ISSUE: WHAT ABOUT LIABILITY INSURANCE? WHY CAN’T WE SIMPLY INSURE OUR WAY TO SAFETY?
This is a reasonable and common question we get from clients and advisors alike. In the most egregious cases of arm-chair quarterback misinformation, we actually see uninformed advisors telling their clients that the only Asset Protection they need is a good umbrella policy – THIS IS FLAT OUT WRONG for the kind of successful people we protect. Why? Because they are successful, visible and typically have assets above and beyond just the insurance policy itself, they are good targets from a net-worth perspective.
1. Our position on Liability Insurance (as distinct from Life Insurance – which will be the subject of part two of this discussion) is pretty simple: Buy as much liability insurance as you can afford, assume it won’t be adequate and have a plan B;
2. What about my “umbrella” policy? - It is a great idea to have an umbrella policy, but you and your liability carrier have different ideas about what umbrella means. To you it means everything, to your carrier it means specific events in the base policy, covered to specific increased limits, and governed by a specific set of exclusions detailed in the fine print of your policy. Clearly two very different definitions. The lesson here is that there is no real way to insure yourself against a universe of possible exposures and have every single one covered to an unlimited dollar amount, nor is this reasonable to expect of your liability coverage. As just one state’s example, the top ten civil verdicts in the Sate of Arizona for 2007 ranged in value from $6 million against a pharmacy that dispensed prescriptions that combined to cause a patient’s death to $360,000,000 million on a dispute over a real estate deal. Do you think their E&O coverage applied and was adequate? Here’s the link to the State bar’s article if you want to see it yourself:
http://www.myazbar.org/AZAttorney/PDF_Articles/0608CivilVerdicts.pdf
Just some real examples of the “impossible” that actually happened and resulted in large claims:
- Parents away for the weekend return to find that a teenager died at their home during a party their child had from the drugs he brought with him;
- Chiropractor adjusts a patient’s hip and the woman dies on table from cardiac arrest-he is sued for wrongful death;
- Long time, most trusted employee of medical practice molests a minor female patient during treatment;
- Employees of moving company get drunk and severely beat another employee and lock him in company truck in company yard over weekend;
- LLC for RE development is pierced and a passive member is held jointly and severally liable for the actions of the other members;
- Dentist works on elderly patient who goes home and dies of unrelated heart attack hours later, dentist sued for wrongful death.
3. The insurance business model – is a pretty simple one. Take in lots of premium payments, pay as few claims as possible and the difference equals shareholder profit. That’s right; they make money in part by reducing and limiting the number of claims against the premiums that you and the other insured pay. This is not a value judgment, simply a statement of a simple business equation. As you know, the first thing that happens when you make a claim is that you spend time on the phone with a variety of people at the insurance company who take the facts and make a determination as to whether or not the event is covered under your policy or if it can be excluded from coverage or if the amount of available coverage can be reduced by some percentage because of some contributory negligence by you, the insured. In some of the most egregious cases the insurance companies have even framed their insured and knowingly used vendors like fire inspectors who falsely claimed that fire damage to their insured’s homes and businesses after earth quakes was related to arson and not covered. Another even put, “Deny, Delay, Don’t Pay” on the cover of the training manuals they give their adjusters so that they can “paperwork” people and their valid claims to death. Does this mean we should give up and not carry insurance or only carry minimal coverage? Of course not, it just means that the insurance system, like most things, is imperfect and that we need to be aware of this. We want those I help protect to be empowered and to take steps to make the coverage they do have an effective source of protection. Also, if for no other reason, we like seeing the insurance policy in place to cover the costs of defense – which can easily be six figures before the fight even really starts. We have also seen changes in how the coverage limits are calculated such as in some of the malpractice liability policies that many of our thousands of physician clients must carry. These changes include making the coverage limits inclusive of the cost of defense. What this means is that if you have a $1MM insurance policy and the carrier spends $400K defending you, you only have $600K left to pay any resulting actual judgment.
4. SOLUTION - So how do we help make sure that the coverage is enough? Pretty simple – we buy all the insurance we can reasonably afford, make sure we have the appropriate riders and umbrellas in place then we present a hard, uncollectible target beyond the limits of the policy. Most, if not all, lawsuits are motivated by the potential financial gain to the plaintiff and their attorney. As just one example, examine the gap between the average national medical malpractice verdict of around $3.9 MM and the average national liability policy in this area of $1MM. What that means is that the defendant was left holding the bag for $2.9MM.
In most cases, plaintiffs and their attorneys don’t chase people beyond the limits of the policy if there is nothing else to take or if there is nothing that they can get their hands on with any reasonable certainty. A properly protected individual is uncollectible, at least for the most-part.
We want to present a deterrent and make it clear to the plaintiff that we have this policy in place that covers this event (we hope!) and that there is nothing beyond that policy of any value that you will be able to take from us by force. You may sue, you may win, but you will never collect. If there is an instance of liability that prompts a properly Asset Protected individually to offer some settlement amount above the policy, great, but the defendant decides to do so and the terms they are willing to make the offer under as opposed to being held up at the point of a gun by a verdict and an unsympathetic jury. When faced with the scenario of an uncollectible defendant and the monolithic strength of the planning we typically put in place, what would you do? If you are like most plaintiff’s attorneys, especially those of the contingency fee variety, you settle and move on to the next case and hopefully the next defendant who is an easier target, because you won’t as the attorney, get paid unless you win and collect. People who are protected in the way we and others in our business suggest have taken the steps they can, addressed the exposure to their family’s wealth in a responsible manner, and move on with their lives and work and practice in their chosen profession as fearlessly as possible. In the end that’s what all good Asset Protection planning really comes down to, taking the right steps at the right time – NOW.
