Step Up in Basis Part 2

In Part 1, we covered a “step up in cost basis” principles with regards to real estate. In this post we will address step up in basis rules pertaining to marketable securities such as stocks, bonds, and mutual funds.

Your cost basis in a security is what you initially purchased it for plus any reinvested dividends.  So if mom bought 1,000 shares of Ford Motor Company back in 1980 when it was trading at $1.00 a share her cost basis is exactly $1,000 (trading costs such as commissions can also be included).   As of 10/25/2013 Ford was trading at $17.60 a share so if mom sold it today she would receive $17,600 from the sale of the Ford stock.  She would be able to subtract her basis for tax purposes ($1,000) and she would have a long term realized capital gain of $16,600.  At today’s long-term capital gains rates mom would owe Uncle Sam as much as 20% of that gain or $3,320.  However, let’s say mom never sold her Ford stock and left it to you after her death.  If mom died on October 25th 2013 your new inherited basis would be the closing market price of Ford on the date of death ($17.60).  Assuming you sold Ford stock at $17.60 you would owe nothing in capital gains thanks to the step up in basis rule.  Please remember that this analysis is only relevant if you are inheriting assets in a taxable account. If you are inheriting Ford stock inside of an IRA (or other similar tax deferred account) then the cost basis is irrelevant – at least for income tax purposes. 

What if mom is feeling generous and decides she wants to gift you the shares of Ford Stock while she is alive?  In this instance you would also receive mom’s cost basis of $1.00 rather than the higher step up in basis at death. 

As always, income tax consequences alone should not dictate financial decisions.  However, care should be taken to maximize both gifts and inheritances. Please speak with a financial advisor about cost basis and other tax-related issues.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters.  You should discuss tax or legal matters with the appropriate professional.  The illustration is hypothetical.  Individual results will vary.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Individual results will vary.   This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Center for Financial Planning, Inc., Raymond James Financial Services, Inc., its affiliates, officers, directors or branch offices may in the course of business have a position in any securities mentioned in this report.

Carrots for a Cause: Our day at the Gleaners Food Bank

 You don’t think about the behind-the-scenes work that goes into a food bank until you roll up your sleeves and help. That’s what the Center team and our loved ones did on Saturday September 21 at the Gleaners Community Food Bank of Southeastern Michigan. When we showed up at the Warren Distribution Center, many of us had no idea that we would work up a sweat and leave feeling so satisfied.

We separated into 2 groups, one packing 4-pound bags of carrots (the bags had to be exactly 4 pounds or Jen Hackmann’s astute 10-year-old daughter Jadyn would send you back to the bin to make your corrections). The other group helped in the packaged food assembly line putting together large bags of non-perishable goods to be handed out to families in need. 

The Center’s Jen Hackmann said pitching in gave her a sense of balance. “It’s personally rewarding to do these types of activities with my work and home families together.  I also really enjoy spending time with co-workers outside of the everyday work environment and getting to know the important people in their lives.”

Anyone interested in sending personal donations or finding out how to volunteer their time for Gleaners Community Food Bank can find out more at www.gcfb.org.

Step Up in Basis Part 1: A Key to Understanding Your Inheritance

If you stand to inherit assets, it is crucial that you get the gist of the often-misunderstood concept of step up in basis. This is an area that is more pertinent then ever before as the aging U.S. population looks to transfer a large amount of wealth to the next generation.  The rules are a little different depending on what type of asset you are dealing with, but this blog is going to focus on “real assets” such as property.

In order to fully understand this topic, you need to know what cost basis means.  Your cost basis is simply how much you paid for something.  If you bought some land for $10,000 then your cost basis in the property is $10,000.  If that property appreciates in value and you sell it for $100,000 then you have realized a $90,000 capital gain.  The IRS allows you to subtract the original $10,000 (your cost basis) from the $100,000 sale price because you already paid tax on the $10,000.

