Personal Guarantee Insurance for Doctors (and everyone else)

Source: Physicians Practice

Non-medical business exposures that threaten doctors’ financial solvency continue to grow in scope and number. This week we take a look a relatively new type of risk-management product:

Personal Guarantee (PG) Insurance.

We’ve covered both exposure related to residential and commercial real estate debt and other

non-medical liabilities that have been financially fatal to doctors in previous columns. These types of

general business exposures, along with increased regulatory risks on issues like HIPAA, Medicare

billing, and RAC audits, along with employment-related lawsuits, now pose a threat to your practice

that must be given the gravity of a dreaded malpractice claim itself. In fact, in my personal

experience working with physicians in every state over the last ten years, as statistically real as

malpractice claims are, I’ve seen far more business- and risk-related crises than catastrophic

medical malpractice claims.

What is PG Insurance?

It’s a form of fully underwritten insurance coverage that can cover 30 percent to 70 percent of your

debt liability on a specific loan, depending on the policy and features you pay for.

What kinds of loans are covered?

The insurance is available for both individual loan/borrower scenarios and those related to a business

you own in which you might have several partners or be subject to joint and several liability. It may

also be available if you are a third-party guarantor on the debt of another, as in situations where you

may have “co-signed” to help a family member get credit. Loan amounts run from around $750K to

multiple millions of dollars.

What does it cost?

It depends. Like any other form of valid insurance it is underwritten specifically to you, the property,

dollar amount, and so on. The premium you pay is based on these risk factors.

Does it last the entire term of the loan?

No. At this point it seems to be re-underwritten every year based on your income, property value

and other factors relating to creditworthiness.

Can I get it if I’m already in trouble or worried?

Probably not. The insurance company only wins if they odds are heavily in their favor and they only

insure people and loans unlikely to default and well collateralized by the property itself. The

insurance company has credit, earnings, and other requirements including a required seven-figure

(corporate) earnings history and wants you to have been producing at that level for several years.

This requirement may sound very limited but most commercial credit, including loan underwriting

itself, has similar standards.

Personal Guarantees (PGs) always need to be entered into carefully and with advance legal counsel.

While my preference would be always be for non-collateralized, non-recourse loans that don’t subject

your other assets to any legal risk, those types of loans are a rarity and are growing increasingly so.

No. At this point it seems to be re-underwritten every year based on your income, property value

and other factors relating to creditworthiness.

In most cases the loan is guaranteed by both the property itself and your personal guarantee, backed by your other available assets, to make up any shortfall between the liquidation value of the property and what you borrowed to begin with. In this column on several previous occasions we have addressed the issue of this liability and have always advised that physicians carefully limit the guarantees as much as possible to very specific dollar limits or specific assets used as collateral and to avoid the dreaded “joint and several liability” scenario. If possible, limit your debt liability in the loan contract itself to a dollar amount that is equivalent to the percentage of what you actually own, not the entire loan. More specifically, for instance, don’t sign a loan that makes you liability for an entire $3MM dollar loan when your 20 percent is worth only $600K.

As we’ve seen over the last six years in particular, what seems like a “sure thing” on residential or

commercial property can quickly become a bottomless pit of liability if the market changes and

values drop. In situations like this and several others being able to transfer some of that risk to a

third party for a finite cost becomes an intelligent way to limit your risks.

I must point out that this coverage is new so there is not any credible history of claims payment to

point to and that at present it is offered by only one carrier but re-sold by many insurance agencies

including some very reputable national agencies. I rely on their due diligence and the assumption

that claims will actually be paid for purposes of this discussion. We will continue to watch as this new

category of risk management evolves and becomes an important part of any doctor, business owner or real estate investor’s asset protection plan.

Source URL: http://www.physicianspractice.com/personal-guarantee-insurance-doctors

Attorney Christopher Charles

The general rule is that the forgiveness of debt is a taxable event.  26 U.S.C.   § 61(a)(12).  Debt forgiveness is included within the taxpayer’s gross income. For example, if I loan my uncle $100,000 to open a new fast food franchise and then later, I hit the Powerball and subsequently tell my brother not to worry about repaying the $100,000 loan, the I.R.S. will deem the $100,000 loan as taxable income for my brother. 

