Raymond James &Associates, Inc.Michael W. ArySenior Vice President, Investments710 S. Thornton Avenue Suite BDalton, GA 30720706-913-1967mike.ary@raymondjames.comraymondjames.com/mikeary

July 2017Future of the Federal Estate Tax

The Health-Wealth Connection

What is a funeral trust?

What is a pet trust?

Don't Let Rising Interest Rates Catch You by Surprise

See disclaimer on final page

You've probably heard thenews that the FederalReserve has been raisingits benchmark federalfunds rate. The Feddoesn't directly controlconsumer interest rates,but changes to the federalfunds rate (which is the

rate banks use to lend funds to each otherovernight within the Federal Reserve system)often affect consumer borrowing costs.

Forms of consumer credit that charge variableinterest rates are especially vulnerable,including adjustable rate mortgages (ARMs),most credit cards, and certain private studentloans. Variable interest rates are often tied to abenchmark (an index) such as the U.S. primerate or the London Interbank Offered Rate(LIBOR), which typically goes up when thefederal funds rate increases.

Although nothing is certain, the Fed expects toraise the federal funds rate by small incrementsover the next several years. However, you stillhave time to act before any interest rate hikessignificantly affect your finances.

Adjustable rate mortgages (ARMs)If you have an ARM, your interest rate andmonthly payment may adjust at certainintervals. For example, if you have a 5/1 ARM,your initial interest rate is fixed for five years,but then can change every year if theunderlying index goes up or down. Your loandocuments will spell out which index your ARMtracks, the date your interest rate and paymentmay adjust, and by how much. ARM rates andpayments have caps that limit the amount bywhich interest rates and payments can changeover time. Refinancing into a fixed ratemortgage could be an option if you'reconcerned about steadily climbing interestrates, but this may not be cost-effective if youplan to sell your home before the interest rateadjusts.

Credit cardsIt's always a good idea to keep credit card debtin check, but it's especially important wheninterest rates are trending upward. Many credit

cards have variable annual percentage rates(APRs) that are tied to an index (typically theprime rate). When the prime rate goes up, thecard's APR will also increase.

Check your credit card statement to see whatAPR you're currently paying. If you're carrying abalance, how much is your monthly financecharge?

Your credit card issuer must give you writtennotice at least 45 days in advance of any ratechange, so you have a little time to reduce orpay off your balance. If it's not possible to payoff your credit card debt quickly, you may wantto look for alternatives. One option is to transferyour balance to a card that offers a 0%promotional rate for a set period of time (suchas 18 months). But watch out for transactionfees, and find out what APR applies after thepromotional rate term expires, in case abalance remains.

Variable rate student loansInterest rates on federal student loans arealways fixed (and so is the monthly payment).But if you have a variable rate student loanfrom a private lender, the size of your monthlypayment may increase as the federal funds raterises, potentially putting a dent in your budget.Variable student loan interest rates aregenerally pegged to the prime rate or theLIBOR. Because repayment occurs over anumber of years, multiple rate hikes for variablerate loans could significantly affect the amountyou'll need to repay. Review your loandocuments to find out how the interest rate iscalculated, how often your payment mightadjust, and whether the interest rate is capped.

Because interest rates are generally lower forvariable rate loans, your monthly payment maybe manageable, and you may be able to handlefluctuations. However, if your repayment term islong and you want to lock in your payment, youmay consider refinancing into a fixed rate loan.Make sure to carefully compare the costs andbenefits of each option before refinancing.

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Future of the Federal Estate TaxWhile no one can predict the future, thepossibility of tax reform is once again in thespotlight. If it occurs, it may very well includerepeal of the federal estate tax and relatedchanges to the federal gift tax, the federalgeneration-skipping transfer (GST) tax, and thefederal income tax basis rules.

History of the federal estate taxIn general, an estate tax is a tax on property aperson owns at death. In one form or another, afederal estate tax has been enacted orrepealed a number of times since 1797.1

Estate tax enacted Estate tax repealed

1797 1802

1862 1872

1894 1902

1916 2010*

2011*

*For 2010, the estate tax was repealed, butlater retroactive legislation provided that anestate could elect to be subject to estate tax inreturn for a stepped-up (or stepped-down)income tax basis for most property. The estatetax was extended in 2011, with some changes.

