Beachside Wealth PartnersFrances Povloski, CRPS, AIF

Financial Advisor131 Second Avenue North

Suite 200Jacksonville Beach, FL 32250

904-246-0346904-246-0346

Frances.Povloski@RaymondJames.comwww.beachsidewealth.com

The New Estate Tax Rules andYour Estate Plan

01/01/2020

The Tax Relief, Unemployment InsuranceReauthorization, and Job Creation Act of 2010 (the2010 Tax Act) included new gift, estate, andgeneration-skipping transfer (GST) tax provisions.The 2010 Tax Act provided that in 2011 and 2012, thegift and estate tax basic exclusion amount was $5million (indexed for inflation in 2012), the GST taxexemption was also $5 million (indexed for inflation in2012), and the maximum rate for both taxes was35%. New to estate tax law was gift and estate taxapplicable exclusion portability: generally, any gift andestate tax basic exclusion left unused by a deceasedspouse could be transferred to the surviving spousein 2011 and 2012. The GST tax exemption, however,is not portable. Starting in 2013, the AmericanTaxpayer Relief Act of 2012 (the 2012 Tax Act)permanently extended the $5 million (as indexed forinflation) basic exclusion amount and GST taxexemption and portability of the gift and estate taxapplicable exclusion amount, but also increased thetop gift, estate, and GST tax rate to 40%. The TaxCuts and Jobs Act doubled the basic exclusionamount to $11.18 million in 2018 (indexed annuallyfor inflation). The exclusion is $11.58 million in 2020.After 2025, the exclusion is scheduled to revert to itslevel prior to 2018 and be cut by about one-half. Youshould understand how these new rules may affectyour estate plan.

Exclusion portabilityUnder prior law, the gift and estate tax exclusion waseffectively "use it or lose it." In order to fully utilizetheir respective exclusions, married couples oftenimplemented a bypass plan: they divided assetsbetween a marital trust and a credit shelter, orbypass, trust (this is often referred to as an A/B trustplan). Under the recent Tax Acts, the estate of adeceased spouse can transfer to the surviving spouseany portion of the basic exclusion amount it does notuse (this portion is referred to as the deceasedspousal unused exclusion amount, or DSUEA). Thesurviving spouse's applicable exclusion amount, then,is increased by the DSUEA, which the surviving

spouse can use for lifetime gifts or transfers at death.

Example: At the time of Henry's death in 2011, hehad made $1 million in taxable gifts and had an estateof $2 million. The DSUEA available to his survivingspouse, Linda, is $2 million ($5 million - ($1 million +$2 million)). This $2 million can be added to Linda'sown exclusion for a total of $13,580,000 ($11,580,000+ $2 million), assuming Linda dies in 2020.

The portability of the exclusion coupled with anincrease in the basic exclusion amount to$11,580,000 per taxpayer allows a married couple topass on up to $23,160,000 gift and estate tax free in2020. Though this seems to negate the usefulness ofA/B trust planning, there are still many reasons toconsider using A/B trusts.

• The assets of the surviving spouse, includingthose inherited from the deceased spouse, mayappreciate in value at a rate greater than the rateat which the basic exclusion amount increases.This may cause assets in the surviving spouse'sestate to exceed that spouse's available applicableexclusion amount. On the other hand, appreciationof assets placed in a credit shelter trust will avoidestate tax at the death of the surviving spouse.

• The distribution of assets placed in the creditshelter trust can be controlled. Since the trust isirrevocable, your plan of distribution to particularbeneficiaries cannot be altered by your survivingspouse. Leaving your entire estate directly to yoursurviving spouse would leave the ultimatedistribution of those assets to his or her discretion.

• A credit shelter trust may also protect trust assetsfrom the claims of any creditors of your survivingspouse and the trust beneficiaries. You can alsoinclude a spendthrift provision to limit yoursurviving spouse's access to trust assets, thuspreserving their value for the trust beneficiaries.

A/B trust plans with formula clausesIf you currently have an A/B trust plan, it may nolonger carry out your intended wishes because of the

Looking ahead

The Tax Cuts and Jobs Actdoubled the basic exclusionamount to $11.18 million in2018 (indexed annually forinflation). The exclusion is$11.58 million in 2020. After2025, the exclusion isscheduled to revert to itslevel prior to 2018 and becut by about one-half.

