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Mar Bonnin-Palmer highlights the impact of exchange rate movements on the value of international estates

Inheriting an estate or funds from abroad can already be a complex process, and can be made all the more complicated when you are required to exchange your foreign inheritance and make international payments. However, through working with STEP, a global professional association for practitioners who specialise in family inheritance and succession planning, we aim to make the foreign exchange process as simple and easy as possible.

Mar Bonnin-Palmer, our Senior Key Account Managers, sat down with STEP to provide more of an insight into how the currency market can affect overseas inheritance.

 

Any practitioner involved in the administration of an estate with assets abroad will need to consider the impact that fluctuations of the exchange rate might have on the value of those assets. This duty takes on special importance when a solicitor has been appointed as the executor of the inheritance. In this case, there are fiduciary responsibilities to act in the best interest of the estate and its beneficiaries. Of course, an executor is not responsible for the value of GBP, nor for any events that may cause a change in its value. However, some due diligence regarding the current risks (and opportunities) regarding GBP and any relevant currencies may provide some insight into the best ways to maximise the final value of the estate. It is also important to examine whether the fees incurred in any transfer, either from a bank or professional currency provider, are fair and in line with the market average to ensure that none of the value is lost through excessive fees.

 

What moves the exchange rate?

A number of factors influence the value of a particular currency. Economic factors such as a nation’s gross domestic product or employment figures can affect the strength of a currency; positive figures signal a strong economy and may increase a currency’s value, while any signs that an economy is slowing or stagnant may cause a currency to fall. Central banks such as the Bank of England, the European Central Bank or the US Federal Reserve do not always have a direct influence on the value of currency, but their actions regarding interest rates may have an impact. Political circumstances also impact the value of currencies, which are often volatile around the time of general elections or other times of political uncertainty.

 

Impact on international payments

A recent example of this is the UK’s decision to leave the EU. Immediately after the referendum, the pound lost 12 per cent of its value against the euro: from levels above 1.30 to levels close to parity. As the negotiations continue, the volatility, even if not as drastic, can still pose a massive threat to the value of a large transaction. As an example, in 2019* we have seen the GBP/EUR oscillating between 1.10 and 1.17. In real terms, such as in the case of a repatriation of a EUR200,000 estate, this could have represented a difference of more than GBP10,000.

 

Protecting the value of transactions

Although trends can be identified within the currency market, it is not possible to fully predict all the movements. However, understanding the foreign exchange (forex or FX) market will help protect against losses. There are a number of factors to take into consideration to maximise the value of international payments. These include the time frame for the payment, the scope for a variable budget, attitude to risk and understanding of market trends. Research shows that the average overseas probate process takes from 12 to 24 months. Tools such as market orders that allow the tracking and targeting of specific rates, together with expert guidance, can also help ensure that the best available rate is reached, and that the client is fully aware of the potential final value of the inheritance. Another option is to take advantage of fixing a prevailing exchange rate before the assets are fully available by setting up a forward contract**.

 

Fiduciary responsibility

There have been occasions where an executor has been liable for a loss of value in an inheritance due to inadequate management of the FX exposure included in the estate. Although the requirement to closely assess or manage the FX market ahead of an inheritance transfer is not legally binding, the requirement to act in the best interests of the estate and its beneficiaries is, so it could be seen as best practice to put plans into effect ahead of the transfer.

* Figures based on data collected on 12 March 2019.

** A forward contract may require a deposit.

This article first appeared in the STEP Journal, Vol27 Iss5, page 69

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