The 2007 Mortgage Debt Relief Act

 Important exceptions to the general rule, however, apply to mortgage debt forgiveness.  Notably, pursuant to the 2007 Mortgage Debt Relief Act (the “Act”), the forgiveness of debt concerning a “qualified principal residence” is excluded from income tax.  26 U.S.C. §108.   This essentially means that there is no tax liability on the short sale difference or foreclosure deficiency of a qualified principal residence. In order to qualify as a “qualified principal residence,” the loan must have been used to purchase or “substantially improve” the taxpayer’s principal residence.  Principal residence is defined as the residence where the taxpayer has resided for a “period aggregating two of the last five years.”

The Act has three major limitations: (1) it sunsets at the end of 2013; (2) it does not apply to commercial properties; and (3) it only applies to the taxpayer’s primary residence.

Fortunately, many property owners in Arizona can benefit from other exclusions under the tax code without the need to rely on the Act.

The Insolvency Exception

For example, if the taxpayer is insolvent at the time of the mortgage debt forgiveness, the taxpayer can exclude liability for the debt forgiveness, even if the property is an investment property or vacation home.  26 U.S.C. §108(a)(1)(B).

The IRS’s definition of insolvency essentially means that the total sum of the taxpayer’s liabilities exceeds the total sum of the fair market value of the taxpayer’s assets, on the date immediately preceding the debt forgiveness.

The Bankruptcy Exception

Also, if the debt is discharged in bankruptcy, then there is no liability for the debt forgiveness, as long as the taxpayer filed the petition for bankruptcy before the debt forgiveness, e.g. before the completion of the short sale or foreclosure.

Capital Loss May Offset Any Debt Forgiveness Income Tax

Further, even if the Act does not apply, and if neither of the above exclusions apply, the taxpayer may be able to claim a capital loss regarding the disposition of the property, which may offset any debt forgiveness in regard to an investment property.

Non-Recourse Debt Exception

Finally – and perhaps most importantly in Arizona – there is no tax liability for mortgage debt forgiveness regarding “non-recourse debt.” Treas. Reg. § 1.1001-2(a)(2) and (c), Ex. 8; see also Rev. Rul. 90-16, 1990-1 C.B. 12.  Non-recourse debt means that the creditor can seize only the property that secures the loan, even if the fair market value of the property is not sufficient to cover the loan balance.  Non-recourse debt can be the result of express contract or the result of statute, as in the case of Arizona’s anti-deficiency statutes.

Thus, even if the Act expires and none of the above exemptions apply, the taxpayer may still have arguments to exclude tax liability for mortgage debt forgiveness if the loan is non-recourse under Arizona law. The Arizona appellate courts have broadly interpreted Arizona’s anti-deficiency statutes and recently extended their protection to vacant land in some cases.  See M & I Marshall and Ilsley Bank v. Mueller, 228 Ariz. 478, 268 P.3d 1135 (App. 2011).

Even if the loan is non-recourse, the lender will still issue the IRS Form 1099-A or 1099-C by February 2^nd of the year following the mortgage forgiveness.

Importantly, the issuance of the 1099 is not dispositive on the issue of whether any tax is owed.  Instead, the taxpayer can respond to the 1099 with the Form 982 and identify which of the above exceptions apply and identify why no tax is owed.

In sum, although the forgiveness of debt may create tax liability, taxpayers have several options for avoiding liability.  Please visit Mr. Charles’ attorney page at www.davismiles.com to download a free manual regarding mortgage debt forgiveness.

Christopher Charles is an experienced real estate lawyer and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (AAR).  He is a Partner with the law firm Davis Miles McGuire Gardner, PLLC where he serves as the chair of the Real Estate Practice Group. Mr. Charles is an Arbitrator and Mediator for AAR regarding real estate disputes; he serves on the State Bar of Arizona Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions. 