Next you need to understand what step up in basis means.  A step up in basis typically occurs when somebody dies and leaves assets to their heirs.  Using our land example again, let’s say that Mom bought a property back in 1960 for $10,000 and left it to you in her will when she died.  The fair market value upon Mom’s death is $100,000.  If Mom sells the property the day before she died she would have a $90,000 capital gain.  However, if Mom leaves the property to you in her will, and you decided to sell it the day after the funeral, you would pay no capital gains tax on the sale proceeds.  The reason for this is that the IRS gives you a full step up in basis at the date of death.  So the $10,000 cost basis that represents the property’s original purchase price is now stepped up to the current market value of $100,000.

In our next blog, we will focus on step up in basis when you are dealing with securities such as stocks, bonds, mutual funds, etc.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors, of RJFS, we are not qualified to render advice on tax or legal matters.  You should discuss tax or legal matters with the appropriate professional.

Curtain Call

 

The Center's Team enjoys sharing their knowledge with the press to help stories come to life, share facts and bring important topics to the forefront.  We are also honored when we are recognized by media and publications for our work and service to our profession. Here's what's new:

Investment News

Melissa Joy, CFP® was quoted in InvestmentNews on October 11, 2013, in an article titled, “Oppenheimer’s risky bond bets backfire – again,” by Jason Kephart.

Melissa Joy, CFP® was quoted in InvestmentNews on October 8, 2013, in an article titled, “Quarter of investors have no financial plan and don’t expect to have one” by Megan Durisin.

Melissa Joy, CFP® was quoted in InvestmentNews on September 22, 2013, in an article titled, “Who will be alts' best in show” by Jason Kephart.

Melissa Joy, CFP® was quoted in InvestmentNews on September 3, 2013, in an article titled, “American Funds preps a contrarian play” by Jason Kephart.

Raymond James

Matthew Chope, CFP® was interviewed for the October 2013 edition of Raymond James® AUDIOFILE titled Developing cross-generational relationships with your clients.

Investment Honor for Center Partner Melissa Joy

For the 3rd consecutive year, Partner Melissa Joy, CFP has been named to the Financial Advisor Magazine All-Star Research Managers team. She was featured in an article titled, “Uncommon Talents” written by Karen Demasters. The All-Star team recognized at the Fiduciary Gatekeeper Summit in Boston October 24-25.

Financial Advisor magazine recently asked its Financial Advisor readers to nominate the research managers they think are doing the best job. Selection for 2013 All-Star Research Managers team was based on those nominations.

Vacation Homes: Dreams or Nightmares?

Each year in August, and again in January, after trips to a warm destinations for summer or winter fabulous summer vacations, we get calls from clients who have found their dream “home away from home”.  The dream is usually a condo located at a favorite vacation spot and a place where they can drive up, find a warm bed waiting, and the next day the beach beckons for a relaxing walk.

But hold on just a minute.  When you open those doors you might also find a leaky toilet or a few critters who also like your home.  It is then you begin to discover there are many good things about a second home but also lots to think about before signing on the dotted line. Here are a few checklist items for your consideration:

Location and Use

• How often will it be used? 

• Is it easy to get to or is the expense of getting there a consideration?

• Are you close to attractive features? 

• Is it a desirable property in case you wish to sell?

Maintenance

• Older condos may be ready for big outside assessments and lots of inside updates as well. Ongoing maintenance is a necessity when you own property regardless of age.   It is also the biggest complaint of owners.  If the property is rented, both the need for maintenance and complaints triple. Who is going to take care of maintenance and what is the cost?

• If the renters are family members how are increased utility bills going to be handled---yes they can be substantial.

Amenities 

• You may have fallen in love with the swimming pool but are you going to use the tennis courts, golf course and clubhouse? You will be paying for them.

Costs   

• The purchase cost is just the beginning.  The monthly association dues rarely go down.  Periodic assessments for parking lots and landscaping can be substantial. 

• You also need to know about insurance costs and added on fees for particular activities or uses.

• Furniture is also a consideration.

If you find the monthly costs are going to strain your budget, you might want to rethink the decision to buy.  One couple had a sound practice of not financing a second home until the first one was paid in full. If you are relying on rentals to cover most of the costs, it is best to have a contingency plan since renters may be scarce in poor economic times.

