Baird Wealth ManagementSeth Kaplan, CFP®, CPWA®,CDFA, MAFFDirector300 University AvenueSuite 200Sacramento, CA 95825916-563-2010skaplan@rwbaird.comsethkaplanfinancialadvisor.com

July / August 2017

Future of the Federal Estate Tax

Kickstart Your College Fund with a 529 Plan

What happens to my property if I die without a will?

Can I roll my traditional 401(k) account balance over to a Roth IRA?

Wealth Advisor InsightsFinancial Updates

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

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Kickstart Your College Fund with a 529 PlanIf you're looking to save money for college, oneoption to consider is a 529 college savingsplan. Created over 20 years ago and namedafter the section of the tax code that governsthem, 529 plans offer a unique combination offeatures that have made them the 401(k)s ofthe college savings world.

How do 529 plans work?529 college savings plans are individualinvestment-type accounts specifically made forcollege savings. People at all income levels areeligible. Plans are offered by individual states(you can join any state's plan) but managed byfinancial institutions designated by each state.

To open an account, you select a plan and fillout an application, where you will name anaccount owner and beneficiary (there can beonly one of each), choose your investmentoptions, and set up any automatic contributions.You are then ready to go. It's common to openan account with your own state's 529 plan, butthere may be reasons to consider anotherstate's plan; for example, the reputation of thefinancial institution managing the plan, theplan's investment options, historical investmentperformance, fees, customer service, websiteusability, and so on.

A plan's investment options typically consist ofportfolios of various mutual funds that vary fromconservative to aggressive in their level of risk.Depending on the market performance of theoptions you've chosen, your account will eithergain or lose money, and there is the risk thatthe investments will not perform well enough tocover college costs as anticipated.

BenefitsSo why bother going to the trouble of opening a529 account when you could choose your ownmutual funds (or other investments) in anon-529 account?

Federal tax benefits: Contributions to a 529plan accumulate tax deferred, which means noincome tax is due on any capital gains ordividends earned along the way. Later,earnings are completely tax-free when awithdrawal is used to pay the beneficiary'scollege expenses — a benefit that could besignificant depending on how your investmentoptions perform. States generally follow thisfederal tax treatment and may offer an incometax deduction for contributions. That's why it'simportant to know what 529 tax benefits yourstate offers and whether those benefits arecontingent on joining the in-state 529 plan.

Contributions: You can contribute a lot to a 529plan — lifetime contribution limits are typically$300,000 and up. Compare this to the small

$2,000 annual limit allowed by CoverdellEducation Savings Accounts. In addition, 529plans offer a unique lump-sum gifting featurethat some may find particularly compelling:Individuals can contribute a lump-sum amountof up to five years' worth of the $14,000 annualgift tax exclusion — a total of $70,000 in 2017 —and avoid gift tax if they make a special electionon their tax return and avoid making any othergifts to that beneficiary during the five-yearperiod. Married couples, such as grandparentswho want to contribute to their grandchild'scollege fund, can make a joint lump-sum gift upto $140,000 that is tax-free.

College account on autopilot: For collegesavers who are too busy or inexperienced tochoose their own investments or change theirasset allocation over time, a 529 collegesavings plan offers professional moneymanagement. And by having a designatedaccount for college savings, you segregatethose funds and possibly lessen the temptationto dip into them for a non-college purpose — ascenario that may be more likely if you areusing a general savings account to save forcollege. Finally, by setting up automaticmonthly contributions to your 529 account, youcan put your savings effort on autopilot.

TradeoffsNon-college use of funds: The federal taxbenefits of 529 plans can be great if you usethe funds for college. If you don't, then theearnings portion of any withdrawal is subject tofederal income tax at your rate and a 10%federal penalty.

Changing investment options: With a 529 plan,you're limited to the investment options offeredby the plan. Plans generally offer a range ofstatic and age-based portfolios with differentlevels of risk, fees, and investment goals.(Age-based portfolios generally have a "glidepath" where the underlying investmentsautomatically become more conservative as thebeneficiary approaches college age.) If you'reunhappy with the performance of the optionsyou've chosen, under federal law you canchange the investment options for your futurecontributions at any time, but you can changethe options for your existing contributions onlytwice per calendar year. This rule can make itdifficult to respond to changing marketconditions. However, also under federal law,once every 12 months you can roll over yourexisting 529 plan account to a new 529 planwithout having to change the beneficiary, whichgives you another option if you're unhappy withyour current plan's investment options orreturns.

Assets hit $266 billion mark

As of March 2017, assets in529 college savings plansreached $266 billion, spreadover 12.2 million accounts.

Source: Strategic Insight, 1Q2017 529 Data Highlights

Before investing in a 529plan, you should considerthe investment objectives,risks, charges, andexpenses, which areavailable in the issuer'sofficial statement andshould be read carefully.The official disclosurestatements and applicableprospectuses — whichcontain this and otherinformation about theinvestment options,underlying investments, andinvestment company — canbe obtained by contactingyour financial professional.Also consider whether yourstate offers a 529 plan thatprovides residents withfavorable state tax benefits.As with other investments,there are generally fees andexpenses associated with a529 plan.