Monday, December 8, 2008
ASSET PROTECTION - APROPRIATE LEVELS OF LIABILITY COVERAGE FOR AUTO POLICY
ISSUE: APROPRIATE LEVELS OF LIABILITY COVERAGE FOR AUTO POLICY
This actually comes to me through a relative, who is now in an unfortunate position:
While driving in the middle of the day our friend, “Mr. Good” was struck broadside while crossing an intersection with a green light. The driver of the other car was turning left and failed to yield right of way, striking Mr. Good’s vehicle and injuring himself and causing his own death in the process. The reporting officers at the scene cleared Mr. Good of any wrongdoing and cited the other (deceased) driver noting that he was an elderly man who was driving at a high rate of speed and who had not been wearing his seatbelt when he for some reason broadsided Mr. Good in oncoming traffic. Mr. Good retained counsel and after receiving treatment for his injuries settled with the insurance carrier of the deceased. As far as Mr. Good and his family are concerned it was over. That changed two days ago on Sunday morning when Mr. Good was served with papers by the family of the deceased, at fault driver, seeking to making a wrongful death claim and demanding detailed financial information from Mr. Good. Any wrongful death claim (and worse, potential jury award) will doubtless be in excess of the basic policy that Mr. Good has in place. He is understandably shaken and is now wondering what will be taken from him and how it will affect himself and his family. He has no Asset Protection planning in place, it’s too late to start and he did not have a large liability umbrella.
This is simply one specific example of a million possible scenarios, other examples that I have personally seen in the last 90 days:
- Wife of successful high profile builder blows through stoplight while looking at her Blackberry and injures occupants of several other vehicles;
- Teenager (minor) involved in fatal accident while driving vehicle owned and insured by wealthy parents;
- Owner of business involved in fatal accident on way to lunch, family of deceased seeks recovery against the business he owns because title to car is held by business.
It should also be noted that personal injury attorneys are now explicitly advertising and boasting about the fact that they have prevented defendants from seeking bankruptcy protection against these judgments. One national firm, Goldberg and Osborne has this as the center of a new television advertising campaign. The implication is that even the small amount of wealth that would have been preserved by bankruptcy is within their grasp and is available for recovery, “At no cost to you” a frightening development for those who have no planning in place at all.
Solution:
Carry as much coverage as you can comfortably afford and include a liability umbrella policy. The major expense is always in the base policy. The umbrella is typically an inexpensive add-on that can increase base coverage amounts by several times. Don’t think that this alone is enough however, and understand that to you umbrella means everything, to your carrier; it means specific events up to specific limits. Make sure you have taken steps to protect your personally held assets and income streams and have a back-up plan in case your carrier reduces coverage or excludes the event completely due to some form of contributory negligence, like the fact that you happened to be on your cell phone. Consult your local insurance agent for prices and have them show you in writing what the umbrella covers and excludes.
Beyond that, be a hard target, and do some planning now while the option still exists in a legal and ethical way. It’s not a coincidence that they asked for financial info up front in our first example. Defendants who do not have any assets or who do not have assets easily reachable by predators make poor targets, especially for contingency fee attorneys.
Finally, pay attention to how your vehicle is titled. Having your vehicle titled in the name of your business is very dangerous.
Which of the following three would be most exciting? Getting hit by:
John Smith;
Dr. Smith;
Smith Cosmetic Dentistry Associates.
That’s right – number 3 is the big winner (or loser) a corporate defendant with very deep pockets. What about the tax deduction you were taking on the lease or payments? Simple, give your self a car allowance to cover the cost of the vehicle and have your CPA deduct accordingly, but please do not take the most dangerous activity you repeat on a daily basis (driving) and tie it to the most valuable thing you own – your business!
This actually comes to me through a relative, who is now in an unfortunate position:
While driving in the middle of the day our friend, “Mr. Good” was struck broadside while crossing an intersection with a green light. The driver of the other car was turning left and failed to yield right of way, striking Mr. Good’s vehicle and injuring himself and causing his own death in the process. The reporting officers at the scene cleared Mr. Good of any wrongdoing and cited the other (deceased) driver noting that he was an elderly man who was driving at a high rate of speed and who had not been wearing his seatbelt when he for some reason broadsided Mr. Good in oncoming traffic. Mr. Good retained counsel and after receiving treatment for his injuries settled with the insurance carrier of the deceased. As far as Mr. Good and his family are concerned it was over. That changed two days ago on Sunday morning when Mr. Good was served with papers by the family of the deceased, at fault driver, seeking to making a wrongful death claim and demanding detailed financial information from Mr. Good. Any wrongful death claim (and worse, potential jury award) will doubtless be in excess of the basic policy that Mr. Good has in place. He is understandably shaken and is now wondering what will be taken from him and how it will affect himself and his family. He has no Asset Protection planning in place, it’s too late to start and he did not have a large liability umbrella.