A second home can be a wonderful place for the family to gather and for you to have a relaxing respite from daily demands.  Like most things in life, make sure it will bring you satisfaction that you can afford.

Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Our Cliff Notes from the FPA Fall Symposium

 In our busy lives, both at home and at work, it can often seem as if there are just not enough hours in the day to accomplish everything we’d like.  Despite our busy schedules, it is our responsibility as trusted advisors to step out of the office occasionally to better ourselves both professionally and personally.  I was fortunate enough to attend the 2013 Financial Planning Association (FPA) Fall Symposium in late September.  The FPA is a well-known and respected organization in the financial planning profession giving advisors the chance to network; discuss better business practices and, most importantly, learn from each other’s experiences.  Over the two-day event, Matt Trujillo, Sandy Adams and I attended close to 10 presentations regarding the market, the economy and various financial planning strategies.  While I won’t bore you with every “take-away” we found extremely helpful and useful, here are some key points discussed at the conference that I felt clients would find valuable and beneficial:

Key Points

• Stay Smart: Under stress (such as experiencing a market downturn) studies have shown that IQ levels drop an average of 13%.  It is extremely important for us to remind clients of the negative effects of poor investment decisions during stressful periods in the market and to help guide them through these turbulent times. 
• Make it Personal: Labeling accounts has been shown to increase saving on average by 50%.  For example, labeling a checking or savings account as “Jane’s college fund” greatly increases the savings level by adding a personal touch or goal to the account. 
• What to Watch: Although domestic equities have done phenomenally this year, valuations still point to potential further appreciation, as price-to-earning (P/E) ratios are approximately 7% below the historical average. 
• Eye on Europe: Many portfolio managers and market strategists are forecasting a strong outlook for international equities in the coming years as Europe emerges out of their recession. 
• Bond Buzz: Despite rising interest rate environments, investors should still consider bonds!  Bonds act as a diversifier to the equity portion of the portfolio and can be a very integral piece of the investment puzzle.  We think investors should be focusing on shorter duration bonds to hedge against interest rate risk. 

Several of these points have been on our investment team’s radar for quite some time and we are still implementing them within client portfolios.  It is, however, a nice feeling to know many of the suggestions made by some very bright speakers were things we at the Center do for clients on a daily basis. 

One of my favorite quotes from the symposium was this: “The future is more consistent than the present”.  As much as I wish I had that highly sought-after crystal ball, we cannot possibly predict what the market will do on a day-to-day basis.  What we can do, however, is help guide clients over many years and walk them through each stage of their financial plan to help ensure long-term success, which as the quote states, is far more predictable –something we can all value and appreciate.  

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation or an offer to buy or sell any investment referred to herein. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of Nick Defenthaler, CFP and not necessarily those of RJFS or Raymond James. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing involves risk and investors may incur a profit or a loss. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation or an offer to buy or sell any investment referred to herein. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of [FANAME] and not necessarily those of RJFS or Raymond James. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise,bond prices fall and when interest rates fall, bond prices generally rise. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing involves risk and investors may incur a profit or a loss. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

A Bond Market Doomsday – Part 2

 With the bond bear potentially rearing its’ ugly head, it is important to understand what a bond bear market looks like to properly prepare a portfolio for it. 

Only one in five investors know how interest rates affect bond prices

In a 2009 study on financial capability, only 21% of respondents knew that prices on existing bonds generally go down when interest rates go up (National Financial Capability Study, 2009 National Survey, Financial Industry Regulatory Authority).   Prices and rates typically move inversely because older bonds with lower rates are less attractive to buyers than newly issued bonds that offer higher rates.

If bond prices have been at all-time lows this stands to reason that bond prices have a long way to fall and indeed they began this fall earlier this year.

When rates go up, prices go down

Take a look at the examples below, illustrating the effect of rising rates on a 5‑year US Treasury bond.

Source: MFS

This is a hypothetical example that represents the effect a rise in the interest rate of a new issue bond may have on the price of existing bond issues.  Although bond prices and interest rates typically move inversely, a change in interest rates is only one factor determining the price of a bond security.

