaw Website Lists Law Blogs

In mid-January, 2008, USLaw.com updated its listing of law blogs, which are categorized by topic or jurisdiction, as a public consumer legal resource.

USLaw describes itself as follows:

USLaw.com is a leading online provider of legal information. Since 1999 the site has catered to consumers of online legal information with particular emphasis on individuals and small businesses. We also provide online marketing services to law firms and small practitioners including websites, blogs, and lead generation. * * *
USLaw's blog list includes the topics of "Elder Law" (3 blogs) and "Taxation & Estate Planning" (8 blogs), among other practice areas.

PA Elder, Estate & Fiduciary Law Blog is listed under the Elder Law heading, along with David Goldman's Florida Estate Planning Lawyer Blog and Professor Kim Dayton's Elder Law Blog (part of the Law Profs Blog Network). The web page for each blog lists prior posts by title and date, indexed in alphabetical order, not in chronological order, which is customary on other sites containing "feeds" from blogs.

USLaw's topical catalogs of blogs joins similar listings recently released, updated, or highlighted online. See:
PA EE&F Law Blog postings:
Such internet legal resource lists are growing, and also converging in their inventories of links.

A milestone was passed earlier this week by one legal blog -- this PA EE&F Law Blog.

The site counter that I installed in September, 2006, as offered free by
StatCounter, reported to me on Monday that this site has surpassed 100,000 hits by viewers. In the mass market of general interest blogs, that number is minimal; but in the niche market of legal blogs, it is respectable.

That makes me proud, and motivates me to continue posting. Thank you.

Wednesday, January 23, 2008

PBA RPPT Section Newsletter Issued

The most recent issue of the Newsletter of the Pennsylvania Bar Association's Real Property, Probate & Trust Law Section, designated as a "Fall 2007" issue is in the printing process and soon will be mailed to Section Members.

Also, a PDF, two-color, counterpart of the Newsletter soon will be available to Section members on the website of the PBA.

This most recent issue continues the traditional semi-annual (Spring-Fall) issuance of a newsletter by the PBA RPPT Section. It is designated as Issue No. 64, reflecting thirty-two years of continuous Newsletter production by the Section.

This is a long issue (64 pages), with much information, as evidenced by its Table of Contents:

Section Report From the Chair (p. 1)
Real Property Division (p. 2)


Recent Legislation (p. 4)


Pa. Probate, Estates and Fiduciary Code Revisions Proposed (p. 10)
The Doctrine of Necessaries (p. 12)
PBI Published Elder Law in Pennsylvania, Second Ed. (p. 14)
Procedures for Medical Decisions in a Hospice (p. 15)
West Offers Free Access to Pa’s Statutes Online (p. 17)
I Bequeath My Machine Gun To (p. 18)
Hot Property of the Dead (p. 20)
Victim of Identity Theft May Profit from Purchase of Property (p. 22)
Preneed Funeral Contracts in Pennsylvania (p. 23)


RPPT Section Listservs (p. 25)
Probate & Trust Law from the Listserv (p. 28)


Mortgage Foreclosure Where Owner Died (p. 51)


Real Property Law from the Listserv (p. 52)
RPPT Section Leadership (p. 61)
RPPT Committee List (p. 61)
Upcoming Courses from PBI (p. 63)
Articles appearing in this issue of the Newsletter on page 10, page 14, page 17, page 18, page 20, page 23, & page 51 were drawn from previous postings on this PA EE&F Law Blog, as edited to appear in print.

I am pleased to contribute to the Newsletter in this fashion, since I serve as the Newsletter's Executive Editor. This is my twenty-fifth (25th!) year in continuous service as an editor of this Newsletter.

Mark B. Hammond, Esq., of Chambersburg, a stalwart member of our Section, serves as Editorial Assistant, and our teammate. Actually, he acts as head driver (like, with a whip!). Thank you, Mark.

According to the PBA Publications Staff Editor, Patricia Graybill -- who is responsible for layout & publication of the Newsletter (and has been for the past many years) -- the printed copies of the Newsletter should be mailed later this week to all current Section members. Thank you, Patricia.

This will please our Section's leaders, including our Section's Chair, David Schwager, who has been . . . waiting . . . patiently . . . for . . . this day. Thank you, David.