This is simply one specific example of a million possible scenarios, other examples that I have personally seen in the last 90 days:
- Wife of successful high profile builder blows through stoplight while looking at her Blackberry and injures occupants of several other vehicles;
- Teenager (minor) involved in fatal accident while driving vehicle owned and insured by wealthy parents;
- Owner of business involved in fatal accident on way to lunch, family of deceased seeks recovery against the business he owns because title to car is held by business.
It should also be noted that personal injury attorneys are now explicitly advertising and boasting about the fact that they have prevented defendants from seeking bankruptcy protection against these judgments. One national firm, Goldberg and Osborne has this as the center of a new television advertising campaign. The implication is that even the small amount of wealth that would have been preserved by bankruptcy is within their grasp and is available for recovery, “At no cost to you” a frightening development for those who have no planning in place at all.
Solution:
Carry as much coverage as you can comfortably afford and include a liability umbrella policy. The major expense is always in the base policy. The umbrella is typically an inexpensive add-on that can increase base coverage amounts by several times. Don’t think that this alone is enough however, and understand that to you umbrella means everything, to your carrier; it means specific events up to specific limits. Make sure you have taken steps to protect your personally held assets and income streams and have a back-up plan in case your carrier reduces coverage or excludes the event completely due to some form of contributory negligence, like the fact that you happened to be on your cell phone. Consult your local insurance agent for prices and have them show you in writing what the umbrella covers and excludes.
Beyond that, be a hard target, and do some planning now while the option still exists in a legal and ethical way. It’s not a coincidence that they asked for financial info up front in our first example. Defendants who do not have any assets or who do not have assets easily reachable by predators make poor targets, especially for contingency fee attorneys.
Finally, pay attention to how your vehicle is titled. Having your vehicle titled in the name of your business is very dangerous.
Which of the following three would be most exciting? Getting hit by:
John Smith;
Dr. Smith;
Smith Cosmetic Dentistry Associates.
That’s right – number 3 is the big winner (or loser) a corporate defendant with very deep pockets. What about the tax deduction you were taking on the lease or payments? Simple, give your self a car allowance to cover the cost of the vehicle and have your CPA deduct accordingly, but please do not take the most dangerous activity you repeat on a daily basis (driving) and tie it to the most valuable thing you own – your business!
Recession Proof Your Assets and Net Worth - Part Two
“The ability to be cool, confident and decisive in crisis is not an inherited characteristic but it is the direct result of how well the individual has prepared himself for the battle.”
Richard M. Nixon, 1962
REAL ESTATE DEALS AND PERSONAL GUARANTEES:
Try to avoid or limit personal guarantees. For example, if you must sign a guaranty, try to limit it to a maximum amount or percentage (such as pro rata with other guarantors). If there are more than one guarantor, have a contribution agreement among the guarantors to establish, as among themselves, the proportionate obligation of each; the per-capita (by heads) allocation otherwise generally used by courts may be very far off from the proportionate share of each guarantor in the business.
PROTECT YOUR CREDIT - IT IS NOW MORE THAN EVER AMONG YOUR MOST VALUABLE ASSETS:
Good credit has always been important on both personal and business fronts, but it is now more important that ever. As credit markets have tightened even the wealthy are having trouble obtaining credit for every day issues like home and auto purchase or leasing. Banks are scared and have pulled in the reigns on lending to all but those who have sterling credit, “good” is no longer good enough. They are also using late payments of any kind to move to the default interest rates permissible under various types on loan and consumer credit agreements as a way to generate fees and increase revenue internally. This could mean that your VISA ay 8.9% jumps to 29.99% APR if your spouse sends in the check late, or worse, if your course of business has been to pay certain credit lines down late to a friendly creditor, it could now put you into default or cause an acceleration. We are also hearing that clients who have used revolving credit lines for years as part of their business model either for capitalization or to pay recurring expenses are suddenly finding that their credit lines have been terminated as is permissible in the fine print of most such agreements. This is despite the fact that the client has had no change in income or credit. Banks are simply deciding that they have too much exposure and are proactively limiting your ability to draw that money out. Solution? – If you have a credit line that you know you are going to need or cannot risk losing – draw the money out now and look at the interest cost like an insurance premium; you may not want to pay it but if you need the “insurance” of having that money available it will not be available at any cost, certainly not in any short term scenario. There are services out there that we have referred friends and clients to with great results. For an investment of a few hundred dollars many negative or inaccurate items can be removed in a short period of time increasing your credit score by dozens of points.
FRAUD AND IDENTITY THEFT ARE ON THE RISE – TAKE SIMPLE STEPS
When times are tough all types of fraud increase, not just the lawsuits that are typically the focus of these updates. In addition to the obvious financial exposure of having someone access your identity and accounts is the risk to your credit. ID theft can take years and thousands of dollars to fix. ID thieves are trolling nice neighborhoods like yours and stealing trash and mail from your curb and mailbox, as well as using more devious and intricate methods like fake notices that your anti-virus software has expired and you need to click to update. An excellent source of information on these issues can be found here: http://www.ftc.gov/bcp/edu/microsites/idtheft/consumers/deter.html
Some basic tips:
Use a shredder for anything with an account number both at home and at your office. This includes things that you would typically put in your office trashcan. Would you let the person who empties the can at your desk have your checkbook?
