Summary: New Transfer Tax Law

The President has signed into law the long-awaited legislation concerning transfer taxes. The new law is known as the Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010 (the "Act"). Here is a brief summary of the changes made by the Act, all of which expire on December 31, 2012:

The Act establishes a $5M estate tax exemption, and a maximum estate tax rate of 35 percent, for decedents dying after January 1, 2010. For income tax purposes, the personal representative of a decedent who died during 2010 may elect to choose between 1.) a step-up in basis in decedent's property, or 2.) a carryover basis in decedent's property with no estate tax.

The Act establishes an increase in the gift tax exemption to $5M (with a gift tax rate of 35 percent), effective January 1, 2011. The gift tax annual exclusion amount will remain at $13,000; and the $1M exemption remains for gifts made in 2010.

The Act establishes a $5 million Generation-Skipping Transfer (GST) tax exemption (with a GST tax rate of 35 percent) for gifts made, and decedents dying, after January 1, 2010. Transfers made in 2010 will be subject to a zero GST tax rate, and gifts made in 2010 to grandchildren outright or in trust will incur no current GST tax. What's more, future distributions to grandchild from a trust created in 2010 can also be made free of GST tax. Distributions in 2010 from a non-exempt GST trust can still be made without incurring a GST tax.

Effective for decedents dying after January 1, 2011, the personal representative can elect to transfer any unused estate tax exemption to the surviving spouse.

The act extends lower individual income tax rates, including the 15% rate on long-term capital gains and qualified dividends, and provides AMT relief. Effective January 1, 2010, individuals older than 70½ may rollover up to $100,000 per year directly from an IRA to a public charity. These transfers will qualify as meeting the MRD for the year in which they are donated, and will not be included in the individual's gross income for federal income tax purposes. Also, any transfers made in January 2011 may be treated as made in 2010. The AMT relief and IRA charitable rollover provisions expire on December 31, 2011.

QE2

I stated in another post that everything that could be done to stimulate more robust economic recovery has been done (and there is nothing left to do but wait). Well, the FED has decided to undertake what is now dubbed "QE2," in a "last shot" attempt it feels worth the risk: The official news came in paragraph 3 of last Wednesday's FOMC Press Release.

I was having coffee with a couple of colleagues Tuesday (the previous night), one of whom was following stock market results on her Android and noted rumors of the FED effort had resulted in broad advances that day. At that point the other colleague asked me: "What exactly is this "quantitative easing?". My answer quickly degenerated into an eye-glazing explanation of reserve requirements and the FED balance sheet, at which time I realized: "I have no idea how to explain this!" So, I just shut-up and drank coffee.

Sorry, Rob! But, I didn't give up: Turns-out Wikipedia has economist contributors, who provide an excellent explanation of "quantitative easing (QE)," generally, and "QE2" in particular.


"But, wait, there's more!" A few points need to be made of this QE2 endeavor by the FED: It's worth paying attention to because 1. The experiment is historic; 2. it may not work; and 3. we'll soon forget it.

It's historic because we're in uncharted waters, as we were at the time of Ronald Reagan's "supply side" growth experiment. Most of the data informing the current easing comes from analysis of the Japanese experience in the early 2000s. For example, see (but don't spend too much time reading), Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment, by Ben S. Bernanke, Vincent R. Reinhart, and Brian P. Sack, 2004-48 (September); and Quantitative Monetary Easing and Risk in Financial Asset Markets, by Takeshi Kimura and David Small, 2004-57 (October).

QE, or what the FED prefers to call "credit easing" may not work for our current recession, like quantitative easing didn't work for Japan, but at least we'll know for sure. In 1981, supply-side economists had data, which suggested cutting marginal tax rates would increase growth and revenues. Reagan tried, but unfortunately the experiment failed: Constant dollar revenues actually fell, and growth came not from tax rate cuts, but with recovery from the 1982 recession after the FED (led by Volcker) increased interest rates; but now we (mainstream economists) know that and can focus our problem-solving research on other issues.

And, if you pay attention, you will likely live to see how soon the nation will forget whether it worked. Heck, few of our neighbors got the supply-side memo (or remember it). Only a few election cycles later, those same neighbors still believe politicians quoting 1981 hypotheses, which promise that cutting taxes will increase growth and revenues.

On Deck: the "Volcker Rule"

In his recent Bloomberg article, "Proprietary Traders Earn 'Trust, but Verify'," Simon Johnson seems to argue for more (rather than less) scrutiny of big bank proprietary trading.

Wouldn't it be much cheaper (and just as effective) to simply prohibit the practice under threat of severe consequences (including dissolution)? Fine; but, there's certainly no sense arguing his position regarding the more fundamental and continuing matter of "too big to fail":

"Whatever you hear from politicians, there is no way to handle the failure of global megabanks because there is no cross-border resolution mechanism or bankruptcy procedure that can handle their failure, a point I made with co-author James Kwak in “13 Bankers.” The idea that too big to fail has been legislated away is simply an illusion."

So, regulators are left to work with whatever can be saved from Dodd-Frank's "Volker Rule." Financial reform is no longer the top story, but it's now time for public comments as to how the "Volker Rule" rule will be implemented. As Simon Says:

"You can stand on the sidelines or you can send comments to the committee; they will only ask once. If you care about future financial stability and regard the ability of big banks to endanger the system as unnecessary and inappropriate, you should consider sending in comments to that effect."

Mr. Johnson's article is a good review.

This Crisis Cannot be Fixed in Two Years (or Three)

Though a week old, I just watched this worthwhile interview with Tim Geithner, which does a good job of putting in context a very timely issue. Regardless what you think of him or his party - I have no opinion on his appointment and consider him a competent economist - Geithner makes good points, which I think should be highlighted.

