Your Financial Future

YOUR FINANCIAL FUTUREYour Guide to Life Planning

February 2016

Our roads to success may havetwists and turns and ups anddowns; together we can navigatea course and enjoy the sceneryalong the way.

Christian PhillipsPhillips FinancialLPL Registered Principal1920 Tienda Drive Suite 202Lodi, CA 95242209-367-0868Fax: [email protected]://lpladvisorweb.com/PhillipsFinancial/

CA Insurance Lic# 0A20651

In This Issue

Wealth Transfer in a Low-rate EnvironmentDespite the recent interest rate move by the Federal Reserve, there are still ways to transfer wealth that arebest for a low interest rate environment.

Marriage and Your FinancesMarriage affects your ability to build wealth, plan for retirement, plan your estate, and capitalize on taxand insurance-related benefits.

Making the Grade: Test Your Knowledge of Key College PlanningFactsCollege planning is a major financial goal for countless American families, and it can be a source of muchanxiety and confusion. This "Test Your Knowledge" quiz can serve as a refresher course for some, or anintroduction for others, to the world of financial aid and 529 college savings plans.

Intergenerational Wealth Planning: A Win-Win for the WholeFamilyWealth transfer is a sensitive topic within families. But addressing it is crucial to ensuring that a planningprocess is created and passes from one generation to the next.

Advance Directives: Planning Ahead for Your Own CareSomeday you could face a health crisis that leaves you unable to make your own medical decisions, so beprepared.

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2 Your Guide to Life Planning

Recent low rates ofinterest have affected twoimportant factors used tovalue wealth transfersinvolving trusts -- theapplicable federal rate(AFR) and the Section7520 rate -- both of whichare published andcalculated each month bythe Internal RevenueService (IRS).

Wealth Transfer in a Low-rate Environment

For those fortunate few individuals whose personal wealth exceeds the current estate-tax exemption threshold -- $5.43million for 2015 rising to $5.45 million for 2016 -- today's historically low interest rate environment offers potentiallypowerful wealth transfer opportunities.

Recent low rates of interest have affected two important factors used to value wealth transfers involving trusts -- theapplicable federal rate (AFR) and the Section 7520 rate -- both of which are published and calculated each month by theInternal Revenue Service (IRS). These rates reflect what the IRS assumes the assets in a trust will earn over the life of theportfolio. They are sometimes referred to as "hurdle" rates because if investment returns outperform the interest rate, thedifference may be passed tax free to trust beneficiaries.

Given current conditions, the following strategies may prove especially attractive.

Grantor Retained Annuity Trusts (GRATs). A GRAT is an irrevocable trust that is used to shift the growth andappreciation of assets from one generation to the next, often with little or no gift-tax consequence. In a typical GRAT, adonor or "grantor" places stock or other assets in the trust for a specified term during which he or she takes back principalin the form of annuity payments that are calculated using the low IRS-prescribed interest rate.

Any appreciation in trust assets above that interest rate passes to the GRAT's remainder beneficiaries outside of thetransfer-tax system. Thus, the lower the interest rate, the greater the potential gift that can pass out of the donor's taxableestate to heirs.

How might a GRAT play out today? Given current conditions, an individual could transfer more shares of depressedstock into a GRAT. Then, if the market rebounds and outperforms the hurdle rate for an extended period, that differencecould represent considerable wealth that would transfer to heirs.

Charitable Lead Annuity Trusts (CLATs). For those who wish to combine charitable giving with the transfer of wealthto family members, a CLAT offers an alternative solution to a GRAT. In this case, periodic annuity payments are made toa charity of choice, not the grantor. At the end of the trust's term, any remaining assets are then paid out to thenon-charitable beneficiaries, typically family members, tax free.

Sale of Assets to a Family Trust. Another potentially attractive technique is to sell (rather than give) assets that arelikely to appreciate in value to a family trust for the benefit of children. The grantor receives a promissory note with AFRinterest. Because the grantor is essentially making a loan to himself or herself, the interest received on the note is notconsidered taxable income. As the property increases in value, the note remains static, while appreciated assets pass toheirs.

The current environment may present an attractive opportunity for those gifting assets as well as those receiving them. Besure to explore these and other wealth transfer options with your tax and legal advisors as part of your overall planningstrategy.

This communication is not intended as tax and/or legal advice and should not be treated as such. Each individual'ssituation is different. You should contact your tax professional to discuss your personal situation.