Protect personal information of your employees and clients like it was your own – they will hold you responsible if that information is compromised. Make sure that such information is locked up, password protected and ideally traceable, i.e. who logged in and when if stored electronically.
Update your computer security software and make sure your anti-virus and spam ware is regularly updated and correctly functioning.
Be careful about the detail of information available on you online, especially in the age of business-social networking. If you are reading this we have probably had a discussion about distancing yourself from title to certain assets. I am continually amazed about the personal details about assets and family that people put on line.
Check your credit and the credit of your children regularly. ID thieves have started accessing the SS numbers of children and using them as clean slates then running up thousands or more of bad debt. In many cases the family is unaware that this has happened until years later or until the collection calls start coming.
INVESTMENT ACCOUNTS DOWN? DO SOME HOUSE KEEPING AND MAINTENANCE – APATHY KILLS:
Income is down, investment accounts are down and your RE is worth less than year ago – now what? At times like this you cannot afford to take another step back in your net worth and you need to keep every dollar, or fraction thereof, that the law allows. Talk to your advisors like your Financial Advisor, CPA and Estate/Tax Attorney to make you are as safe as possible, are taking advantage of all possible tax deductions and that your portfolio has been adjusted to current market conditions through the use of guaranteed income and other products that will give you all or most of the market upside with a down-side safety net of as high as 7%. If your advisor is unwilling to do so, or simply suggests you “hold and wait” talk to the advisors of your friends who are down less than you are and look at the differences in the strategies. Many of our clients put tremendous amounts of blood, sweat and tears into making money and building a legacy for their family, yet we are continually surprised at how many of them have help in the financial and accounting areas that is merely “adequate” or that they are holding onto someone they have outgrown because, “He’s a nice guy”. I understand that, I even respect it, a little – so keep him on your Christmas card list but get the level of sophisticated help your years of hard work merit. Worried about bank solvency? Explore cash alternatives like certain insurance products that provide money market rate returns and cash values as high as 100%, in addition to state law creditor protection up to 100% in certain states. Also, be aware of what the law actually protects. If you have to be liquid, consider using strategies that keep multiple accounts in place all within FDIC insurance limits. If you must be liquid for seven figures, spread the risk among several banks.
INVEST SOME TIME AND MONEY INTO YOURSELF
Make sure you are keeping on top of little health issues that can escalate into big issues, and stay insurable. Make sure your family's planning is complete, up to date and reflects the guardians and trustees who you still trust the most. If you have old planning update it. Not sure? We can have an expert review your Revocable Living Trust for (as one example) as little as $400.00 and spot issues that could cost millions if not addressed. Have good planning? Great - make sure it is adequately funded with the assets you created it to protect and convey and make sure your family knows where it is and who to turn to for help. We often see that the family is only vaguely aware that mom and dad have a will, but they don't know who did it or where it is. These issues are easily addressed but become a nightmare in a time of crisis.
ESTATE TAX AND INCOME REQUIREMENTS
We are also finding that many of our clients have polices that were adequate in terms of their estate exposure and income when the planning was first implemented, often not long after a marriage or the birth of a first child. Then, with some hard work and luck our clients become increasingly successful over the course of a number of years. Then ten years (or less) later when the client has a substantially larger net worth and typically substantially larger bills and estate tax exposure, they have the same policy they had ten years earlier, which is in many cases much too low. Remember, in many cases you don’t just need insurance to make sure the home is paid off, but to provide income, cover estate taxes, provide for education and expenses for kids, pay off medical bills, the list goes on and on, especially if the deceased was not of retirement age and if using those funds would create a big penalty for the surviving spouse. How far is that policy supposed to stretch?
We also find that many couples have never adequately explored second to die policies or the use of certain polices to build tax free retirement income for spouses who do not work outside the home but want to fund a plan. We typically come across and easily spot these issues during and will point them out to you.
INVEST IN YOUR BUSINESS
Again, now is the time to do some fine tuning. Make sure liability coverage is adequately in place and covers all obvious exposures, update employee manuals, (covered below in PART 1 in detail), update operating agreements and tax planning and make sure that the business assets are appropriately sub-divided, that is make sure the baskets of eggs that comprise your business assets are of a size that is manageable but limits exposure.
BUSINESS OWNERS – BUY SELL AND CROSS PURCHASE AGREEMENTS
We also see that many of our clients who have these agreements in place either don’t have adequate coverage or in the worst cases, the coverage required has never been implemented. This leads to expense, delay and in many cases litigation when one partner dies and the surviving spouse and heirs are suddenly trying to get a business appraised and fighting for what is theirs. This can lead to the untimely sale of the business or its assets and really create a mess for the surviving partners; we want to avoid this and can avoid it with a simple insurance policy.