However, what bond bear markets lack in depth, they make up for in length.  In Part 1 I suggested we are in a time similar to the early 1950’s when rates bottomed out at similar levels to where we are today.  Below is a table of returns for the 10 years following rates bottoming taken from the Federal Reserve database in St. Louis. 

*Stock represented by the S&P 500, Treasury bill rate is a 3-month rate and the Treasury bond is the constant maturity 10-year bond, but the Treasury bond return includes coupon and price appreciation

Rising rates historically means rising income and total returns.  If rates rise slowly, interest has a chance to outweigh loss of principal over time as you can see in the chart above.  Devastating returns are not seen on the bond side of the ledger, but rather slow returns that tend not to keep up with long term inflation rates. 

Diversification rather than Doomsday

While we are not at doom’s doorstep, diversification is certainly the key, as it always is.  Most likely, not all areas of the bond market will suffer at all times over the coming years.  Investors must be careful of certain investments with characteristics similar to that of bonds (i.e. “bond proxies”) though.  Investing in something like dividend paying stocks in place of your bonds could add a lot of potential risk to the portfolio.  These types of positions will not support a portfolio in times of a stock market correction like bonds generally do.  It is important now more than ever to work with your financial planner to make sure you have a well-diversified portfolio and are making decisions with your overall financial goals in mind.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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Diversification does not ensure a profit or guarantee against a loss.  The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  The information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  This information is not intended as a solicitation or an offer to buy or sell any investment referred to herein.  Investments mentioned may not be suitable for all investors.  Investing involves risk and investors may incur a profit or a loss.  Dividends are not guaranteed and must be authorized by the company’s board of directors.  Past performance is not a guarantee of future results.

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A Bond Market Doomsday – Part 1

 Eye-catching headlines like this are great ratings boosters right now.  Phrases like “Surviving financial annihilation” or “Devastating losses” have been en vogue lately because investors are becoming more aware that bonds may not be the pillar of our portfolios as we have come to rely on them over the past 30 years.  Yields on bonds have been kept artificially low due to the Federal Reserve’s intervention over the past several years with the Quantitative Easing (QE) programs.  However, now that it looks as though the FED will be backing off of their QE programs, since it looks like the economy will be able to stand on its own two legs, we are left with a bond market with yields at nearly all-time lows. 

Does this mean that the bond bear is finally out of hibernation? 

The chart below gives us a history lesson on the last time we headed into a bond bear market (early 1950’s).  Rates on the 10-Year U.S. Treasury bond were at similar levels to where they are today.

From what we have seen already this year, it does seem that rates have nowhere to go but up.  According to the above chart, it will be important to temper our return expectations coming from this bond portion of a portfolio.  The average return we have come to expect from bonds will likely be drastically reduced going forward.  If expectations are properly tempered, this need not “annihilate” our portfolios going forward.  In my next blog I will go into more detail of what a bond bear market has looked like in the past.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

Medicare open enrollment begins October 15th

 Medicare’s open enrollment season is upon us. That means from now until December 7, you are able to make changes to your Medicare Advantage and prescription drug coverage. If you’re happy with your coverage, you don’t have to do anything. But this could be a good opportunity to make adjustments based on changes in your situation and changes to Medicare.

It pays to take the time to compare plans and shop around. While many plans have maintained or decreased their premiums, more than 450 plans are expected to increase premiums for 2014. You can also expect continued discounts on prescription drugs as part of the Affordable Care Act’s plan to gradually close the Part D coverage or “doughnut hole”.

Even if you’re satisfied, open enrollment presents a great opportunity to make sure you’re getting the most out of Medicare.

Here are some tips to help you get started.

• Ask yourself some important questions. Have your needs changed? Is your current coverage adequate? Will the cost of your current plan be going up? Are there comparable, lower-cost plans available?
• Review the annual notice of change from your current plan provider. You should have received this in September.
• Compare plans using medicare.gov’s Medicare Plan Finder.
• Call the Medicare Rights Center at 800.333.4114 for free counseling.

Medicare decisions can be complicated. If you have any questions about open enrollment, or if you’d like to discuss how healthcare costs factor into your overall financial plan, please contact your Center planner.