Talk about Money: Not even death, taxes are certain in extraordinary times

In 1789, when Benjamin Franklin said “In this world, nothing is certain but death and taxes,” even a mind as great as his couldn’t have predicted the surreal state of our tax system at the beginning of 2010. By not properly prioritizing the legislative agenda, our Congress has failed to preempt the one-year repeal of the estate “death” tax and the inevitable mess that will ensue.
This all dates back to 2001, when Congress passed the expansive tax reform act known as EGGTRA. A large portion of this legislation had to do with increasing the estate tax exemption. (Estate taxes, at the time, were being levied on more and more ordinary folks — a segment of the population this tax was never intended for — and the tax rate was a whopping 55 percent.)
In an effort to get the bill passed, Congress compromised on a system that would incrementally increase the tax exemption, from $1 million in 2002 to $3.5 million in 2009. The estate tax would be fully repealed for a year in 2010 before reverting back to the paltry and inadequate $1 million exemption in 2011. This is known as the “sunset” provision of the law and was never actually intended to take place.
When the law was passed, legislators (mistakenly) figured they would address the issue as time drew closer to the hard deadline of 2010.
What transpired was something quite different: With all the other bills before Congress last year, they shelved this important piece of legislation.
Congress could have easily “frozen” the estate tax system at 2009 levels and addressed reform this year — something most experts felt was immanent — but they did not. So, as it stands, there will be no estate taxes this year.
If you’re “fortunate” enough to be worried about estate taxes, don’t get too excited. This doesn’t mean there won’t be any taxes owed on transferred property. Under the new system, heirs will inherit the “basis” on transferred property and will owe capital gains taxes when it is disposed. That means the IRS now expects you to determine the basis on those shares of General Electric that Grandpa bought in 1962 (with all the reinvested dividends) and report the gains. Good luck!
The Generation Skipping Transfer Tax has also gone away, and the Gift Tax rate has been lowered to 35 percent. But don’t get too comfortable with this new, untenable system. It’s widely expected (though by no means certain) that Congress will reform the estate tax system this year, making the tax permanent and possibly even retroactive.
While we wait with bated breath, all of this is sure to wreak havoc on the court system, tax planners, and even the plans implemented by their clients over the past nine years. And it’s sure to create a tax quagmire for the IRS itself — a governmental agency that’s already stretched and is about to be more so when the health care bill is finalized.
All of this could and should have been easily avoided if Congress was responsible enough to make this a priority, but have we come to expect anything less from our elected officials? I’ll let you arrive at your own conclusions.
• Orion Melehan is a certified financial planner for LMC Financial Services in Scotts Valley. Contact him at 454-8042 or

or***@lm**********.com











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Securities and investment advisory services offered through SagePoint Financial Inc. member FINRA/SIPC a registered investment advisor. LMC Financial Services is not affiliated with SagePoint Financial Inc. or registered as a broker/dealer.