Even in cases where the agreement is in place and has been well funded, we keep seeing cases where it was done so when the business was young. Now 10 or more years later the business has much higher revenues and value, and the “old” appraisal in longer valid. We also examine DISABILITY INSURANCE (DI) in these cases. Think of the scenario where the business is supposed to have a DI policy in place on various partners but never gets it. Then one of the partners has a disability event like an injury or illness and can’t work but needs income. This is a big hit to the business, not only is it down one productive person, but the other partners have to continue to pay the disabled partner. This leads to resentment, financial burden, lawsuits and other issues that again could be simply and cost effectively avoided.
DON’T LEAVE MONEY ON THE TABLE – IT’S NOT JUST WHAT YOU MAKE, IT’S ALSO WHAT YOU KEEP:
Now is the time to make the effort to keep the money you have been leaving on the table. Every year we give up a portion of every dollar because of the competing issues of spending time making vs.. keeping money. Own commercial real estate? Great – make sure you have looked at solutions like Cost Segregation Studies that allow you to take huge amounts of depreciation up front, when you need the write off, NOW as opposed to spread over the next 30 years a thimbleful at a time. Likewise, energy reduction surveys can be completed on commercial buildings generating tax credits of up to $1.80 per square foot! There may also be substantial deductions you can take for things like family meetings related to FLPs and other tools, travel, investment management, even investments that carry large tax credits like certain types of approved oil and gas investments. There are dozens of examples of squeezing more value out of each dollar – this is just the beginning.
Richard M. Nixon, 1962
REAL ESTATE DEALS AND PERSONAL GUARANTEES:
Try to avoid or limit personal guarantees. For example, if you must sign a guaranty, try to limit it to a maximum amount or percentage (such as pro rata with other guarantors). If there are more than one guarantor, have a contribution agreement among the guarantors to establish, as among themselves, the proportionate obligation of each; the per-capita (by heads) allocation otherwise generally used by courts may be very far off from the proportionate share of each guarantor in the business.
PROTECT YOUR CREDIT - IT IS NOW MORE THAN EVER AMONG YOUR MOST VALUABLE ASSETS:
Good credit has always been important on both personal and business fronts, but it is now more important that ever. As credit markets have tightened even the wealthy are having trouble obtaining credit for every day issues like home and auto purchase or leasing. Banks are scared and have pulled in the reigns on lending to all but those who have sterling credit, “good” is no longer good enough. They are also using late payments of any kind to move to the default interest rates permissible under various types on loan and consumer credit agreements as a way to generate fees and increase revenue internally. This could mean that your VISA ay 8.9% jumps to 29.99% APR if your spouse sends in the check late, or worse, if your course of business has been to pay certain credit lines down late to a friendly creditor, it could now put you into default or cause an acceleration. We are also hearing that clients who have used revolving credit lines for years as part of their business model either for capitalization or to pay recurring expenses are suddenly finding that their credit lines have been terminated as is permissible in the fine print of most such agreements. This is despite the fact that the client has had no change in income or credit. Banks are simply deciding that they have too much exposure and are proactively limiting your ability to draw that money out. Solution? – If you have a credit line that you know you are going to need or cannot risk losing – draw the money out now and look at the interest cost like an insurance premium; you may not want to pay it but if you need the “insurance” of having that money available it will not be available at any cost, certainly not in any short term scenario. There are services out there that we have referred friends and clients to with great results. For an investment of a few hundred dollars many negative or inaccurate items can be removed in a short period of time increasing your credit score by dozens of points.
FRAUD AND IDENTITY THEFT ARE ON THE RISE – TAKE SIMPLE STEPS
When times are tough all types of fraud increase, not just the lawsuits that are typically the focus of these updates. In addition to the obvious financial exposure of having someone access your identity and accounts is the risk to your credit. ID theft can take years and thousands of dollars to fix. ID thieves are trolling nice neighborhoods like yours and stealing trash and mail from your curb and mailbox, as well as using more devious and intricate methods like fake notices that your anti-virus software has expired and you need to click to update. An excellent source of information on these issues can be found here: http://www.ftc.gov/bcp/edu/microsites/idtheft/consumers/deter.html
Some basic tips:
Use a shredder for anything with an account number both at home and at your office. This includes things that you would typically put in your office trashcan. Would you let the person who empties the can at your desk have your checkbook?
Protect personal information of your employees and clients like it was your own – they will hold you responsible if that information is compromised. Make sure that such information is locked up, password protected and ideally traceable, i.e. who logged in and when if stored electronically.
Update your computer security software and make sure your anti-virus and spam ware is regularly updated and correctly functioning.
Be careful about the detail of information available on you online, especially in the age of business-social networking. If you are reading this we have probably had a discussion about distancing yourself from title to certain assets. I am continually amazed about the personal details about assets and family that people put on line.
Check your credit and the credit of your children regularly. ID thieves have started accessing the SS numbers of children and using them as clean slates then running up thousands or more of bad debt. In many cases the family is unaware that this has happened until years later or until the collection calls start coming.