© 2016 Wealth Management Systems Inc. All rights reserved.

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A prenuptial agreementpermits couples to keeptheir finances separate,protect each other fromdebt, and take actionsthat could limit the rightsof either partner.

Marriage and Your Finances

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate,and capitalize on tax and insurance-related benefits. State and federal laws on these subjects provide default positions.Some of these baseline conditions can be modified by a prenuptial agreement, a contract that permits a couple to keeptheir finances separate, protect each other from debt, and take other actions that could limit the rights of either partner.

Building Wealth

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. Forexample, if both of you have access to employer-sponsored retirement plans and each contributes $18,000 a year to a401(k), as a couple you are contributing $36,000, far in excess of the maximum contribution of an individual ($18,000 for2016). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which may makeit possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement Benefits

Some (but not all) pensions provide benefits to widows or widowers following a pensioner's death. When participating inan employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless thespouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to amaximum of 50% of the benefit earned by a deceased spouse.

Estate Planning

Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate taxconsequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire tostructure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estateplanning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition ofan estate take effect. Also, certain types of trusts, such as qualified terminable interest property (QTIP) trusts and maritaldeduction trusts, are restricted to married couples.

Tax Planning

Depending on your individual income levels, filing federal income taxes as a married couple may result in higher orlower tax liability as compared with when you each filing singly. Keep in mind that when you are married, you must fileas married. Only if you are not married may you file as single or head of household.

Debt Management

In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse.Couples wishing to guard against this practice may do so with a prenuptial agreement.

Family Matters

Marriage may enhance a partner's ability to collect financial support, such as alimony, should the relationship dissolve.Although single people do adopt, many adoption agencies show preference for households that include a maritalrelationship.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said,there are financial and legal benefits that you may want to explore with your partner before tying the knot.


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529 plans have alterededucation planning inmuch the same way thatthe 401(k) alteredretirement planning.

Making the Grade: Test Your Knowledge of Key College Planning Facts

The latest report on college costs published by the College Board brought some good news: The increases in tuition andfees for the 2014-2015 academic year were lower than the average annual increases in the past 30 years across all sectorsincluded in the study.

Yet even though college price increases are not accelerating, the report's authors affirmed that, in real terms, college costshave been rising for decades. For instance, the report, "Trends in College Pricing 2014," revealed that theinflation-adjusted average published price for in-state students at public four-year universities is 42% higher than it was10 years ago and more than twice as high as it was 20 years ago. In the private nonprofit four-year sector, the increaseswere 24% over 10 years and 66% over 20 years.

Given this reality, it is easy to see why devising a plan to pay for college is a major stressor for many American families.Underlying that anxiety are numerous misconceptions about the financial aid process and how a family's savings mightaffect a student's eligibility to receive aid.

Further, there also seems to be a general lack of knowledge about college savings vehicles, specifically 529 collegesavings plans -- how they work, and the many benefits they have to offer families struggling to juggle multiple financialgoals.1

529 plans have altered education planning in much the same way that the 401(k) altered retirement planning. A uniquecombination of features -- high contribution limits, professional asset management, account holder control of assets,flexibility in transferring the money, and perhaps most important, generous tax advantages -- have solidified the 529plan's position as a leader in the education planning world.

Test Your Knowledge

Here's your chance to test your knowledge about college planning and 529 plans. We hope that the information sharedhere will shed new light on some of the details of the process.

What form do all colleges require of students applying for financial aid?

_____ CSS Financial Aid PROFILE

_____ FAFSA

_____ EFC

Answer: Any college or university that awards federal student aid requires the Free Application for FederalFAFSA.Student Aid (FAFSA). For the majority of colleges this is the only aid application required. The CSS Financial AidPROFILE is required by some private colleges for assessing eligibility for the specific college's institutional aid dollars.The Expected Family Contribution (EFC) is a number calculated by the financial aid forms.

Saving for college in a 529 college savings plan negatively impacts eligibility for financial aid.

_____ True

_____ Maybe, but often the effect is minimal in the financial needs-analysis process

_____ False

Answer: The value of a 529 savings plan account set up by a parent orMaybe, but often not enough to worry about.legal guardian is reported as a parental asset on the FAFSA and only increases the EFC by a maximum of 5.64% of thetotal account value. 529 plans and Coverdell Education Savings Accounts tend to be two of the better options for savingfor college without jeopardizing financial aid. Income is generally more of a determinant of need-based financial aideligibility or lack thereof.