Page 3 of 4, see disclaimer on final page

Baird Wealth ManagementSeth Kaplan, CFP®, CPWA®,CDFA, MAFFDirector300 University AvenueSuite 200Sacramento, CA 95825916-563-2010skaplan@rwbaird.comsethkaplanfinancialadvisor.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017

IMPORTANT DISCLOSURES

Broadridge Investor CommunicationSolutions, Inc. does not provideinvestment, tax, or legal advice. Theinformation presented here is not specificto any individual's personal circumstances.

To the extent that this material concernstax matters, it is not intended or written tobe used, and cannot be used, by ataxpayer for the purpose of avoidingpenalties that may be imposed by law.Each taxpayer should seek independentadvice from a tax professional based onhis or her individual circumstances.

These materials are provided for generalinformation and educational purposesbased upon publicly available informationfrom sources believed to be reliable—wecannot assure the accuracy orcompleteness of these materials. Theinformation in these materials may changeat any time and without notice.

Certified Financial Planner Board ofStandards Inc. owns the certificationmarks CFP®, CERTIFIED FINANCIALPLANNER™ and federally registered CFPin the U.S., which it awards to individualswho successfully complete CFP Board'sinitial and ongoing certificationrequirement. Robert W. Baird & Co. doesnot provide tax or legal services.

Can I roll my traditional 401(k) account balance over toa Roth IRA?Yes, you can make a direct or60-day rollover from a 401(k)plan [or other qualified plan,403(b) plan, or governmental

457(b) plan] to a Roth IRA, as long as you meetcertain requirements.*

First, you must be entitled to a distribution fromyour plan. While you can always access youraccount when you terminate employment, insome cases you may be able to withdraw yourown or your employer's contributions whileyou're still working (for example, at age 59½).

[Note: Your plan may also permit the "in plan"conversion of all or part of your accountbalance to a Roth account, regardless ofwhether you're eligible for a distribution fromthe plan. Check with your plan administrator.]

Second, your distribution must be an "eligiblerollover distribution." Distributions that cannotbe rolled over include hardship withdrawals,certain periodic payments, and requiredminimum distributions (RMDs).

Third, you must include the taxable portion ofthe distribution in your gross income in the yearyou make the rollover ("conversion"). But that's

the price you have to pay to potentially receivetax-free qualified distributions from your RothIRA in the future.

Fourth, if your distribution includes bothafter-tax and pre-tax dollars, you can generallydirect that only the after-tax dollars be rolledover to the Roth IRA (resulting in a tax-freeconversion), while making a tax-deferredrollover of the pre-tax dollars to a traditionalIRA.

When evaluating whether to initiate a rolloverfrom an employer plan to an IRA, be sure to: (1)ask about possible surrender charges that youremployer plan or IRA may impose, (2) compareinvestment fees and expenses charged by yourIRA with those charged by your employer plan(if any), and (3) understand any accumulatedrights or guarantees that you may be giving upby transferring funds out of your employer plan.Also consider all of your distribution options,including leaving the money in your employer'splan, transferring the funds to a new employer'splan, or taking a cash withdrawal.* If you make a 60-day rollover, your plan will withhold20% of the taxable portion of your distribution forfederal income tax purposes.

What happens to my property if I die without a will?If you die without a will, yourproperty will generally passaccording to state law (underthe rules for intestatesuccession). When this

happens, the state essentially makes a will foryou. State laws specify how your property willpass, typically in certain proportions to variouspersons related to you. The specifics, however,vary from state to state.

Most state laws favor spouses and childrenfirst. For example, a typical state law mightspecify that your property pass one-half orone-third to your surviving spouse, with theremainder passing equally to all your children. Ifyou don't have children, in many states yourspouse might inherit all of your property; inother states, your spouse might have to sharethe property with your brothers and sisters orparents.

But not all property is transferred by will orintestate succession. Regardless of whetheryou have a will, some property passesautomatically to a joint owner or to a designatedbeneficiary. For example, you can transferproperty such as IRAs, retirement plan benefits,

and life insurance by naming a beneficiary.Property that you own jointly with right ofsurvivorship will pass automatically to thesurviving owners at your death. Property held intrust will pass to your beneficiaries according tothe terms you set out in the trust.

Only property that is not transferred bybeneficiary designation, joint ownership, will, ortrust passes according to intestate succession.You should generally use beneficiarydesignations, joint ownership, wills, and truststo control the disposition of your property sothat you, rather than the state, determine whoreceives the benefit of your property.

Even if it seems that all your property will betransferred by beneficiary designation, jointownership, or trust, you should still generallyhave a will. You can designate in the will whowill receive any property that slips through thecracks.

And, of course, you can do other things in a willas well, such as name the executor of yourestate to carry out your wishes as specified inthe will, or name a guardian for your minorchildren.

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