INVESTMENT ACCOUNTS DOWN? DO SOME HOUSE KEEPING AND MAINTENANCE – APATHY KILLS:
Income is down, investment accounts are down and your RE is worth less than year ago – now what? At times like this you cannot afford to take another step back in your net worth and you need to keep every dollar, or fraction thereof, that the law allows. Talk to your advisors like your Financial Advisor, CPA and Estate/Tax Attorney to make you are as safe as possible, are taking advantage of all possible tax deductions and that your portfolio has been adjusted to current market conditions through the use of guaranteed income and other products that will give you all or most of the market upside with a down-side safety net of as high as 7%. If your advisor is unwilling to do so, or simply suggests you “hold and wait” talk to the advisors of your friends who are down less than you are and look at the differences in the strategies. Many of our clients put tremendous amounts of blood, sweat and tears into making money and building a legacy for their family, yet we are continually surprised at how many of them have help in the financial and accounting areas that is merely “adequate” or that they are holding onto someone they have outgrown because, “He’s a nice guy”. I understand that, I even respect it, a little – so keep him on your Christmas card list but get the level of sophisticated help your years of hard work merit. Worried about bank solvency? Explore cash alternatives like certain insurance products that provide money market rate returns and cash values as high as 100%, in addition to state law creditor protection up to 100% in certain states. Also, be aware of what the law actually protects. If you have to be liquid, consider using strategies that keep multiple accounts in place all within FDIC insurance limits. If you must be liquid for seven figures, spread the risk among several banks.
INVEST SOME TIME AND MONEY INTO YOURSELF
Make sure you are keeping on top of little health issues that can escalate into big issues, and stay insurable. Make sure your family's planning is complete, up to date and reflects the guardians and trustees who you still trust the most. If you have old planning update it. Not sure? We can have an expert review your Revocable Living Trust for (as one example) as little as $400.00 and spot issues that could cost millions if not addressed. Have good planning? Great - make sure it is adequately funded with the assets you created it to protect and convey and make sure your family knows where it is and who to turn to for help. We often see that the family is only vaguely aware that mom and dad have a will, but they don't know who did it or where it is. These issues are easily addressed but become a nightmare in a time of crisis.
ESTATE TAX AND INCOME REQUIREMENTS
We are also finding that many of our clients have polices that were adequate in terms of their estate exposure and income when the planning was first implemented, often not long after a marriage or the birth of a first child. Then, with some hard work and luck our clients become increasingly successful over the course of a number of years. Then ten years (or less) later when the client has a substantially larger net worth and typically substantially larger bills and estate tax exposure, they have the same policy they had ten years earlier, which is in many cases much too low. Remember, in many cases you don’t just need insurance to make sure the home is paid off, but to provide income, cover estate taxes, provide for education and expenses for kids, pay off medical bills, the list goes on and on, especially if the deceased was not of retirement age and if using those funds would create a big penalty for the surviving spouse. How far is that policy supposed to stretch?
We also find that many couples have never adequately explored second to die policies or the use of certain polices to build tax free retirement income for spouses who do not work outside the home but want to fund a plan. We typically come across and easily spot these issues during and will point them out to you.
INVEST IN YOUR BUSINESS
Again, now is the time to do some fine tuning. Make sure liability coverage is adequately in place and covers all obvious exposures, update employee manuals, (covered below in PART 1 in detail), update operating agreements and tax planning and make sure that the business assets are appropriately sub-divided, that is make sure the baskets of eggs that comprise your business assets are of a size that is manageable but limits exposure.
BUSINESS OWNERS – BUY SELL AND CROSS PURCHASE AGREEMENTS
We also see that many of our clients who have these agreements in place either don’t have adequate coverage or in the worst cases, the coverage required has never been implemented. This leads to expense, delay and in many cases litigation when one partner dies and the surviving spouse and heirs are suddenly trying to get a business appraised and fighting for what is theirs. This can lead to the untimely sale of the business or its assets and really create a mess for the surviving partners; we want to avoid this and can avoid it with a simple insurance policy.
Even in cases where the agreement is in place and has been well funded, we keep seeing cases where it was done so when the business was young. Now 10 or more years later the business has much higher revenues and value, and the “old” appraisal in longer valid. We also examine DISABILITY INSURANCE (DI) in these cases. Think of the scenario where the business is supposed to have a DI policy in place on various partners but never gets it. Then one of the partners has a disability event like an injury or illness and can’t work but needs income. This is a big hit to the business, not only is it down one productive person, but the other partners have to continue to pay the disabled partner. This leads to resentment, financial burden, lawsuits and other issues that again could be simply and cost effectively avoided.
DON’T LEAVE MONEY ON THE TABLE – IT’S NOT JUST WHAT YOU MAKE, IT’S ALSO WHAT YOU KEEP:
Now is the time to make the effort to keep the money you have been leaving on the table. Every year we give up a portion of every dollar because of the competing issues of spending time making vs.. keeping money. Own commercial real estate? Great – make sure you have looked at solutions like Cost Segregation Studies that allow you to take huge amounts of depreciation up front, when you need the write off, NOW as opposed to spread over the next 30 years a thimbleful at a time. Likewise, energy reduction surveys can be completed on commercial buildings generating tax credits of up to $1.80 per square foot! There may also be substantial deductions you can take for things like family meetings related to FLPs and other tools, travel, investment management, even investments that carry large tax credits like certain types of approved oil and gas investments. There are dozens of examples of squeezing more value out of each dollar – this is just the beginning.
Recession Proof Your Net Worth - Part 1
PART 1 - ORIGINALLY SENT JAN/FEB 2008
ISSUE – WHAT CAN BE DONE TO RECESSION PROOF YOUR ASSETS?
