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The British Are Leaving! Why the Brexit Matters to Investors

On June 23, citizens of the United Kingdom (England, Scotland, Wales, and Northern Ireland) voted to leave the European Union by a margin of 52% to 48%

Though pre-election polls suggested that public opinion was evenly divided, when the election results became clear, financial markets around the world reacted swiftly to concerns about potential economic ramifications of a British exit—or Brexit—from the EU.

On June 24, the British pound plunged more than 10% against the dollar to its lowest point since 1985, before recovering slightly to settle nearly 8% lower at the end of the day.² European stocks suffered the worst sell-off since 2008, with the Stoxx Europe 600 Index tumbling 7%, and the Japanese Nikkei Index posted a one-day drop of 7.9%.³ In the United States, the S&P 500 Index fell 3.6%, reversing year-to-date gains.⁵

Here's an overview of the economic issues surrounding the Brexit, and what this historic decision could mean for the United Kingdom, world trade, and international investors.

The EU and the Referendum

The European Union was formed after World War II to help promote peace through economic cooperation. Over time, it became a common market, allowing goods and people to move freely around 28 member states as if they were one country. The U.K. joined the trading bloc in 1973, when there were only 9 member states.

In 2012, Prime Minister David Cameron rejected calls for a referendum on EU membership but later agreed to hold one if the Conservative party won the 2015 election.⁶ The leaders of all five major political parties campaigned to remain in the EU, including Cameron, warning voters that leaving the EU was a leap into the unknown that could damage the U.K.'s economy and weaken national security.⁷

Brexit supporters said leaving the EU allows the nation to take back control over business, labor, and immigration regulations and policies. They also claimed the money being contributed to the EU budget (a net contribution of 9.8 billion pounds in 2014) would be better spent on infrastructure and public services in the U.K.⁸

Economic Expectations

The negative outlook for the U.K. economy depends on the terms of trade deals yet to be negotiated with the EU and other nations. For example, the International Monetary Fund (IMF) projects that U.K. gross domestic product could decline about 1.5% by 2021, assuming the United Kingdom is granted access to the EU market quickly. Under a more adverse scenario (which assumes trade defaults to World Trade Organization rules), the IMF projects a precarious decline in GDP of about 4.5%.⁹

The U.K.'s departure strikes a serious blow to the EU, which has been beleaguered by debt crises, a Greek bailout, the influx of millions of refugees, high unemployment, and weak GDP growth. If trade activity and business conditions in the region deteriorate, it's possible that the U.K. and the EU could fall back into recession.

Next Steps

Once Article 50 of the Lisbon Treaty is invoked, the formal process of leaving the EU will begin, opening up a two-year window of negotiations on the terms of the exit. The U.K. will remain a member of the EU until it officially departs.ᴵᴼ

The U.K. is the first nation to break away from the EU, but a larger concern is that anti-EU factions in other nations could be empowered to follow suit. Moreover, Scotland could seek independence from the U.K. in order to remain in the EU, and Northern Ireland might consider reunification with the Republic of Ireland.¹¹

What About Us?

The EU is the largest trading partner of the United States, so the Brexit complicates pending trade negotiations and will require adjustments to existing agreements. It may also take time to forge new deals with the U.K.¹²

U.S. companies with a significant presence in the U.K. could take a hit. With the British pound weakening against an already strong dollar, U.S. exports become more expensive, reducing foreign sales. The U.S. economy is not as vulnerable as the EU, but the U.S. Federal Reserve may be more likely to delay its decision to raise interest rates until the consequences of the Brexit on U.S. and global markets can be assessed.¹³

Brexit-related anxiety could continue to spark market volatility until the details are finalized and the economic fallout is better understood, possibly for several years. Having a sound investing strategy that matches your risk tolerance could prevent you from making emotional decisions and losing sight of your long-term financial goals.

Investments are subject to market fluctuation, risk, and loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to a specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost. The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest in any index.

*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Asset Strategy Advisors to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Estate Planning and Income Tax Basis

Income tax basis can be an important factor in deciding whether to make gifts during your lifetime or transfer property at your death.

This is because the income tax basis for the person receiving the property depends on whether the transfer is by gift or at death. This, in turn, affects the amount of taxable gain subject to income tax when the person sells the property.

What is income tax basis?