Mr. Charles is a licensed real estate instructor and teaches continuing education classes at the Arizona School of Real Estate and Business. For a list of upcoming speaking engagements, please visit www.davismiles.com.  he can be reached at ccharles@davismiles.com

Although painted in a negative light in recent popular lore because of issues with large numbers of tax evaders (many of who are American doctors) the defensive value of the IAPT remains intact. The simple mistake made by most of the people you read about having trouble with offshore accounts can be reduced to simply failing to report the accounts as the law requires. You do have a well-established right to have offshore bank accounts and trusts and the event of moving money to a foreign bank account owned by a trust or held personally as we covered in our previous article on offshore finance is typically not taxable in and of itself. 

A large number of successful American doctors set up this kind of defensive planning in the first place because they lack full confidence in the often inconsistent and subjective nature of the American court system and are unwilling to remain exposed to any claim or lawsuit that may come along, regardless of its validity and amount. One of the questions that I’ve asked clients pondering the domestic vs. foreign asset protection trust question is this: If you feel you that ensuring your life’s efforts against the above mentioned exposures in the U.S. court system is a good idea, does it make sense to rely on that very same system’s laws and subjective judgment in the planning you implement against it? While opinions and tactics vary widely among planners not all of those strong opinions are backed by actual long-term experience; make sure the answers you are getting actually are.

There are many international jurisdictions to choose from when creating an IAPT ranging from familiar Caribbean islands to Belize, Jersey, The Isle of Mann and the Cook Islands, one of my personal favorites. Some jurisdictions (especially many of the romanticized Caribbean ones) are now too close and connected to the United States to provide the full value of an offshore trust structure and others may be too remote, politically unstable or under-developed to provide many westerners comfort. This author’s personal experience with several thousand of these structures has been to use a remote but well-established protective jurisdiction staffed by top international banks and trust companies that controls assets housed in first-world, European-state-owned and insured banks. These provide superior solvency risk and political stability.  Banks such as these provide the many layers of protection and part of the system of checks and balances so important when moving your assets.

Once assets are moved, the “investment advisor” to the trust can allocate the trust’s assets to nearly any imaginable conventional investment and a few you can’t participate in directly as an individual U.S. citizen. In addition to the basic legitimate business purposes of wealth preservation and estate planning, the IAPT is also gaining popularity with those who have concerns about having their entire investment portfolio here in the United States. Currency stability as well as social political and economic variables have prompted more Americans than ever before to investigate these options over the last five years.

The costs and legal formalities, as well as the history and legal protection afforded, vary widely between jurisdictions, so it’s important to work with an experienced planner that has full range of required support resources like banks, trust companies, protectors, and investment advisors. As always, timing is key, so looking at these tools after an exposure has occurred dramatically reduces their effectiveness and legality.  In this limited forum we can’t possibly cover every detail, so get personalized professional legal help when examining this important asset protection strategy or any other.

We’ve even seen estate planners use them as the General Partner of a Limited Partnership. A disaterous result when combined with the scenario above that would actually put a creditor in control of the entity you might be using for defensive purposes and to which they might not otherwise have had any access.

When ever I talk to the owner of a C-Corp. the question I ask is typically, “Why do you have a C-corp. ?” and I an continually surprised at the very small number of people who can actually articulate a reason other than that was what their CPA or attorney suggested and always does. I’ll say that’s not good enough and you and your counsel should be able to articulate a reason and that they should provide you with a comparison like the one at the end of the article linked below.

Look Before You Leap from an S to a C Corporation

http://www.accountingtoday.com/news/Look-Before-You-Leap-Corporation-66407-1.html?ET=webcpa:e6974:134343a:&st=email

There are absolutely times when the C-Crop. is the best choice as in cases where they are established to give the owner of a closely held and profitable business access to certain kinds of tax personal deferral planning. Unfortunately that’s often not why it happened. As always, this is not tax or legal advice specific to you. Get expert personalized help when examining these issues.