As times get tough and we endure another economic slowdown, no matter how cyclical in nature, we encourage our friends to be aware of the following issues and to examine how they can “winterize” their net worth. Here are some critical points to be aware of:
1. As times get tough people look for alternate sources of income. Be aware that as belts tighten fear drives greed, people who might not ordinarily sue, (or who might settle on reasonable terms) are more prone to do so when they feel they have an economic need. Lawyers are aware of this and are actively out there recruiting new plaintiffs and looking for cases. Remember, being right is not enough; if a plaintiff is looking for a deep pocket any collectible pocket will do, including yours;
2. The best defense is a good offense, be proactive and examine your assets and how they are being held. Have you implemented appropriate Asset Protection? Have you funded the plan you created by properly re-titling assets into the plan? Do you have assets in your own name that, while valuable, could themselves be the source of liability such as commercial real estate? Do you have valuable “safe” assets held in your own name or the name of your revocable living trust? Remember the RLT does not shield assets from your judgment creditors. These issues can be easily addressed and their risk reduced, if you act before a crisis occurs. I CANNOT STRESS THIS ENOUGH: NOW IS THE TIME TO DO SOMETHING ABOUT THESE ISSUES – NOT AFTER YOU ARE EXPOSED TO A SPECIFIC RISK;
3. Are you properly protected from employee liability? For those of you who are business owners and have employees, this is especially important, especially if you may have to consider lay-offs or downsize as a result of the current business climate. Remember that the people affected by these kinds of economic necessities take it personally, not just as a business decision, and will often turn a necessity based lay-off into a discrimination claim with the help of a contingency fee employment attorney. Be sure you carefully document any staff reduction, whether based on economic necessity or performance, how would you react if you were fired or laid off amidst fears of a recession? Most people panic and grasp at straws. Make sure you have adequate employee/work place policy manuals in place and that those manuals include detailed arbitration/mediation policies of the type we have probably discussed in the past. These policies give you opportunities to amicably resolve the issue in an informal way without being subject to the high risk, expense and distraction of a formal court proceeding. More importantly, I f the agreement is properly drafted and implemented the employee MUST comply and we remove most of the economic incentive their attorney was motivated by. This is also a good time to review what your employees are doing with your clients and each other and to remind them of policies that you may have in place to protect you. We must be vigilant of the fact that you are responsible for their actions with clients and how they interact with each other as well. At times like this maintaining safe and proper procedures in everything from billing to keeping the hallway floor dry is especially important;
4. What about insurance? Are you carrying adequate amounts of insurance? Do you have life insurance sufficient to not only cover funeral expenses (as laughable TV ads encourage) but address estate tax liability and provide adequate levels of income and support to those who depend on you? Are your liability coverage limits (homeowners, auto, professional malpractice/ E&O, etc.) appropriate and do you have a good idea of where these documents are if you or a family member needed to use them? Finally, have you addressed the possibility of needing long term care or a disability that remove or diminish your earning capacity? For most, disability insurance is cheaply obtained and can be had in amounts that can make a real difference.
5. What about my investments? I consulted with a professional* on this, here is what one expert had to say. First, this is a great time to do a “fire drill”. Take a close look at your asset allocation and make sure that is designed for optimum performance in all three market conditions, up, down and sideways or flat. By using this kind of strategy some advisors have been able to reduce their clients’ exposure to the recent drop in market value of nearly 10% substantially, ranging from 0-50% of the market losses. Second, look at shifting market risk to insurance companies through the use of guaranteed income products such as Variable Annuities that allow you all or most of the market upside with little or no risk of principal loss. This “heads you win, tails you break even strategy” makes sense for at least a portion of your portfolio at minimal cost. There are many good companies that offer these kinds of products, and each product is specifically designed for a particular purpose, so they are not all the same. Get professional help in picking the one that best suits your particular goals. Third, don’t panic sell and perhaps even look at options for putting money into the market. Everyone wants to buy low and sell high, but most people buy when the market is on the way up and a lot of the “lift” is out of any specific investment. You “go all in” and buy bargains when the market is down, not up. Again, get professional help on this issue and please ignore media sources like Money Magazine and Suzie Ormond – get advice specific to you by people who actually do this every day. Fourth, take advantage of current market issues in your favor like low interest rates. We are having some great results with programs like Premium Financing for life insurance and Accounts Receivable Financing (the income protection program we may already have spoken about). Rates are low and falling in our clients’ favor, making the cost of money cheaper than it’s been in recent history.
6. Maximize every dollar you are already earning. Actuarial tables have changed dramatically over the last few years, in the favor of consumers. If you have a life or disability insurance policy that is more than a few years old there is a chance that it can be reviewed and replaced in a way that benefits you. We are routinely seeing clients get more coverage for the same premium or the same coverage at a lower cost. Make sure your tax planning/avoidance strategies have been vetted and maximized. Remember, a good holistic approach to this issue incorporates many issues including income; tax advantaged investing, tax deferment plans and etc. Don’t stop asking questions just because you’ve max-funded your IRA.
*My thanks to Jeff Christenson, President Christenson Wealth Mgmt.