The estate tax has undergone many changesover the years, including the addition of afederal gift tax and a federal GST tax duringmodern times. A gift tax is a tax on gifts aperson makes while alive. A GST tax is a tax ontransfers to persons who are two or moregenerations younger than the transferor. Inrecent years, property owned at death hasgenerally received an income tax basis steppedup (or down) to fair market value at death.

During the 2000s, the estate, gift, and GST taxrates were substantially reduced, and the giftand estate tax lifetime exclusion and the GSTtax exemption were substantially increased.The estate tax and the GST tax, but not the gifttax, were scheduled for repeal in 2010(although certain sunset provisions would bringthem back unless Congress acted), butlegislation extended the estate tax and the GSTtax in 2011. (For 2010, the estate tax ended upbeing optional and the GST tax rate was 0%.)The gift and estate tax lifetime exclusion andthe GST tax exemption were increased to$5,000,000 and indexed for inflation in lateryears. For 2013, the top estate, gift, and GSTtax rate was increased to 40%, and theextension and modifications were made"permanent."

2017 Estate Planning Key Numbers

Annual gift taxexclusion

$14,000

Gift tax and estate taxbasic exclusionamount

$5,490,000

Noncitizen spouseannual gift taxexclusion

$149,000

Generation-skippingtransfer (GST) taxexemption

$5,490,000

Top gift, estate, andGST tax rate

40%

Federal estate taxRepeal of the estate tax seems possible onceagain. If repeal occurs, it could be immediate orgradual as during the 2000s. Would it besubject to a sunset provision, so that the estatetax would return at a later time? All of this maydepend on congressional rules on thelegislative process, other legislative priorities,and the effect the legislation would have on thebudget and the national debt.

Federal gift taxIf the estate tax is repealed, the gift tax mayalso be repealed. However, it is possible thatthe gift tax would be retained as a backstop tothe income tax (as in 2010). To some extent,the gift tax reduces the ability of individuals totransfer property back and forth in order toreduce or avoid income taxes.

Federal GST taxIf the estate tax is repealed, the GST tax wouldprobably be repealed (as in 2010). If the gift taxis not repealed, it is possible that the lifetimeGST tax provisions would be retained, but theGST tax provisions at death repealed.

Federal income tax basisIf the estate tax is repealed, it is possible thatthe general income tax basis step-up (orstep-down) to fair market value at death wouldbe changed to a carryover basis (i.e., thedecedent's basis before death carries over tothe person who inherits the property). In 2010,a modified carryover basis (a limited amount ofproperty could receive a stepped-up basis)applied unless the estate elected to be subjectto estate tax. It is also possible that aCanadian-style capital gain tax at death couldbe adopted in return for a stepped-up basis forthe property.

The federal estate tax hasbeen enacted or repealed anumber of times over theyears, while undergoingmany changes. Tax reform,including possible repeal ofthe estate tax, is back in thespotlight once again.

1 2015 Field Guide to EstatePlanning, Business Planning& Employee Benefits

Page 2 of 4, see disclaimer on final page

The Health-Wealth ConnectionIt's a vicious cycle: Money is one of the greatestcauses of stress, prolonged stress can lead toserious health issues, and health issues oftenresult in yet more financial struggles.¹ The clearconnection between health and wealth is whyit's so important to develop and maintainlifelong plans to manage both.