Income tax basis is the base figure you use when determining whether you have recognized capital gain or loss on the sale of property for income tax purposes. When you purchase property, your basis is generally equal to the purchase price. However, there may be some adjustments made to basis. If you sell the property for more than your adjusted basis, you'll have a gain. Sell the property for less than your adjusted basis, and you'll have a loss. Example: You purchased stock for $25,000. Your basis in the stock is $25,000. If you sell the stock for more than $25,000, you would have gain. If you sell the stock for less than $25,000, you would have a loss.

What is the income tax basis for property you receive by gift?

When you receive a gift, you generally take the same basis in the property that the person who gave you the property (the donor) had. (This is often referred to as a "carryover" or "transferred" basis.) The carried-over basis is increased--but not above fair market value (FMV)--by any gift tax paid that is attributable to appreciation in value of the gift (appreciation is equal to the excess of FMV over the donor's basis in the gift immediately before the gift). However, for purpose of determining loss on a subsequent sale, the carried-over basis cannot exceed the FMV of the property at the time of the gift.

Example: Say your father gives you stock worth $1,000. He purchased the stock for $500. Assume the gift incurs no gift tax. Your basis in the stock, for purpose of determining gain on the sale of the stock, is $500. If you sold the stock for $1,000, you would have gain of $500 ($1,000 received minus $500 basis). 

Now assume that the stock is worth only $200 at the time of the gift, and you sell it for $200. Your basis in the stock, for purpose of determining gain on the sale of the stock, is still $500; but your basis for purpose of determining loss is $200. You do not pay tax on the sale of the stock. You do not recognize a loss either. In this case, your father could have sold the stock (and recognized the loss of $300--his basis of $500 minus $200 received) and then transferred the sales proceeds to you as a gift. (You are not permitted to transfer losses.)

Example: Assume your father gives you real estate worth $1,000,000. He purchased the land for $200,000. Assume your father paid gift tax of $400,000 on the transfer. Your basis in the land, for purpose of determining gain (or loss) on the sale of the land, is $520,000 [$200,000 + $400,000 x (($1,000,000 - $200,000) / $1,000,000)].

If you sold the land for more than $520,000, you would have gain. If you sold the land for less than $520,000, you would have a loss. Now assume your father gives you real estate worth $1,000,000, but he purchased the land for $1,200,000. Assume your father paid gift tax of $400,000 on the transfer. Your basis in the land, for purpose of determining gain (or loss) on the sale of the land, is $1,000,000. In this case, your father could have sold the land (and recognized the loss of $200,000--his basis of $1,200,000 minus $1,000,000 received) and then transferred the sales proceeds to you as a gift.

What is the income tax basis for property you inherit?

When you inherit property, you generally receive an initial basis in property equal to the property's FMV. The FMV is established on the date of death or, sometimes, on an alternate valuation date six months after death. This is often referred to as a "stepped-up basis," since basis is typically stepped up to FMV. However, basis can also be "stepped down" to FMV. Example: Say your mother leaves you stock worth $1,000 at her death. She purchased the stock for $500. Your basis in the stock is a stepped-up basis of $1,000. If you sold the stock for $1,000, you would have no gain ($1,000 received minus $1,000 basis). Now assume that the stock is worth only $200 at the time of your mother's death. Your basis in the stock is a stepped-down basis of $200. If you sold the stock for more than $200, you would have gain.

Transfers within one year of death. If you transfer appreciated property to a person within one year of his or her death, and then you (or your spouse) receive the property back at that person's death, the basis in the property is not stepped up or down to FMV. Instead, the basis in the property is equal to that person's basis immediately before death. (And this basis is probably pretty close to the basis you originally had in the property before you transferred it.) This rule is designed to prevent you from obtaining a stepped-up basis by transferring appreciated property to a dying person who then transfers it back to you (or your spouse) at death. However, the rule does not apply if the dying person lives for more than one year after you transfer the property to him or her. Also, the rule does not apply if the property passes from the decedent to someone other than you or your spouse (e.g., to one of your children). In those cases, a stepped-up basis would be available.