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond JamesFinancial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary orstatement of all available data necessary for making an investment decision and does not constitute a recommendation. The informationcontained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Thisinformation is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitablefor all investors. The material is general in nature. Past performance may not be indicative of future results. Raymond James Financial Services,Inc. does not provide advice on tax, legal or mortgage issues. These matters should be discussed with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC . Investment advisory services are offered throughRaymond James Financial Services Advisors, Inc. Beachside Wealth Partners is not a registered broker/dealer and is independent of RaymondJames Financial Services.

increased exclusion amount. Many of these plans usea formula clause that transfers to the credit sheltertrust an amount equal to the most that can pass freefrom estate tax, with the remainder passing to themarital trust for the benefit of the spouse. Forexample, say a spouse died in 2003 with an estateworth $11,580,000 and an estate tax exclusion of $1million. The full exclusion amount, or $1 million, wouldhave been transferred to the credit shelter trust and$10,580,000 would have passed to the marital trust.Under the same facts in 2020, since the exclusionhas increased, the entire $11,580,000 estate willtransfer to the credit shelter trust, to which thesurviving spouse may have little or no access. Reviewyour estate plan carefully with an estate planningprofessional to be sure your intentions will be carriedout under the new laws.

Wealth transfer strategies throughgiftingBecause of the larger exclusion and lower tax rates,there may be unprecedented opportunities for gifting.

By making gifts up to the exclusion amount, you cansignificantly reduce the value of your estate withoutincurring gift tax. In addition, any future appreciationon the gifted assets will escape taxation. Assets withthe most potential to increase in value, such as realestate (e.g., a vacation home), expensive art,furniture, jewelry, and closely held business interests,offer the best tax savings opportunity.

Gifting may be done in several different forms. Theseinclude direct gifts to individuals, gifts made in trust(e.g., grantor retained annuity trusts and qualifiedpersonal residence trusts), and intra-family loans.Currently, you can also employ techniques thatleverage the high exclusion to potentially provide aneven greater tax benefit (for example, creating afamily limited partnership may also provide valuationdiscounts for tax purposes).

For high-net-worth married couples, gifting to anirrevocable life insurance trust (ILIT) designed as adynasty trust can reduce estate size while providing asubstantial gift for multiple generations (depending onhow long a trust can last under the laws of yourparticular state). The value of the gift may beincreased (leveraged) by the purchase ofsecond-to-die life insurance within the trust. Further,the larger exclusion enables you to increase, gift taxfree, the premiums paid for life insurance policies thatare owned by the ILIT or other family members.

Premium payments on such policies are taxable gifts,so these premium payments are often limited to avoidincurring gift tax. This in turn restricts the amount oflife insurance that can be purchased. But theincreased exclusion provides the opportunity to makesignificantly greater gifts of premium payments, whichcan be used to buy a larger life insurance policy.

Before implementing a gifting plan, however, thereare a few issues you should consider.

• Can you afford to make the gift in the first place(you may need those assets and the related cashflow in the future)?

• Do you anticipate that your estate will be subject toestate taxes at your death?

• Is minimizing estate taxes more important to youthan retaining control over the asset?

• Do you have concerns about gifting large amountsto your heirs (i.e., is the recipient competent tomanage the asset)?

• Does the transfer tax savings outweigh thepotential capital gains tax the recipient may incur ifthe asset is later sold? The recipient of the gift getsa carryover basis (i.e., your tax basis) for incometax purposes. On the other hand, property left toan individual as a result of death will generallyreceive a step-up in cost basis to fair market valueat date of death, resulting in potentially lessincome tax to pay when such an asset is ultimatelysold.

Caution: The amount of gift tax exclusion you used inthe past will reduce the $11,580,000 available to youin 2020. For example, a person who used $1 millionof his or her exclusion in 2012, will be able to makeadditional gifts totaling $10,580,000 during 2020 freefrom gift tax.

Tip: In addition to this opportunity to transfer asignificant amount of wealth tax free, it's important toremember that you can still take advantage of the$15,000 (in 2019 and 2020) per person per yearannual gift tax exclusion. Also, gifts of tuitionpayments and payment of medical expenses (if paiddirectly to the institutions) are still tax free and can bemade at any time.

Gifts

The large exclusion maymake it easier than ever tomake large gifts, but theymay also reduce the needto make large gifts in orderto reduce the gross estatefor estate tax purposes.

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