Assets held in a 529 college savings plan can be used to pay for what type of school?

_____ Four-year college or university

_____ Two-year community college

_____ Qualified trade school

_____ All of the above

Answer: With a 529 savings program, you can use your account at any accredited college or universityAll of the above.in the country (and some outside of the country).

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What happens to the 529 college savings funds if the student does not go to college?

_____ The money can be used by another family member to pay for qualified expenses

_____ The federal government will seize the account

_____ Nothing

_____ The plan will be declared void, and the money returned to the plan owner

Answer: That money can be used by a sibling, cousin, or other familyYou may generally change the beneficiary.member for qualified higher education expenses, without penalty.

529 held in the grandparent's name are shielded from the needs-analysis process.assets

_____ True

_____ False

Answer: Assets saved in the name of a grandparent are not reported on the FAFSA and do not typically countTrue.toward the EFC.

Caution: from a grandparent-owned 529 plan used to pay for a student's college expenses generally weighDistributionsheavily in the federal needs-analysis process and are typically counted as student income on the following year's FAFSAform, with an assessment rate of 50%.2

529 plan from a parent-owned 529 account do not increase the family's EFC.distributions

_____ True

_____ False

Answer Unlike distributions from a grandparent-owned account, from a parent-owned 529 plan that: True. distributionsare used to pay for a dependent student's college expenses are not reported on the FAFSA and do not typically count asincome in the federal needs-analysis process.2

What is assessed most heavily in the federal financial aid formula for dependent students?

_____ Student's income

_____ Parent's income

_____ Student's assets

_____ Parent's assets

Answer: The federal formula considers up to 50% of aStudent's income is generally assessed at the highest rate.dependent student's income as being available to pay for college. Here are the approximate rates for the primary financialresource categories that are assessed in computing an EFC:

Student's income Up to 50%Parent's income 22% to 47%Student's assets 20%Parent's assets 2.6% to 5.64%

Federal loans tend to be the most common type of financial aid used for the education of dependentundergraduates.

_____ True

_____ False

Answer: For many families, the lion's share of financial aid is in the form of federal loans often supplemented byTrue.private loans, particularly when incomes are above a certain level and many need-based grants have been ruled out.

Important caveat: If you combine all grant/scholarship aid dollars from all sources for all undergraduates, the amountwould exceed the total federal loan dollars. Federal loans constituted 34% of total undergraduate student aid in 2013-14,according to the College Board.

How did you do? Hopefully this information has helped you to better understand the financial aspects of college planning-- in particular the powerful but somewhat complex 529 college savings plan. To learn more about 529 plans and


selecting the right plan for your situation, contact a qualified financial advisor.

For more on the financial aid process, the following organizations offer ample, free information:

The College Board: Call your regional office or visit .collegeboard.orgFinAid: Visit http://www. .finaid.orgU.S. Department of Education, Federal Student Aid Information Center: Call (800) 433-3243 or visit

.www.fafsa.ed.gov

Investing in 529 plans involves risk, including loss of principal. Before you invest in a 529 plan, request the plan's1

official statement and read it carefully. The official statement contains more complete information, including investmentobjectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider beforeinvesting. You should also consider whether your home state or your beneficiary's home state offers any state tax or otherbenefits that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by anystate or federal agency. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the taxbenefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at thestate level may vary.

Note that some private colleges may treat the needs-analysis process a little differently from what is reported here, and2

generally the comments in this document apply to the federal needs-analysis process. Individual situations will vary.

Sources:

The College Board, "Trends in College Pricing 2014," November 13, 2014.

Wealth Management Systems Inc., "Increasing 529 Sales & Savings Rates: The Role of Personalized Planning Tools andEducation: Part 2," June 2015.

The College Board, "Trends in Student Aid 2014," November 13, 2014.

, "How Much Do You Know About a 529 Savings Plan? [Quiz]," June 23, 2015.Forbes


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http://www.collegeboard.org/

http://www.finaid.org/

http://www.fafsa.ed.gov/


Opening the dialogueabout wealth transfer is acomplicated, personaldecision. It is influencedlargely by how wealthholders themselves havebeen brought up to viewmoney and theresponsibilities that comewith it.

Intergenerational Wealth Planning: A Win-Win for the Whole Family

Discussing the transfer of wealth from parents to children can be uncomfortable for both parties. Yet by introducingchildren to the wealth management process from a young age, affluent families may be able to reduce family tensionslater in life and help ensure that the planning tradition passes intact to future generations.