ISSUE – WHAT CAN BE DONE TO RECESSION PROOF YOUR ASSETS?
As times get tough and we endure another economic slowdown, no matter how cyclical in nature, we encourage our friends to be aware of the following issues and to examine how they can “winterize” their net worth. Here are some critical points to be aware of:
1. As times get tough people look for alternate sources of income. Be aware that as belts tighten fear drives greed, people who might not ordinarily sue, (or who might settle on reasonable terms) are more prone to do so when they feel they have an economic need. Lawyers are aware of this and are actively out there recruiting new plaintiffs and looking for cases. Remember, being right is not enough; if a plaintiff is looking for a deep pocket any collectible pocket will do, including yours;
2. The best defense is a good offense, be proactive and examine your assets and how they are being held. Have you implemented appropriate Asset Protection? Have you funded the plan you created by properly re-titling assets into the plan? Do you have assets in your own name that, while valuable, could themselves be the source of liability such as commercial real estate? Do you have valuable “safe” assets held in your own name or the name of your revocable living trust? Remember the RLT does not shield assets from your judgment creditors. These issues can be easily addressed and their risk reduced, if you act before a crisis occurs. I CANNOT STRESS THIS ENOUGH: NOW IS THE TIME TO DO SOMETHING ABOUT THESE ISSUES – NOT AFTER YOU ARE EXPOSED TO A SPECIFIC RISK;
3. Are you properly protected from employee liability? For those of you who are business owners and have employees, this is especially important, especially if you may have to consider lay-offs or downsize as a result of the current business climate. Remember that the people affected by these kinds of economic necessities take it personally, not just as a business decision, and will often turn a necessity based lay-off into a discrimination claim with the help of a contingency fee employment attorney. Be sure you carefully document any staff reduction, whether based on economic necessity or performance, how would you react if you were fired or laid off amidst fears of a recession? Most people panic and grasp at straws. Make sure you have adequate employee/work place policy manuals in place and that those manuals include detailed arbitration/mediation policies of the type we have probably discussed in the past. These policies give you opportunities to amicably resolve the issue in an informal way without being subject to the high risk, expense and distraction of a formal court proceeding. More importantly, I f the agreement is properly drafted and implemented the employee MUST comply and we remove most of the economic incentive their attorney was motivated by. This is also a good time to review what your employees are doing with your clients and each other and to remind them of policies that you may have in place to protect you. We must be vigilant of the fact that you are responsible for their actions with clients and how they interact with each other as well. At times like this maintaining safe and proper procedures in everything from billing to keeping the hallway floor dry is especially important;
4. What about insurance? Are you carrying adequate amounts of insurance? Do you have life insurance sufficient to not only cover funeral expenses (as laughable TV ads encourage) but address estate tax liability and provide adequate levels of income and support to those who depend on you? Are your liability coverage limits (homeowners, auto, professional malpractice/ E&O, etc.) appropriate and do you have a good idea of where these documents are if you or a family member needed to use them? Finally, have you addressed the possibility of needing long term care or a disability that remove or diminish your earning capacity? For most, disability insurance is cheaply obtained and can be had in amounts that can make a real difference.
5. What about my investments? I consulted with a professional* on this, here is what one expert had to say. First, this is a great time to do a “fire drill”. Take a close look at your asset allocation and make sure that is designed for optimum performance in all three market conditions, up, down and sideways or flat. By using this kind of strategy some advisors have been able to reduce their clients’ exposure to the recent drop in market value of nearly 10% substantially, ranging from 0-50% of the market losses. Second, look at shifting market risk to insurance companies through the use of guaranteed income products such as Variable Annuities that allow you all or most of the market upside with little or no risk of principal loss. This “heads you win, tails you break even strategy” makes sense for at least a portion of your portfolio at minimal cost. There are many good companies that offer these kinds of products, and each product is specifically designed for a particular purpose, so they are not all the same. Get professional help in picking the one that best suits your particular goals. Third, don’t panic sell and perhaps even look at options for putting money into the market. Everyone wants to buy low and sell high, but most people buy when the market is on the way up and a lot of the “lift” is out of any specific investment. You “go all in” and buy bargains when the market is down, not up. Again, get professional help on this issue and please ignore media sources like Money Magazine and Suzie Ormond – get advice specific to you by people who actually do this every day. Fourth, take advantage of current market issues in your favor like low interest rates. We are having some great results with programs like Premium Financing for life insurance and Accounts Receivable Financing (the income protection program we may already have spoken about). Rates are low and falling in our clients’ favor, making the cost of money cheaper than it’s been in recent history.
6. Maximize every dollar you are already earning. Actuarial tables have changed dramatically over the last few years, in the favor of consumers. If you have a life or disability insurance policy that is more than a few years old there is a chance that it can be reviewed and replaced in a way that benefits you. We are routinely seeing clients get more coverage for the same premium or the same coverage at a lower cost. Make sure your tax planning/avoidance strategies have been vetted and maximized. Remember, a good holistic approach to this issue incorporates many issues including income; tax advantaged investing, tax deferment plans and etc. Don’t stop asking questions just because you’ve max-funded your IRA.
*My thanks to Jeff Christenson, President Christenson Wealth Mgmt.
Subscribe to:
Posts (Atom)