The big pictureConsider the following statistics:

1. More than 20% of Americans say they haveeither considered skipping or skipped going tothe doctor due to financial worries. (AmericanPsychological Association, 2015)

2. More than half of retirees who retired earlierthan planned did so because of their ownhealth issues or to care for a family member.(Employee Benefit Research Institute, 2017)

3. Chronic diseases such as heart disease,type 2 diabetes, obesity, and arthritis areamong the most common, costly, andpreventable of all health problems. (Centers forDisease Control and Prevention, 2017)

4. Chronic conditions make you more likely toneed long-term care, which can cost anywherefrom $21 per hour for a home health aide tomore than $6,000 a month for a nursing home.(Department of Health and Human Services,2017)

5. A 65-year-old married couple on Medicarewith median prescription drug costs would needabout $265,000 to have a 90% chance ofcovering their medical expenses in retirement.(Employee Benefit Research Institute, 2017)

Develop a plan for long-term health ...The recommendations for living a healthylifestyle are fairly straightforward: eat right,exercise regularly, don't smoke or engage inother risky behaviors, limit soda and alcoholconsumption, get enough sleep (at least sevenhours for most adults), and manage stress. Andbefore embarking on any new health-relatedendeavor, talk to your doctor, especially if youhaven't received a physical exam within thepast year. Your doctor will benchmark importantinformation such as your current weight andrisk factors for developing chronic disease.Come to the appointment prepared to shareyour family's medical history, be honest aboutyour daily habits, and set goals with yourdoctor.

Other specific tips from the Department ofHealth and Human Services include:

Nutrition: Current nutritional guidelines call foreating a variety of vegetables and whole fruits;whole grains; low-fat dairy; a wide variety ofprotein sources including lean meats, fish,eggs, legumes, and nuts; and healthy oils.Some medical professionals are hailing thelong-term benefits of the so-called"Mediterranean diet." Details for a basic healthydiet and the Mediterranean diet can be found athealth.gov/dietaryguidelines.

Exercise: Any physical activity is better thannone. Inactive adults can achieve some healthbenefits from as little as 60 minutes ofmoderate-intensity aerobic activity per week.However, the ideal target is at least 150minutes of moderate-intensity or 75 minutes ofhigh-intensity workouts per week. For moreinformation, visit health.gov/paguidelines.

... and long-term wealthThe recommendations for living a financiallyhealthy life aren't quite as straightforwardbecause they depend so much on yourindividual circumstances. But there are a fewbasic principles to ponder:

Emergency savings: The amount you needcan vary depending on whether you're single ormarried, self-employed or work for anorganization (and if that organization is a riskystartup or an established entity). Typicalrecommendations range from three months' toa year's worth of expenses.

Retirement savings: Personal financecommentator Jean Chatzky advocates strivingto save 15% of your income toward retirement,including any employer contributions. If thisseems like a lofty goal, bear in mind that aswith exercise, any activity is better than none —setting aside even a few dollars per pay periodcan lead to good financial habits. Considerstarting small and then increasing yourcontributions as your financial circumstancesimprove.

Insurance: Make sure you have adequateamounts of health and disability incomeinsurance, and life insurance if others dependon your income. You might also considerlong-term care coverage.²

Health savings accounts: Thesetax-advantaged accounts are designed to helpthose with high-deductible health plans setaside money specifically for medical expenses.If you have access to an HSA at work, considerthe potential benefits of using it to help save forhealth expenses.

"Always keep two things instock: crunchy vegetables andan emergency savingsaccount."

Michael F. Roizen, MD, andJean Chatzky, personal financecommentator

Authors of Ageproof: LivingLonger Without Running Out ofMoney or Breaking a Hip

¹ American PsychologicalAssociation, February 4,2015; The Telomere Effect:A Revolutionary Approachto Living Younger, Healthier,Longer, by Blackburn andEpel; and Ageproof: LivingLonger Without Running Outof Money or Breaking a Hip,by Chatzky and Roizen

² The cost and availability oflife insurance depend onfactors such as age, health,and the type and amount ofinsurance purchased. Acomplete statement ofcoverage, includingexclusions, exceptions, andlimitations, is found only inthe policy. It should benoted that long-term carecarriers have the discretionto raise their rates andremove their products fromthe marketplace.

Page 3 of 4, see disclaimer on final page

Raymond James &Associates, Inc.Michael W. ArySenior Vice President,Investments710 S. Thornton Avenue Suite BDalton, GA 30720706-913-1967mike.ary@raymondjames.comraymondjames.com/mikeary

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017

This information was developed byBroadridge, an independent thirdparty. It is general in nature, is nota complete statement of allinformation necessary for makingan investment decision, and is nota recommendation or a solicitationto buy or sell any security.Investments and strategiesmentioned may not be suitable forall investors. Past performancemay not be indicative of futureresults. Raymond James &Associates, Inc. member New YorkStock Exchange/SIPC does notprovide advice on tax, legal ormortgage issues. These mattersshould bediscussed with an appropriateprofessional.

