CRAIN LAW FIRM, LLC

MONTHLY NEWSLETTER

JANUARY 2010

Predictions for 2010

I am sure I am dating myself, but I fondly remember Johnny Carson’s routine, “Carnac the Magnificent”.  Johnny donned a turban and cape to play Carnac, and would answer a sequence of questions from Ed McMahon.  Each question was “hermetically sealed” in a separate envelope, and Carnac would divine the answer to the question before the envelope was opened.  This allowed Johnny to seriously intone the punch line before the audience knew the setup for the gag.

I am no Carnac, but I do have some predictions for what might happen in the coming year.  Unfortunately these punch lines are nothing to laugh about. 

1.              Taxes are going up. 

It does not take a genius to see this one coming.  With the stimulus package and health care reform, the U.S. budget deficit is at an all time high of $1.4 trillion.  Congress was already behind as films like I.O.U.S.A. tried to warn us, and last year’s record spending just made things worse.  Something has got to give, and I fear that something is the pocketbook of the American taxpayer.

2.              Estate tax reform will take shape.

The House of Representatives “fixed” the estate tax in December 2009 with a bill making the existing $3.5 million estate tax exemption permanent.  If the Senate agrees and the President signs this law, look for Congress to complete the reform by reunifying the transfer tax exemption, and by allowing the exemption to be portable between spouses.

Under current law, a decedent can give away up to $3.5 million tax free, but a living donor is limited to $1 million during his or her lifetime.  This law is an aberration of the so-called “unified credit” which began as the same amount for both estate tax and gift tax purposes.  Congress will fix this by raising the lifetime exemption to the same level as the estate tax exemption, $3.5 million.  This will once again unify the credit.

Also under current law, the $3.5 million estate tax exemption dies with the decedent.  If the decedent failed to carefully plan his or her estate to take advantage of the tax credit, it was lost.  This often happened if a decedent simply left all of his or her property to the surviving spouse.  The marital deduction overrode the credit, and the credit for the first decedent was lost.  Most of my clients carefully guard against this with a trust called a “bypass trust” or “family trust”. 

Congress will probably make the estate tax exemption portable between spouses.  No matter which spouse dies first, his or her unused tax exemption will carry over to the surviving spouse.  Both tax exemptions can be used, with or without the bypass trust.

3.              The alternative minimum tax will receive further attention.

The AMT continues to be a problem for more and more middle income taxpayers despite feeble attempts in the past to remedy its worst problems.  Congress will take up the gauntlet again, but will not repeal this unpopular tax.  Its revenue production is too lucrative to give up, especially since the hardest hit (upper income taxpayers) are few in number.

4.              Capital gains rates will increase.

This is an obvious target for a Democrat administration.  Right now taxes on capital gains are capped at 15%, while the highest federal rate on ordinary income is 35%.  If the Democrats are the party of the little man, why not bring the tax rates for the other party’s constituents in line with the tax rates for your constituents? 

5.              Health care providers and health care insurers will fold.

I believe this is an obvious one also.  Would your clients want to enter an industry or to stay in an industry that faces an exponential increase in government regulation and direct competition from that same government?  Neither would I.

6.              Republicans will gain in off year elections.

Democrats triumphed in 2008 largely due to dissatisfaction with the policies of an unpopular Republican administration.  The political pendulum will almost undoubtedly swing back again this year.

7.              Crain Law Firm can help.

I do not always know the answers, but I frequently know where to look.  If you or your clients need a little guidance about the future, please give me a call.

J. Kevin Crain

CRAIN LAW FIRM, LLC

636-G Long Point Road #95

Mt. Pleasant, SC 29464

Phone (843) 735-7602

Fax (843) 735-7002

Email kevin@kevincrain.com

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