And thanks to all who contributed to this issue of the Newsletter!

Upon the mailing of the printed copies, that PDF version of the Newsletter will be posted by Patricia into the Member's Only area of the PBA website along with prior issues.

This issue of the Newsletter also may be made available "for a limited time" publicly on PBA's website. If so, I'll update this posting.

We invite members of the Section, and others too, to contribute articles for future issues. It is a worthwhile process to write an article, and a proud moment when you see your words in print.

UPDATE: 01/29/08:

The Fall, 2007 issue of the PBA RPPT Section Newsletter is now available for the limited period of approximately one week -- until Monday, February 4th, at this link:
Latest Newsletter - limited time access only.

UPDATE: 02/05/08:

The limited period for free access to this issue of the Newsletter has expired. If you are a PBA member, please consider joining the Section.

Tuesday, January 22, 2008

Elders Hoarding Animals Need Help

The Pittsburgh Post-Gazette published an article, dated December 10, 2007, entitled "Animal hoarders proving difficult to contain", by Linda Wilson Fuoco, which highlighted a significant problem. 

The article mentioned a profile of an "animal hoarder": a person over 60 years old who lives alone & has very little income, but who keeps multiple pets in an unhealthy environment. 

What is "animal hoarding", and how did this profile evolve? 

Wikipedia describes "animal hoarding" and its negative health effects, as follows:

[T]he “pathological human behavior that involves a compulsive need to obtain and control animals, coupled with a failure to recognize their suffering,” is the cause of many severe health risks that threaten the hoarded animals, individuals living in hoarding residences, and surrounding neighbors.
In addition, it implicates a variety of mental health issues. The health effects of animal hoarding are widespread and detrimental to all involved. * * *
Hoarding is certainly detrimental, even fatal, to the animals kept under control. Pet-Abuse, a website dedicated to the interests of companion animals, notes the harsh realities for pets subjected to "Animal Hoarding" (using language that may be repugnant to some):

Friday, January 18, 2008

House Passes Bill Abolishing PA Death Taxes

On January 17, 2007, the Morning Call (Allentown, PA) published an article entitled "Pennsylvania House debates dozens of tax cuts", by Mark Scolforo, of the Associated Press, which included references to abolition of the Pennsylvania Inheritance Tax (PIT).

A state House debate on lowering property taxes turned into a multibillion-dollar tax-cutting party on Wednesday, as the chamber gave preliminary approval to breaks on everything from cell phones and business profits to inheritances and pet adoptions.

None of the measures passed out of the House, because the votes were for amendments to an underlying bill that could come up for final consideration today [January 17, 2008].

Unbridled from a pay-as-you-go rule that is part of the budget process, the House stampeded through one tax break after another, as members paid little heed to warnings about the enormous hole they were potentially blowing in the budget.

"I see a lot of passion for what the state might lose in all these taxes that aren't collected," said Rep. Scott Perry, R-York, during debate on eliminating the state inheritance tax at a cost of $420 million in the first two years. * * *

The House Bill underlying this debate is House Bill 377, now in Printers No. 3094. A version in PDF format (34 pages) is available here.

According to the Legislative History for HB 377, it was adopted unanimously (191-0) during third consideration by the Pennsylvania House of Representatives on Thursday, January 17, 2008. Its consideration now will be undertaken in the Pennsylvania Senate.

Collections from the PIT are substantial.
See: PA EE&F Law Blog posting "PA Inh Tax Div Chief Murphy Retired" (12/04/07).

The key provision of HB 377 that would eliminate the PIT is set forth in Section 15:


Under Section 16 of HB 377, the proposed elimination of the PIT would be gradual, with interim reductions in the current tax rates until 2012:

For transfers to lineal descendants, currently taxed at 4.5%, a decedent's estate would be taxed, based on the year of death, as follows:
  • Before or during 2009 -- 4.5%
  • During 2010 -- 2.0%
  • During or after 2011 -- 0%
For transfers to siblings, currently taxed at 12%, a decedent's estate would be taxed, based on the year of death, as follows:
  • Before or during 2008 -- 9.0%
  • During 2009 -- 6.0%
  • During 2010 -- 4.5%
  • During 2011 -- 2.0%
  • During or after 2012 -- 0%
In addition, under the proposal of HB 377, "[i]nheritance tax upon the transfer of property that is jointly-held between a child and a natural parent, an adoptive parent or a stepparent of the child to the natural parent, shall be at the rate of zero per cent."