Income in respect of a decedent (IRD). There is no step up (or step down) in basis for IRD. IRD is certain income that was not properly includable in taxable income for the year of the decedent's death or a prior year. In other words, it is income that has not yet been taxed. Examples of IRD include installment payments and retirement accounts. When you inherit IRD, you include the IRD in income as you receive payments, and take any related deductions. An income tax deduction may be available for any estate tax paid that's attributable to the IRD.

How does generation-skipping transfer (GST) tax affect basis?

As discussed above, when you make a gift, the carried-over basis is increased--but not above FMV--by any gift tax paid that is attributable to appreciation in value of the gift. If the gift is also subject to GST tax, the carried-over basis is then increased--but not above FMV--by any GST tax paid that is attributable to appreciation in value of the gift. Special rules can apply when property in a trust passes at the death of an individual.

Make gift now or transfer at death?

As the following example shows, income tax basis can be important when deciding whether to make gifts now or transfer property at your death. Example: You purchased land for $25,000. It is now worth $250,000. You give the property to your child (assume the gift incurs no gift tax), who then has a tax basis of $25,000. If your child sells the land for $250,000, your child would have taxable gain of $225,000 ($250,000 sales proceeds minus $25,000 basis). If, instead, you kept the land and transferred it to your child at your death when the land is worth $250,000, your child would have a tax basis of $250,000. If your child sells the land for $250,000, your child would have no taxable gain ($250,000 sales proceeds minus $250,000 basis).

In addition to income tax basis, you might consider the following questions:

  • Will making gifts reduce your combined gift and estate taxes? For example, future appreciation on gifted property is removed from your gross estate for federal estate tax purposes. And gift tax paid on gifts made more than three years before your death is also removed from your gross estate.
  • Does the recipient need a gift now or can it wait? How long would a recipient have to wait until your death?
  • What are the marginal income tax rates of you and the recipient?
  • Do you have other property or cash that you could give?
  • Can you afford to make a gift now?

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

Have a Long Term goal? Financial Planning can Help You get you there

After several years of wallowing in financial upheaval caused by a severe recession and financial crisis, Americans are, once again, looking to the future.

 A renewed confidence has many people setting their sights on long term goals that, just a few years ago, may have seemed out of reach. However, as too many people have painfully learned, simply having a long-term goal, whether it’s an early retirement or a college education for your children, is not enough to realize your ambition.

A financial goal is a life destination which requires a map and a way to get there; and, assuming you have finite resources with which to successfully make the trek, they need to be used wisely or you are likely to come up short. If you have a long term goal, financial planning can help you get there.

What exactly is

Financial Planning

All of us have certain things in life we want to accomplish and many of them require financial resources. These are called financial goals. Living a secure and enjoyable retirement is a goal shared by most people. In addition to that, parents want to be able to provide a college education for their children, buy a bigger house, or expand their business, and while working towards all of those, they want to ensure the financial security of their loved ones. These all become intricately linked pieces of your financial puzzle.

A financial plan is about carefully forging those pieces and fitting them in their proper place so that they work effectively together towards your vision. If a piece is missing or doesn’t fit quite right, it could skew all of the other pieces. As you become financially successful, more pieces are needed to complete the financial puzzle, such as risk management, tax strategies, and estate planning. Because of their impact on the total financial puzzle, it is critical to have a well-conceived, integrated plan.

The financial planning process enables you to focus clearly on your specific goals while addressing all of your concerns so they are no longer obstacles. And, having a well-conceived, comprehensive financial plan enables you to shutout the constant drone of doom and gloom, because, in the long-term, your plan is all that matters. 

Steps in the Financial Planning Process

The financial planning process involves four essential steps that, if followed diligently, will increase the likelihood of achieving your long-term goals; however it does require discipline, patience and adherence to basic financial principles.

Establish Clearly Defined Goals

Very rarely does anything of financial importance happen accidently. In reality, absent a clearly defined, quantifiable goal that’s set along a realistic time horizon, chances are it won’t happen. Your goals need to be both realistic and inspiring enough to motivate you to action. It’s not enough to know what it is you want to achieve, you need to have a deep sense of why it’s important, and how it would make you feel when it’s achieved.  To set a realistic goal, envision it, quantify it (what you need to save), and make sure you have the resources to fund it.