In previous discussions we’ve addressed the use of specific tools like limited partnerships and captive insurance companies by doctors, to name just two specific examples of tools that can be effective when used and drafted the right way. This week examine the Asset Protection Trust (APT) and address some of the most basic questions and misconceptions we’ve helped thousands of physicians investigate on a consistent basis.

 When can I do it?

As with any asset-protection strategy, the key element is timing. This is preventative or defensive medicine but terribly ineffective against a pending or existing exposure. Implementing this against something that has already happened is called “fraud”.

 What is it?

The Asset Protection Trust or APT is typically an irrevocable trust that becomes the owner of the assets being put into it, typically referred to as “gifting” or “funding.”

 Why is it irrevocable?

In order for the property to truly be outside the reach of a judgment creditor by law it must go into a vehicle that is granted permanent, irrevocable title. If you, the “grantor” can easily pull it back at will, it is generally not protected from others either. It must truly be the property of the trust.

 Is it the same as my estate-planning trust?

Typically no, but some estate planning vehicles do provide asset protection. The estate planning trust most doctors have or have seen is generally referred to as a Revocable Living Trust, a.k.a. “family trust” or RLT. This structure is often correctly funded with your home, investment account, and other assets. This is so those assets follow a specific chain of custody at your death and avoid the probate process. Unfortunately because this vehicle is revocable by you at will it offers ZERO creditor protection during your lifetime. A simple way to keep this straight is this: Estate planning is death planning and concentrates of giving your property away as you desire at your death. Asset protection on the other hand is life planning and preserves the assets you have, use, and would like to pass on so that they actually get to the estate plan.

 I paid a great deal for my trust, does that mean it does more?

Usually not. Fees can vary widely based on the local legal market and the skill and experience of the drafter and what their expertise demands. Unfortunately, paying more does not it automatically make it better or give it extra features.

Can any lawyer do it?

Like any area of the law asset protection is an increasingly complex and specialized practice and as such it should be ventured into with an attorney with some very specific experience, just as you’d select a divorce, tax, bankruptcy, or other focused practitioner. While it shares similarities with other areas of law including corporate law and estate planning, there are a variety of considerations that must be accounted for with every move including timing, the liquidity needs of the doctor, the most defensible choice of legal entity, the jurisdiction that controls and legitimate business purpose. As asset protection has grown increasingly popular with consumers the number of attorneys and non-attorney promoters that have entered the field has grown exponentially. Furthermore, the leading sellers of form legal documents have recently increased their marketing of documents structured for the this purpose. In some cases, those documents are adequate; in others they are hopelessly inappropriate or drafted with fatal errors. Either way, even assuming the form is perfect, the application must be learned and apply to your very specific asset structure and fact pattern. Buying the best laser in the world will not make me a surgeon.

 This simple introduction just scratches the surface of the features and issues physicians should understand when considering an APT. We will continue the conversation over the next few weeks and cover issues like jurisdiction, selecting counsel and the appropriate use of the tool as part of a system. As always, this information is general in nature and never fact specific legal advice.

This article was originally written for and published by www.PhysiciansPractice.Com, The Nation’s Leading Practice Mgmt. Resource, where Mr. Devji is also a regular contributor.

The Options

The most basic division between choices is simple; APTs can be on-shore or “domestic” or offshore, typically referred to as “international” or “foreign.” Look for these prefixes to indicate this elemental distinction. Both DAPTs and their offshore or international (IAPT) counterparts share some common elements:

• They are irrevocable

• They must strictly comply with all legal, formational and operational requirements imposed by a specific jurisdiction and state so in their drafting

• They have trustees appointed to mange the trust and its assets

• Some require that the assets seeking legal protection are actually located within the jurisdiction and that an approved local agent, trustee or authority is appointed

• They must be set up and funded in advance of any claim or specific liability you want them to be effective against

• Neither structure is secret or tax free, despite what’s promised

• Both are usually ineffective against a current spouse when used in a legal way

There are a number of states that have created laws that allow the formation of a domestic APT or DAPT in their jurisdictions. This number has grown over the last few years due to consumer demand and the states’ realizations that they can generate significant fees as part of being in the trust business.