For transfers to other persons, currently taxed at 15%, a decedent's estate would be taxed, based on the year of death, as follows:
  • Before or during 2008 -- 10.0%
  • During 2009 -- 7.0%
  • During 2010 -- 4.5%
  • During 2011 -- 2.0%
  • During or after 2012 -- 0%
What about the Pennsylvania Estate Tax? The PET is generally described by the Pennsylvania Department of Revenue, as follows:
The [Pennsylvania] estate tax is a “pick-up” tax imposed to absorb the maximum amount of credit allowed by federal estate tax law toward state death taxes.

For residents, the estate tax represents the difference between the Pennsylvania inheritance tax plus death taxes paid to other states and the maximum federal credit for state taxes allowed by federal estate tax law. * * *
HB 377, by way of its Section 17, would also abolish the PET:
SECTION 2117.  ESTATE TAX.--* * *
Will such proposed repeals of the Pennsylvania Inheritance Tax, and its younger sibling, the Pennsylvania Estate Tax, be realized?

Remember, Pennsylvania was the first state to legislate a death tax -- in 1826. The Commonwealth has enforced a death tax continuously since then.

Remember, too, the position of Governor Edward Rendell, applied consistently, even before his re-election to a second term: Any changes in state taxes must be revenue neutral.

In a veto message rejecting a proposed minor increase in the "Family Exemption" deducted in calculation of the PIT, which had been adopted by both the House and the Senate, Governor Rendell stated:
As long as I am Governor, I intend to enforce a “pay as you go” budget process for Pennsylvania.

There will be no significant increases in spending or reductions in revenue without a specific plan to pay for them.
See: PA EE&F Law Blog posting "Repeal PA Inheritance Tax?" (11/17/06).

The House members who adopted HB 377 likely know this, but . . . hey . . . this is politics.

That appreciation would explain one quote in the article:
Minority Leader Sam Smith, R-Jefferson, said the amount of tax cuts voted on was ''probably not realistic'' but sent an important message to Democratic Gov. Ed Rendell about the mood in the House as budget negotiations approach. * * *
In those negotiations to come, Pennsylvania death taxes will be on the table.

Update: 01/19/08:

An article appeared in the Carlisle (PA) Sentinel on January 18, 2008, entitled "
House OKs phasing out estate tax", by Andrea Ciccocioppo, which noted that "[a]n initiative to phase out the inheritance and estate tax is one step closer to fruition."
The state House has approved an amendment proposed by Rep. Scott Perry (R-92nd district) that would phase out the inheritance and estate tax by 2012. * * *

In fiscal year 2007-08, the Department of Revenue has projected the state will collect $801.9 million from this tax.

Perry’s measure, which was attached to House Bill 377, a state tax reform measure, was approved by a vote of 173-23. House Bill 377 passed by a vote of 191-0 and was sent to the Senate for consideration.

"The reduction in revenue will make it tough on those of us drawing up the state budget but that is what we were elected to do -- make tough decisions,” Perry said.

“Perhaps if people can keep more of their money, they won’t have to avail themselves of government programs.”

Perry’s amendment could aid state farmers and could help to preserve farmland.

“Farms tend to be cash poor. Many farmers in Pennsylvania face the prospect of selling off a portion of their farm just to pay federal and state inheritance taxes. The land often goes to development rather than to other farmers,” said Pennsylvania Farm Bureau President Carl T. Shaffer. “ * * *

Repealing the inheritance tax has been a long-time Farm Bureau priority. “The elimination of the inheritance tax would especially help our next generation of farmers,” Shaffer said.

Thursday, January 17, 2008

IRS Wins Rudkin Case in U.S. Supreme Court

On January 16, 2008, the United States Supreme Court issued its decision in Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner of Internal Revenue Service. (No. 06–1286; PDF, 16 pages). In short, the IRS won. But the drama may not be over.

This is the summary of the Court's holding: "Investment advisory fees generally are subject to the 2% floor when incurred by a trust."

The case, on appeal from the Second Circuit Court of Appeals, was argued before the U.S. Supreme Court on November 27, 2007. The case was decided unanimously by the Court in an opinion written by Chief Justice Roberts. The result favored the position advocated by the Internal Revenue Service.

The Court's opinion summarized the setting and issues as follows:

Individuals may subtract from their federal taxable income certain itemized deductions, 26 U. S. C. §63(d), but only to the extent the deductions exceed 2% of adjusted gross income, §67(a).

A trust may also take such deductions subject to the 2% floor, §67(e), except that when the relevant cost is “paid or incurred in connection with the administration of the . . . trust” and “would not have been incurred if the property were not held in such trust,” the cost may be deducted without regard to the floor, §67(e)(1).

After petitioner Knight (Trustee), the trustee of a testamentary trust (Trust), hired the Warfield firm to advise as to Trust investments, the Trust deducted in full on its fiduciary income tax return the investment advisory fees paid to Warfield.

Respondent Commissioner found the fees subject to the 2% floor and therefore allowed the deduction only to the extent the fees exceeded 2% of the Trust’s adjusted gross income.

The Tax Court decided for the Commissioner, and the Second Circuit affirmed, holding that because such fees were costs of a type that could be incurred if the property were held individually rather than in trust, their deduction by the Trust was subject to the 2% floor. * * * [Text reparagraphed.]
For prior discussion about this case and related IRS rulemaking activities, see PA EE&F Law Blog postings: "Rudkin" Regulations Proposed During Appeal (08/02/07); Bankers Associations File Amicus Brief in Rudkin Case (08/24/07); and IRS Gets Comments on "Rudkin" Regs Proposed (11/19/07).

The Court's opinion stated the issue: "In the case of individuals, investment advisory fees are subject to the 2% floor; the question presented is whether such fees are also subject to the floor when incurred by a trust."

The Court answered that question: "We hold that they are and therefore affirm the judgment below, albeit for different reasons than those given by the Court of Appeals."

But note, tax preparers, that this ruling affects more than trusts; it applies to estates too. Footnote No. 1 advised: "Because this case is only about trusts, we generally refer to trusts throughout, but the analysis applies equally to estates."

The opinion reviewed the arguments of the Trust and the IRS regarding Section 67(e)(1) of the Internal Revenue Code, and the resolutions by the circuit courts that considered the issue. It resolved the interpretation of that section as follows:
Thus, in asking whether a particular type of cost “would not have been incurred” if the property were held by an individual, §67(e)(1) excepts from the 2% floor only those costs that it would be uncommon (or unusual, or unlikely) for such a hypothetical individual to incur.

Having decided on the proper reading of §67(e)(1), we come to the application of the statute to the particular question in this case: whether investment advisory fees incurred by a trust escape the 2% floor. * * *

The Court concluded:
[I]t is quite difficult to say that investment advisory fees “would not have been incurred” — that is, that it would be unusual or uncommon for such fees to have been incurred — if the property were held by an individual investor with the same objectives as the Trust in handling his own affairs. * * *

There is nothing in the record, however, to suggest that Warfield charged the Trustee anything extra, or treated the Trust any differently than it would have treated an individual with similar objectives, because of the Trustee’s fiduciary obligations. * * *

It is conceivable, moreover, that a trust may have an unusual investment objective, or may require a specialized balancing of the interests of various parties, such that a reasonable comparison with individual investors would be improper. In such a case, the incremental cost of expert advice beyond what would normally be required for the ordinary taxpayer would not be subject to the 2% floor.

Here, however, the Trust has not asserted that its investment objective or its requisite balancing of competing interests was distinctive. Accordingly, we conclude that the investment advisory fees incurred by the Trust are subject to the 2% floor. * * *
[Text reparagraphed.]
What will the effect of this decision be upon the pending IRS proposed regulations on the same matters? See:
Internal Revenue Bulletin 2007-36, issued September 4, 2007 (REG-128224-06), "Notice of Proposed Rulemaking and Notice of Public Hearing Section 67 Limitations on Estates or Trusts".

Bob Wolf, Esq., of Pittsburgh, PA, provided some initial thoughts in a message to his P & T Hot Tip Emailees on January 16, 2008, after he recited the case holding (reproduced with his permission):
Since investment advisory fees are commonly incurred by individuals, they are subject to the 2% floor. If there had been a quantifiable cost for investment advisory fees as they dealt specific with unique trust issues, the Court left the door open for a full deduction without the 2% floor. These will be unusual, however, given the Court's opinion.

Very importantly, the IRS wanted to go much further than this and did so in its Proposed Regulations, which would have required trustees to literally unbundle their fees to determine which portion of a unified trustee's fee was truly unique to their functioning as a trustee -- such as accountings or fiduciary income tax return preparation, etc. This would have caused a great deal of trouble in the trust world, and led some also to wonder whether attorneys' fees would have to be "unbundled" in the same way!!

It seems quite unlikely that the IRS will feel encouraged to finalize their proposed regulations, given the specifically unfavorable comments by the Supreme Court in this decision to so draconian a set of rules. Thus at first blush, one would expect the Final Regulations to shift course, and if not, a second battle at the High Court would without doubt be in the offing.

Note also, that in a trust account in which there are not a lot of capital gains realized in a particular tax year, this is not the biggest deal in the world for the taxpayer. If the income in the trust, including capital gains incurred, were 6%, then 2% times the 6% would be a mere 12 basis points of deduction lost out of the investment advisory fee that in most cases is around 1%, depending upon the size of the account. The Rudkin Trust had $624,000 in income in a year in which the trust had a value of $2.9 Million. A little excessive turnover maybe?

So it is clear that investment advisory fees incurred by a trust will be ordinarily be subject to the 2% floor on itemized deductions absent special circumstances, but the likelihood that trustees and attorneys will have to unbundle their normal trustees and counsel fees to engage in highly artificial quantifications has been significantly reduced in this writer's opinion.
The issuance of this decision was noted immediately by Professor Paul L. Caron, of the University of Cincinnati College of Law, on the Tax Prof Blog, in his posting "Supreme Court Issues Unanimous Opinion in Knight: Deduction of Trust's Investment Expenses Is Limited by § 67's 2% Floor" (01/16/08).

He noted that the U. S. Supreme Court "thus followed the position of the Tax Court and Second, Fourth, and Federal Circuits, and rejected the position of the Tenth Circuit." He also posted some resource links about the issues in the case and the proposed, outstanding rulemaking of the IRS.

From among those links, I highly recommend reading the article entitled "The Section 67 Question: Are Fees for Investment Advice Fully or Partially Deductible by Trusts?", by Professor James F. Loebl, of Valparaiso University School of Law, as posted on the Social Science Research Network.

Professor Loebl had correctly predicted the outcome of this case in the U. S. Supreme Court; and he further suggested where the next drama might, or should, play -- in Congress.

Update: 01/17/08:

Wall Street Journal noted the Rudkin decision in its article entitled "
Investment-Advice Fee Ruling", by Mark H. Anderson, published January 17, 2008.
The U.S. Supreme Court yesterday unanimously ruled that investment-advice fees incurred by trusts and estates are subject to routine limits if claimed on federal tax returns.

The opinion, written by Chief Justice John Roberts, affirms a lower court ruling that denied a full deduction to more than $20,000 in investment-advice fees spent by a trust set up in 1967 under the will of Henry A. Rudkin, who, with his wife, founded food company Pepperidge Farm.

Chief Justice Roberts, in the opinion, said in most instances trust or estate investment fees must exceed 2% of adjusted gross income to be deductible. The opinion said investment fees may be fully deductible in some instances, such as when additional fees are incurred for fiduciary obligations. * * *

The WSJ article apparently provided a link for readers to this Blog's posting.

Update: 01/18/08:

Professor Gerry Beyer noted this posting in his own, dated January 18, 2008, entitled "Supreme Court Holds Trust Investment Advisory Fees Subject to the 2% Floor", which appeared on the Wills, Trusts & Estates Prof Blog.

Update: 01/24/08:

Commerce Clearning House (CCH) posted an excellent
summary & analysis of the Rudkin (a/k/a/ Knight) case on January 17, 2008, in its Daily Tax News Update, in an article by George L. Yaksick, Jr. & Deborah Petro, of the CCH News Staff, entitled "Supreme Court Limits Trust's Deduction of Investment Advisory Fees to Two-Percent Floor; IRS Likely to Repropose Regulations (Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust, SCt)".
While the decision dashed the hopes of many trust and estate administrators that the Court would allow these fees to be fully deductible, the Court did not adopt the analysis of the Second Circuit Court of Appeals on which the IRS based controversial proposed regulations (NPRM REG-128224-06, I.R.B. 2007-36, 551; TAXDAY, 2007/07/21, I.2). It is likely the IRS will have to repropose the regulations to reflect the Supreme Court's decision, several experts told CCH.

"The decision puts us back to square one," Carol A. Cantrell, co-counsel for the trustee in Rudkin , told CCH. Cantrell, a shareholder with Briggs & Veselka Co., Bellaire, Texas, and a member of the AICPA Fiduciary Accounting Task Force, predicted more litigation as trusts proceed on a case-by-case basis. * * *
Update: 03/04/08:

Attorney Bob Wolf, of Pittsburgh, PA, analyzed the "interim guidance" on these matters, issued by the Internal Revenue Service on February 27, 2008, in this PA EE&F Law Blog posting, "
IRS Issues Interim Guidance for Fid Inc Tax Returns" (03/04/08).

Wednesday, January 16, 2008

Free Software for Trusts & Estates Professionals

On January 10, 2008, the website of Trusts & Estates magazine offered a list of "Free Software for Trusts & Estates Professionals". That list is like a toolbox filled with calculators.

T&E, as a print publication available since 1904, is a well-known subscription resource for professionals. Now, its website references, by links, other
useful resources that are public and free.

T&E calls its website a "Town Center" for professionals, and promises: "On the website, we offer a variety of additional information sources."

Trusts & Estates is the town center where experts who serve the ultra-wealthy's planning needs gather to gain insight into their specialties and to learn about related professions.

This community includes attorneys, fiduciaries, accountants, investment advisors, charitable giving specialists, family office executives, insurance agents and valuation experts. * * *
For example, on its web page entitled "Estate Planning", T&E's Town Center lists online resources, such as blogs. A link to the PA EE&F Law Blog is included among thirteen recommended blog sites.

Also, it offers "Don Kelley's Tech Review" (Jan., 2007 - present), which is described as a "monthly Technology Review by Donald H. Kelley -- a respected connoisseur of software and Internet resources wealth management advisors use to further their practices."

For example, I find Don's most recent column filled with relevant information, along with a multitude of web links to resources. See: "Googling for Trusts and Estates Materials on the Web -- Quick, easy and free searching for T&E practice resources on the Internet" (Dec., 2007).

On this blog, I have referenced other outlets for Don Kelley's work in trust & estate technology. See PA EE&F Law Blog postings: "
ACTEC Offers T&E "Tool Box" Online" (01/03/08); "Fiduciary Administration Software" (12/14/07); "Estate Planning & Drafting Software" (12/11/07); and "ACTEC Notes Blogs on T&E and Taxes" (07/23/07).

Under each of the Town Center's ten major topic headings are references to articles that appeared in the monthly print issues of T&E magazine. However, unless you are a subscriber to that publication, only the identifying information and the initial paragraphs are available to read.

But the listing of free calculators -- that's a different story!

Twenty-one websites are described that offer calculators for a variety of purposes, which I generically characterize as follows:
  • estate tax estimation
  • social security benefits
  • personal financial planning
  • charitable donations
  • savings bond valuation
  • loan, mortgage, & interest payments
  • savings projections for college, retirement, or obligations
  • certain income tax calculations
  • IRA vehicle conversions & comparisons
  • refinancing & amortization costs
  • charitable gift annuities, CLTs, CRATs and CRUTs
If these free versions would not meet your need, consider buying one.

On January 10th, Don Kelley further posted on the T&E Town Center a list of nineteen "Commercially Available Software Applications for Trusts & Estates Professionals". One among those listed could be a good tool for your job.