We should keep in mind (and keep repeating) these factual points if we are interested in REAL solutions:

1. The crisis was "caused" before the current administration took office;
2. The economy suffered serious damage, which will take time and pain to grow out of (reverse); and
3. All that can be (cost effectively) done to reverse the crisis, has been done.

While watching the interview (& suffering through the Crisis), pay special attention to the following language:

JIM LEHRER: But is it correct to say that, had there been a different president and a different set of officials in the government of the United States before [Obama took office], this would never have happened?

TIMOTHY GEITHNER: The crisis itself?

JIM LEHRER: Yes.

TIMOTHY GEITHNER: Oh, absolutely. The -- the financial crisis was caused by a set of policy choices that we made as a country over a significant period of time, certainly the decade before that. So, we saw financial institutions across the country take on a huge amount of risk without restraint. You saw the government of the United States living way beyond its means, borrowing with -- from future generations to finance a set of programs and tax cuts, without paying for them.

Now, lots of other things contributed to this crisis, but the crisis was much more damaging because of those basic judgments. And it's going to be much harder to solve, take more time to solve because of those basic judgments. Those were consequences of policy choices. Now, they weren't solely the responsibility of the previous president or Republicans across a period of time. A lot of responsibility across the country for those choices, but they were -- the crisis was made worse by and was made much harder to solve because of the cumulative set of policy choices that happened in the decade before this president took office.

On the Way Down?

Forget the talking heads on the cable networks - the real danger to our country is disappearance of the middle class. A middle class was the gift of industrial revolution and constitutional democracy. Historically, political stability is impossible without it. This well written article from Spiegel is great food for thought:

On the Way Down: The Erosion of America's Middle Class

We must fight getting depressed by such news and information. Instead, each of us should make it a point to become increasingly more informed about the root causes.

A Tea Party to Nowhere

Former CIA counter-terrorism specialist and military intelligence officer Philip Giraldi points out the terrible Tea Party conundrum: Tea Partiers want smaller and cheaper government, but most also want a strong, assertive national defense and support an aggressive foreign and security policy.

A Tea Party to Nowhere | Philip Giraldi, Campaign For Liberty

Giraldi points-out Tea Partiers have been fed a line of hokum by politicians, aided and abetted by mainstream media. He then explains they fail to understand that it is precisely the interventionist defense and foreign policies that are driving the things they detest in government.

You can pay me now, you can pay me later - but you ain't gettin' it free

While searching for news of the financial crisis at Miami Jackson Memorial Hospital, I ran into a well written and informative August, 2009, article by John Dorschner of the Miami Herald:

"End-of-life dialogue stifled in healthcare reform debate"

The inspiration for this post was NOT John's excellent article, but the ignorant comments, which followed. You've heard them all before, but read the article to fully appreciate my point. To me, that illogical mentality, venomously critical of John's apolitical argument, gets to the sad crux of the larger problem impeding reform of our broken system - we have largely become an uneducated, misinformed mob.

As a litigating elder law attorney, I have consulted with the medical profession, written and lectured on end-of-life decision-making issues, and can vouch for the accuracy of John's assessment. Apart from large financial savings to family and state, a major benefit of advance end-of-life decision making is the emotional relief usually afforded immediate family and close friends. You would think we would know better after the Terri Shiavo matter, but our collective memory is short.

After introducing some facts, John correctly stated "[M]any doctors can't afford to spend time discussing end-of-life desires. The main reform bill before the House of Representatives proposes to change that by requiring Medicare to pay physicians for an end-of-life consultation, if the patient wants to discuss the issue." He then logically supported his uncontroversial thesis. Yet, as if by involuntary reflex, seven of the ten commentators, seemingly oblivious to what they just read, sling mud at the House HCR draft with foolish attacks such as:

- "This is the core of the democrat healthcare destruction plan . . .",
- "[m]aybe the Obama administration requires medical schools to add "The kevorkian 101" class to their curriculum!",
- "[f]or all of you who want the kevorkian way out . . .",
- ". . . require our elected representatives who create it to have to use it",
- ". . . you uniformed Obama sheep are still blaming the GOP for the health care bill's failure", and
- "[w]hen cast primarily as an issue of cost, this discussion loses its dignity and indeed can become the first step on the slippery slope that leads to euthanasia and other evils."

Even the two clearly pro-HCR commentators offered no hint they understood Dorschner's thesis, and ONLY one of the ten commentators "got it," though his comment seemed to address the ignoramuses, not John's article:

"That area of the bill which was to give counseling for end of life decisions will be taken out. There wasn't anything to it and a lot of nonsense ensued because of it. We need a method to save Medicare and Medicaid. If people don't offer a solution how do we expect our public figures to come up with a health care reform that will work. It is difficult and it is too bad that Rush Limbaugh has brought the uninformed down to his level in opposition to this reform."

So, because I am not registered with the Miami Herald, and because I haven't posted for a while, I will comment here:

The cost of an "end-of-life consultation" with a doctor (because you haven't visited an attorney or the library) is usually nominal compared to the financial and emotional cost of the alternative. (After consultation, most people choose to forgo extraordinary life support in futile cases; and, no major religion requires extraordinary life support in futile cases.)

I don't care what Beck, Limbaugh or Palin tell you; on this one, we could have had the cake and ate it too! Fact is: If you don't educate yourself now, you can pay the doctor then, or your family (and, likely, the state) will pay the hospital later - but someone will pay. Clearly, as regards end-of-life realities, we continue to forge ahead unreformed, uneducated and misinformed.