What is a pet trust?A pet trust is an arrangementto provide for the care andfinancial support of your pet(s)upon your disability or death.You fund the trust with

property or cash that can be used to provide foryour pet based on your instructions in the trustdocument.

Your pet trust should name a trustee who willcarry out your instructions for the care of yourpet, including handling and disbursement oftrust funds and turning your pet over to theperson or entity you designate to serve as yourpet's caregiver. The trustee and caregiver couldbe the same person or entity.

As with most trusts, you can create your pettrust while you're alive (an inter vivos or livingtrust) or at your death through your will (atestamentary trust). In either case, you cangenerally change the terms of your pet trust atany time during your lifetime to accommodatechanging circumstances. If you create an intervivos trust, you can fund it with cash or propertyeither during your life (needed if the trust is tocare for your pet if you become incapacitated)or at your death through your will. Atestamentary trust is only funded after you die.

Some of the instructions to consider for yourpet trust include: provisions for food and diet,daily routines, toys, medical care and grooming,how the trustee or caregiver is to documentexpenditures for reimbursement, whether thetrust will insure the caregiver for any injuries orclaims caused by your pet, and the dispositionof your pet's remains.

You may also want to name a person ororganization to take your pet should your trustrun out of funds. Also consider naming aremainder beneficiary to receive any funds orproperty remaining in the trust after your petdies.

A potential problem arises if your pet isexpected to live for more than 21 years afteryour death. That's because, in many states, the"rule against perpetuities" forbids a trust fromlasting beyond a certain period of time, usually21 years after the death of an identified person.However, almost every state has laws relatingto pet trusts that address this issue in particularand allow for the continued maintenance of thetrust, even if its terms would otherwise violatethe rule.

Note that there are costs and expensesassociated with the creation of a trust.

What is a funeral trust?A funeral trust is anarrangement entered into witha provider of funeral or burialservices. Prepaying funeralexpenses may allow you to

"lock in" costs for future funeral or burialservices at an agreed-upon price. The funeralhome sometimes serves as trustee (manager oftrust assets), and you usually fund the trust withcash, bonds, or life insurance. A revocablefuneral trust can be changed and revoked byyou at any time. An irrevocable trust can't bechanged or revoked, and you generally can'tget your money out except to pay for funeralservices.

Irrevocable funeral trusts may also help youqualify for long-term care benefits throughMedicaid. For example, these trusts may befunded with assets that would otherwise becountable resources for Medicaid (i.e., includedin determining Medicaid eligibility). They areoften sold through insurance companies, inwhich case they are typically funded with lifeinsurance. And you can fund the funeral trustright before entering the nursing home — there'sno "look-back" period for these transfers, unlikethe case with certain other transfers that can

cause a delay in the start of Medicaid benefits.

Another advantage of funding your trust with lifeinsurance is that the trust will have no taxableincome to report, because life insurance cashvalues grow tax deferred. Otherwise, incomefrom trust assets may be taxed to you as thegrantor of the trust, unless the trustee elects totreat the trust as a qualified funeral trust byfiling Form 1041-QFT with the IRS, in whichcase trust income is taxed to the trust.

But what happens if you want to change funeralhomes, or the facility you selected goes out ofbusiness? Does your irrevocable trust allow youto change beneficiaries (e.g., funeral homes)?Are trust funds protected from creditors of thefuneral home? State laws regulating prepaidfuneral trusts often require funeral homes tokeep trust assets separate from their ownbusiness assets, keeping them safe fromfuneral home creditors. And most irrevocabletrusts are transferable to another funeral homeshould the initial business fail or you changefuneral homes.

There are expenses associated with thecreation of a trust and the purchase of lifeinsurance, and benefits are not guaranteed.

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