Nicholson Financial Services,Inc.David S. NicholsonFinancial Advisor89 Access RoadSte. CNorwood, MA 02062781-255-1101866-668-1101david@nicholsonfs.comwww.nicholsonfs.com

Spring 2017Future of the Federal Estate Tax

Infographic: 4 Things to Do in the 4Years Before College

Are you ready to retire?

What is an ERISA fiduciary?

Nicholson Financial ServicesDid You Know...?

Don't Let Rising Interest Rates Catch You by Surprise

See disclaimer on final page

Now that we are past Memorial Day andspring is drawing to a close, I hopeeveryone has some good plans for thesummer. Here in the Boston area, this wasa tough spring. As many of you know, Ihave coached youth lacrosse for manyyears (11 including this season). This wasby far the worst weather spring that I canremember. My team had probably half of itspractices canceled, and 5 of its 12 games,due to rain. We were only able to make up2 of the games. As a coach, I was mostfrustrated by the lack of practice. I feel likemy team never came together like it has inthe past. On the bright side, the fields, likeour lawns, are green and we have lessconcern about a drought. The big news inthe financial world is that the FederalReserve just raised rates again. It wasexpected and the markets haven'tover-reacted. There is a great article in thisnewsletter about rising rates and how theycan affect you. Enjoy your summer and besafe...especially over the July 4th holiday!

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

Infographic: 4 Things to Do in the 4 Years Before CollegeCollege is a huge financial undertaking. With costs increasing every year and the prospect of toomuch student debt at the forefront of many families' minds, it's more important than ever to be aneducated college consumer. Go into the planning process wisely with these four steps.

Page 3 of 4, see disclaimer on final page

Nicholson FinancialServices, Inc.David S. NicholsonFinancial Advisor89 Access RoadSte. CNorwood, MA 02062781-255-1101866-668-1101david@nicholsonfs.comwww.nicholsonfs.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017

This information, developed by anindependent third party, has been obtainedfrom sources considered to be reliable, butRaymond James Financial Services, Inc.does not guarantee that the foregoingmaterial is accurate or complete. Thisinformation is not a complete summary orstatement of all available data necessary formaking an investment decision and does notconstitute a recommendation. Theinformation contained in this report does notpurport to be a complete description of thesecurities, markets, or developments referredto in this material. This information is notintended as a solicitation or an offer to buy orsell any security referred to herein.Investments mentioned may not be suitablefor all investors. The material is general innature. Past performance may not beindicative of future results. Raymond JamesFinancial Services, Inc. does not provideadvice on tax, legal or mortgage issues.These matters should be discussed with theappropriate professional.

Securities offered through Raymond JamesFinancial Services, Inc., memberFINRA/SIPC, an independent broker/dealer,and are not insured by FDIC, NCUA or anyother government agency, are not deposits orobligations of the financial institution, are notguaranteed by the financial institution, andare subject to risks, including the possibleloss of principal.

What is an ERISA fiduciary?The Employee RetirementIncome Security Act (ERISA)was enacted in 1974 to protectemployees who participate inretirement plans and certain

other employee benefit plans. At the time, therewere concerns that pension plan funds werebeing mismanaged, causing participants to losebenefits they had worked so hard to earn.ERISA protects the interests of planparticipants and their beneficiaries by:

• Requiring the disclosure of financial and otherplan information

• Establishing standards of conduct for planfiduciaries

• Providing for appropriate remedies,sanctions, and access to the federal courts

It's the fiduciary provisions of ERISA that helpprotect participants from the mismanagementand abuse of plan assets. The law requires thatfiduciaries act prudently, solely in the interestsof plan participants and beneficiaries, and forthe exclusive purpose of providing benefits andpaying reasonable expenses of administeringthe plan.

Fiduciaries must diversify plan investments tominimize the risk of large losses, unless it'sclearly prudent not to do so. Fiduciaries mustalso avoid conflicts of interest. They cannotallow the plan to engage in certain transactionswith the employer, service providers, or otherfiduciaries ("parties in interest"). There are alsospecific rules against self-dealing.

Who is a plan fiduciary? Anyone who:

• Exercises any discretionary control over theplan or its assets

• Has any discretionary responsibility foradministration of the plan

• Provides investment advice for a fee or othercompensation (direct or indirect)

Plan fiduciaries may include, for example,discretionary plan trustees, plan administrators,investment managers and advisors, andmembers of a plan's investment committee.

Fiduciaries must take their responsibilitiesseriously. If they fail to comply with ERISA'srequirements, they may be personally liable forany losses incurred by the plan. Criminalliability may also be possible.

Are you ready to retire?Here are some questions toask yourself when decidingwhether or not you are readyto retire.

Is your nest egg adequate?

It may be obvious, but the earlier you retire, theless time you'll have to save, and the moreyears you'll be living off your retirementsavings. The average American can expect tolive past age 78.* With future medical advanceslikely, it's not unreasonable to assume that lifeexpectancy will continue to increase. Is yournest egg large enough to fund 20 or more yearsof retirement?

When will you begin receiving SocialSecurity benefits?

You can receive Social Security retirementbenefits as early as age 62. However, yourbenefit may be 25% to 30% less than if youwaited until full retirement age (66 to 67,depending on the year you were born).

How will retirement affect your IRAs andemployer retirement plans?

The longer you delay retirement, the longer youcan build up tax-deferred funds in traditionalIRAs and potentially tax-free funds in Roth

IRAs. Remember that you need taxablecompensation to contribute to an IRA.

You'll also have a longer period of time tocontribute to employer-sponsored plans like401(k)s — and to receive any employer match orother contributions. (If you retire early, you mayforfeit any employer contributions in whichyou're not fully vested.)

Will you need health insurance?

Keep in mind that Medicare generally doesn'tstart until you're 65. Does your employerprovide post-retirement medical benefits? Areyou eligible for the coverage if you retire early?If not, you may have to look into COBRA or anindividual policy from a private insurer or thehealth insurance marketplace — which could bean expensive proposition.

Is phasing into retirement right for you?

Retirement need not be an all-or-nothing affair.If you're not quite ready, financially orpsychologically, for full retirement, considerdownshifting from full-time to part-timeemployment. This will allow you to retain asource of income and remain active andproductive.* NCHS Data Brief, Number 267, December 2016

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