Friday, July 16, 2010

Better or Worse to Die in 2010?

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

The stock market continued to rally over the past week and is up roughly 8% from the low on July 1 as I write this. As is usually the case coming off a significant bottom, the “easiest” money has been made with the initial snapback being the most vertical portion of any rally.

With Q2 earnings season coming in full bloom next week, it’s going to be very interesting to see market reaction more than what the actual earnings are. The reports should be fantastic, but the corporate guidance is more important. Stocks certainly could run further in the short-term, but a quick period of digestion is needed sooner than later to keep the nascent rally alive.

In my 11 Shockers for 2010, #7 was that treasury bonds end up as a top performing asset. So far, that asset class is up nicely on the year and continue to behave constructively. As hard to believe as it is, those boring bonds are up more than 10% since the beginning of April and still look appealing into any decent bout of weakness.

Now, on to the unusual estate tax issue…

So far, Congress has failed to reenact estate taxes for 2010, but that doesn’t necessarily mean no tax consequences for heirs in 2010.

Yes, estate taxes and generation-skipping transfer taxes were repealed at the end of 2009. Without Congressional action, they will be back in 2011 at rates from a decade ago of $1 million exempt from taxes and 55% taxes on the remainder. While Congress could pass estate taxes retroactive to January 1, 2010, the more time that passes from the start of the year, the messier that becomes to implement.

Barring new legislation, where taxes still come into play for a 2010 estate is cashing out an inheritance. Items sold from a 2010 estate will be taxable based on their original price. Inherit 1,000 shares of Amazon purchased in 1997 for $18 and sell them today for $130 per share, and you will have taxable gains of $112,000. At the 15% capital gains tax rate, $16,800 could be payable in capital gains taxes on the inheritance. As a result, individuals who might not pay estate taxes under even a $1 million exemption, may find themselves with a taxable inheritance.

The real problem for estates in 2010 will be wills designed to pass as much of the estate through tax free as possible. For example, a will might state that 100% of the estate that could be passed on tax-free be distributed to a designated charity while the remainder goes to the surviving spouse. Today, that could mean nothing for the surviving spouse.

I am scheduled to be on WTNH’s Good Morning Connecticut this Saturday, July 17th, at 7:35 am discussing what investors should do during the second half of 2010. You can view all of our past media appearances, good, bad and disastrous right here.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

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