Maximizing Tax Savings Through Estate Planning Presented By James W. Garrett, Esq. Carrell Blanton Ferris & Associates, PLC 7275 Glen Forest Drive, Suite 310 Richmond, VA 23226 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Copyright © 2016 Carrell Blanton Ferris & Associates, PLC What We’ll Cover Brief History of the Federal Estate Tax Estate Tax Planning Before ATRA the A/B Tax Plan, including a mandatory fractional formula “Side Effects” of the A/B Tax Plan Estate Tax Planning After ATRA Portability “Wait & See” Tax Planning “Fixing” Existing Trusts Amending Revocable Living Trusts Trust Reformation 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

FEDERAL Estate tax MILESTONES 1916: Estate Tax enacted 1981: Unlimited Marital Deduction introduced 2001: Economic Growth & Tax Relief Reconciliation Act (with a 2010 “Sunset”) 2007: Virginia Estate Tax Repealed 2010: Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (with a 2012 “Sunset”) 2012: American Tax Payer Relief Act (ATRA) 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

The Estate Tax In Recent Decades Year Maximum Estate Tax Rate 1987-97 55% 1998 1999 2000-01 2002 50% 2003 49% 2004 48% 2005 47% 2006 46% 2007-08 45% 2009 2010 No tax 2011 35% 2012 2013 40% 2014 2015 2016 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Estate Tax EXEMPTION In Recent Decades Year Exemption 1987-97 $600,000 1998 $625,000 1999 $650,000 2000-01 $675,000 2002 $1,000,000 2003 2004 $1,500,000 2005 2006 $2,000,000 2007-08 2009 $3,500,000 2010 No tax 2011 $5,000,000 2012 $5,120,000 2013 $5,250,000 2014 $5,340,000 2015 $5,430,000 2016 $5,450,000 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Assume the Estate Tax Exemption is $1 Million Per Person, HYPOTHETICAL: Year 2002 Assume the Estate Tax Exemption is $1 Million Per Person, and the Estate Plan Does Not Include the A/B Trust Tax Plan Both Spouses Alive Each Trustmaker has an estate tax exemption. Therefore, it is possible to capture two estate tax exemptions with proper planning Will or Revocable Living Trust with no tax plan or no estate planning documents Combined Estate is $2 Million First Spouse Dies Because all assets are left to the surviving spouse, the first spouse to die’s exemption is lost. No estate tax at this stage due to the Unlimited Marital Deduction All $2 Million becomes the asset of the surviving spouse All Assets to the Surviving Spouse Because the first spouse to die’s exemption was lost, only the $1 Million estate tax exemption of the surviving spouse is available Surviving Spouse Dies All Assets to the Children/Beneficiaries RESULT: $1 Million is subject to estate tax (50% or $500, 000 owed to IRS) 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

HYPOTHETICAL: Year 2002 Assume the Estate Tax Exemption is $1 Million Per Person, and the Estate Plan Includes the A/B Trust Tax Plan Both Spouses Alive The terms of the revocable living trust includes the A/B Trust Tax Plan Revocable Living Trust Combined Estate is $2 Million First Spouse Dies $1 Million is allocated to the B Trust, which captures the first spouse to die’s estate tax exemption. B Trust (AKA Family Trust) A Trust (AKA Marital Trust) The other $1 Million is allocated to the A Trust, which will be subject to the surviving spouse’s estate tax exemption Surviving Spouse Dies $1 Million was and remains exempt from estate tax due to its allocation to the B Trust at the death of the first spouse The $1 Million allocated to the A Trust is subject to the surviving spouse’s estate tax exemption All Trust Assets to the Children/Beneficiaries RESULT: Because both exemptions are captured, all $2 Million passes estate tax free to the children/ beneficiaries (no taxes are owed to the IRS) 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

The Impact of the A/B Trust Tax Plan Positives: Captured the exemption Remarriage protection Asset protection Negatives: Administrative burdens, fees & costs No basis adjustment following death of surviving spouse, subjecting heirs to potentially higher capital gains 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Capital Gains Taxation Tax Rates Range from 15% to 20% Plus 3.8% surcharge for high income earners Plus 5.75% Virginia Income Tax Plus Depreciation Recapture Carryover vs. Step-up Basis Gift during life: Carryover Basis Bequest at death: Step-up Basis 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Capital Gains Taxation with an A/B Trust Tax Plan Only assets left to the surviving spouse outright or in the A/Marital Trust will receive stepped up cost-basis at survivor’s death Because the assets in the B/Credit Shelter Trust never become the assets of the surviving spouse for estate tax purposes, the B Trust assets do not receive a second stepped-up cost-basis at the death of the surviving spouse Remember, the sacrifice of the second stepped-up cost-basis was justified in order to capture the first spouse to die’s estate tax exemption since the estate tax is always higher than the Capital Gains tax 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Fixing Plans with “Outdated” Estate Tax Planning Portability “Wait and See” Tax Planning Options for married couples Trust Reformation for surviving spouses 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Portability (Use it, but don’t rely on it!) “Deceased Spouse Unused Exclusion Amount” Introduced in 2010 & made permanent in 2012 Advantages: Capturing deceased spouse’s exemption in a trust no longer necessary Assets receive a 2nd basis adjustment at survivor’s death Disadvantages: Not automatic: Surviving spouse must file a timely Estate Tax Return, Form 706 Form 706 costs $$$$ May be lost if survivor remarries 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

OR The Wait and See Tax Plan Allows the Surviving Spouse to Pick the Best Option Available at the Death of the First Spouse What about Remarriage Concerns? Revocable Living Trust Both Spouses Alive Option 2: Funding Methods: Spouse disclaims or “Clayton Election” Option 1: If Portability or higher exemption is available First Spouse Dies OR All Trust Assets to the Surviving Spouse Elects Portability B Trust (AKA Family Trust) A Trust (AKA Marital Trust) All Trust Assets to the Children/Beneficiaries (All assets receive a Basis Adjustment) Fund Credit Shelter Trust if: Portability is repealed Exemption is lowered Asset Protection is needed Net Worth outpaces Exemption Surviving Spouse Dies 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Benefits of a “Wait & See” Tax Plan Coupled with Portability Surviving spouses benefit from a simpler way of capturing two estate tax exemptions with Portability However, clients have “peace of mind” knowing that if Portability is repealed or if the estate tax exemption is lowered, they can still rely on the A/B Trust Tax Plan to capture two exemptions 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

“Fixing” an Existing B Trust Non-judicial Modification If all interested parties agree If the change will not violate the Trustmaker’s intent Trust Decanting Introduced in Virginia in 2013 Trustee moves assets to a new trust Judicial Modification 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Copyright © 2016 Carrell Blanton Ferris & Associates, PLC Questions? 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

Copyright © 2016 Carrell Blanton Ferris & Associates, PLC LEGAL DISCLOUSURE ABSENCE OF LEGAL ADVICE. This presentation (in both its written and oral form) is intended for general information purposes only and does not constitute legal advice. The reader/audience member should consult legal counsel to determine how laws apply to specific facts and situations. IRS CIRCULAR 230 NOTICE. Any tax advice expressed above was neither written nor intended by the sender or Carrell Blanton Ferris & Associates, PLC to be used and cannot be used by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein. The reader/audience member should consult legal counsel and/or his or her tax adviser to determine how the tax laws apply to specific facts and situations. 11/12/2018 Copyright © 2016 Carrell Blanton Ferris & Associates, PLC