Among the most popular of the DAPT jurisdictions are Nevada, Montana, Delaware, and Wyoming but there are many others that have similar statutes. Experienced planners have strong opinions about which jurisdictions are best and why and should be able to explain the benefits and how they can effectively apply to you and your assets well beyond just, “Because we are in state X”.  

These trusts are typically less expensive than their offshore counterparts but are as yet untested on any wide scale and rely on the hope that, for instance, a judge in California with jurisdiction over a California defendant will refrain from trying to grab that defendant’s assets in Nevada because Nevada says they are in a special trust. This also unfortunately flies in the face of “full faith and credit” which essentially states that a judgment in any state is good and enforceable against a defendant and their asset in every other state. Large numbers of DAPTS have been established over the last few years in various jurisdictions by planners of widely varying skill for clients with questionable timing.

I’m a strong believer that “bad facts make bad law” and given the number of bad fact-planning cases that have been executed in the last few years, I feel it is likely that you will see many of these structures pierced. Although these cases should be judged individually on their merits, human nature makes it more likely that they will begin to be viewed as a group by the courts and either generally upheld or viewed as ineffective. Until that drama plays out I advise not be in the legal equivalent of a clinical trial.

Consumers must be wary of who they chose to work with for both DAPT and offshore-based planning. There are significant ramifications for making transfers to these kinds of vehicles including tax, estate, and fraudulent conveyance issues that you must understand or have counsel that does. Many recent entrants to the asset-protection business are applying form documents without a full understanding of their use and how it will affect your future defense, control, and use of those assets. Get personalized help from an experienced attorney who can help make sure that you are following the letter of the law to get any and every possible benefit the trust may provide.

Our next discussion on this issue will turn to the use of offshore asset protection trusts by doctors and the myths surrounding IAPT planning and its effectiveness.

 This article was originally written for and published by www.PhysiciansPractice.Com, The Nation’s Leading Practice Mgmt. Resource, where Mr. Devji is also a regular contributor.

The Queen of Versailles traces the lives of billionaires Jackie and David Siegel who have made their fortune from their Westgate Resorts time-share business in Florida. The film begins as they embark on the construction of what was to be the largest home in America — a 90,000 square foot dream home. But the one thing that their blue prints did not plan for was the devastating financial crisis as their extravagant plans are put on hold as a result of the economic collapse. The film captures the strain on the Siegel’s lifestyle, family life and marriage as Jackie tries to hold fast to their dreams while David’s time-share empire confronts a massive credit crunch.

See the whole story about the movie here: http://www.bravotv.com/blogs/the-dish/the-queen-of-versailles-makes-its-tv-debut-on-bravo 

And below is more about what David Siegel and his counsel either didn’t know or forgot. I sent the first version of this to my clients and associates in 2007-2008:

The right financial advice matters now more than ever. We have seen that at the worst, some clients lost as much as 60% of their investment portfolios due to the market and their investment allocations while others were down only a fraction of what the market lost and are relatively free of anxiety. Why the huge disparity in results between advisors? What we see is that it is relatively easy to make money in good times by using a simple allocation table that at first glance seems well diversified between different types of investments such as technology, energy and etc. What those plans, such as the ones we see from big commercial brokerage firms or “wire-houses” are typically lacking in is a good down-market strategy that values principal protection as highly as it does growth. There are ways to get all or most of the market growth available with guaranteed rates of return or principal guarantees. These types of strategies, when properly allocated are the backbone of what saved the second, more fortunate group of investors described above. These clients are not only whole or close to it, but are now poised and financially equipped to take advantage of emerging opportunities.

Again, as the economy and income and profit slow, never taking a step back, or at least taking as few as possible, becomes more important than ever before. Remember, a portfolio that is down 50% will need to DOUBLE to get back to where it was. How long did it take you to double your money the last time? