1. 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
11/12/2018
Copyright © 2016 Carrell Blanton Ferris & Associates, PLC

2. 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

3. 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2007: Virginia Estate Tax Repealed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

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

5. Estate Tax EXEMPTION In Recent Decades
Year
Exemption
$600,000
1998
$625,000
1999
$650,000
$675,000
2002
$1,000,000
2003
2004
$1,500,000
2005
2006
$2,000,000
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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. “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

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

17. 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