Assess Your Current Financial Situation

Financial planning is a continuous process of assessing where you are currently in relation to your goals. This enables you to make the adjustments in your strategies necessary to keep you on track. Your financial picture is comprised of a balance sheet (assets and liabilities) and a cash flow statement (budget and savings). Your objective is to constantly improve your financial picture – reduce debt, increase cash flow/savings, grow your assets - which could enable you to achieve your goal early, or enable you to target additional goals.

Create an Actionable Plan

A financial plan is typically comprised of several strategies, each designed to address a different piece of your financial puzzle. Developing a systematic savings and investment strategy for accumulating the funds needed for your goal is obviously a key part of your financial plan.  But, life happens, and your financial plan should also include strategies for dealing with life’s contingencies, such as an accident or illness, or even a premature death in the family that could derail the plan.

Priorities have to be established in order to shore up all aspects of the plan. Before allocating all of your resources towards your financial goal you need to create an emergency fund to cover at least six months of living expenses, and an insurance plan to protect your finances in the case of a disability or death of a family member. Each priority should have an actionable plan to achieve it.

Monitor and Measure Your Plan

The biggest mistake many people make is to create a financial plan and then put it on the shelf. A financial plan is a living, working document that needs to reflect your current circumstances as well as the impact of a changing environment. It becomes a benchmark against which your progress to your goals is measured.

As your personal circumstances change and evolve, your plan needs to be updated, and, very likely, strategies will need to be updated or added (i.e. increases in insurance amounts, a change in your asset allocation, a new tax reduction strategy). The more frequently you assess your situation and measure your progress, the more minor any adjustments to your strategies will be.

Seek Professional Guidance

Although financial planning is not rocket science – there are plenty of resources available to develop your own – it can become more daunting than the average person is able or willing to tolerate. The body of knowledge required to navigate multiple disciplines (i.e., investments, insurance, taxes, retirement planning, estate planning, etc) is beyond the capacity of most people. In addition, most people lack the discipline and patience to strictly adhere to a plan, especially when their emotions get the upper hand.

A competent financial advisor can more efficiently guide you through the process of planning your future, designing your strategies and navigating the complex universe of investments and financial products. Of equal importance, he or she can also be your financial coach, holding you accountable to your plan while coaching you through your emotions and encouraging you to the finish line.  

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

Saving Versus Paying Off Debt

The saving versus paying off debt is an age-old quandary that has plagued people since the advent of consumer debt. Pose this question to a group of financial planners and the responses will be split, roughly down the middle. While there might be as many advocates for savings as there would be for paying down debt, the broad consensus will likely be that it really depends on the situation.

Much of the debt reduction argument stems from simple math. If you hold consumer debt that costs you 15% and the only available savings instruments yields 1%, then it would seem to be a no-brainer to pay the higher cost debt down. For as much as you can set aside in savings, the net effect is that you would be losing 14% on the money saved. So, the sooner you could pay the expensive debt off, the sooner you can be applying your cash flow to savings. Makes sense, right?

Most planners would agree that paying off high interest consumer debt should be a primary objective for all households, especially in today’s economic environment. The yields on savings accounts are stuck at historic lows and consumer debt interest rates and fees continue to rise for most people. There are two instances, however, where accelerating debt reduction should not come at the expense of savings.

Saving for an Emergency Fund

One lesson most people can take from this economy is that nothing is certain, especially when it comes to employment. And that may not be the biggest worry that an individual or household has to face. Life happens to everyone and unexpected emergencies can interrupt incomes for long periods of time. As tempting as paying off a credit card may be, having a six to twelve month cushion for meeting emergency expenses is a more critical need. Without that cushion, one emergency could cast you back into the debt spiral again, or exacerbate the one you are already in.

Retirement Savings

Unless you’re paying loan shark rates on your debt and it’s inhibiting your ability to make your other ends meet, you might want to think twice before sacrificing contributions to your qualified retirement plan, especially an employer provided plan. The opportunity to save money on a before tax basis and have your employer match your contribution may not always be around, and the lost opportunity to have that money accumulate tax deferred for many years is very costly. Better to pare your retirement contribution back a little and find other means to make debt payments.

For most people, the savings versus debt payoff solution is to arrive at some sort of balance between the two as a way to gain greater control over their financial future. It makes a tremendous amount of sense to get out from underneath the weight of crushing debt, however, in these uncertain times, it is vital to continue to weave that security blanket which might be the only layer of protection you have against the unexpected.

*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.