Closing the Communication Gap

Opening the dialogue about wealth transfer is a complicated, personal decision that is influenced largely by how wealthholders themselves have been brought up to view money and the responsibilities that come with it. For instance, someindividuals may fear that discussing wealth with their children will lead to feelings of expectation and entitlement. Othersmay simply prefer to control all money issues themselves. Still others with young children may be uncertain about theirfuture wealth and reluctant to discuss it until their children are older and have proven how well -- or poorly -- they handlemoney.

Embracing the Planning Process

One strategy that may help families overcome planning challenges is to think about wealth planning not as a one-timeexercise, but as a process that you live with every day -- and that you integrate into children's lives at a very early age.

For instance, when children are young, you can teach them to divide their allowances into three portions -- one for saving,one for spending, and one for giving. Consider matching their giving and saving money and set an example by handlingyour own money in a similar fashion.

Once children become teenagers, allow them to make their own decisions about how they spend their money, and asdifficult as it may be, allow them to live with the consequences of their decisions. As children make the passage toadulthood, gradually involve them in the family business as well as the family's charitable giving activities.

Creating a Win-Win Solution

Certainly, the more wealth a family has, the more important it becomes to make managing wealth a process, especially ifwealth has existed for multiple generations and there are instruments such as family foundations in place. In this way,early involvement helps families prepare heirs for their future role as stewards of the family wealth. It also helps developthe skills and experience needed to manage a family business or wealth plan, while ensuring that such knowledge isshared and passes successfully to the next generation.

Working With Professionals

Working together with your team of planning professionals -- your financial advisor and estate and/or tax planner -- youwill be able to assess your current situation and develop first steps toward implementing a plan of action.

This communication is not intended to be tax or legal advice and should not be treated as such. Each individual's situationis different. You should contact your tax and/or legal professional to discuss your personal situation.


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In most states, a healthcare proxy does not takeeffect until you can nolonger make medicaldecisions for yourself;until then, only you canlegally consent to anytreatment.

Advance Directives: Planning Ahead for Your Own Care

Although the thought may not be pleasant, you may someday face a sudden health crisis that leaves you unable to makeyour own medical decisions. Fortunately, there is a legal means, known as an advance directive, to address this potentialconcern.

An advance directive is a written statement that you complete prior to a serious illness. Generally speaking, this documentnames someone to act on your behalf or outlines how you want medical decisions to be made when you are no longerable to make decisions for yourself. Some types of advance directives may do more for you than others, so it is importantto know the differences.

Why a Health Care Proxy?

The two most common forms of advance directive are a living will and a durable power of attorney for health care,commonly referred to as a health care proxy. A living will explains in writing the care you wish to receive or avoid in theevent you are incapacitated. For instance, it can express your wishes for controlling pain, receiving nutrition, or makinglife-support decisions.

But unlike a living will, a health care proxy allows you to legally designate someone, a proxy, to make medical decisionsfor you. In some states you may even be able to combine a health care proxy and living will into a single document.

Hospitals and nursing homes are required to ask about the existence of an advance directive when you are admitted. Inmost states, a health care proxy does not take effect until you can no longer make medical decisions for yourself; untilthen, only you can legally consent to any treatment. In addition, you can always change or cancel the document as long asyou are mentally alert. If you decide to make changes to these documents, be sure to do so in writing.

Know the Potential Drawbacks

Though it is a legal document, a health care proxy cannot handle every medical situation. For instance, the advancedirective may not be followed by emergency medical services (EMS). If EMS is summoned to treat you, they are usuallyrequired to resuscitate and stabilize you until you reach the hospital, regardless of an existing advance directive.

A lawyer can provide you with additional information about advance directives. Though you cannot anticipate anunexpected health care crisis, you can prepare ahead of time to ensure that you are cared for in a manner that coincideswith your intentions.


Compliance Tracking #513338This article was prepared by Standard & Poor's Financial Communications Tracking # 684645 Exp. 11/17/2011

The opinions voiced in this material are for general information only and are not intended to provide specific advice orrecommendations for any individual. To determine which investment(s) may be appropriate for you, consult yourfinancial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Allindices are unmanaged and cannot be invested into directly.

The financial consultants of Phillips Financial are registered representatives with and Securities are offered throughLPL Financial. Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not FDIC/NCUA Insured Not Bank/Credit Union Guaranteed May Lose ValueNot Insured by any Federal Government Agency Not a Bank Deposit

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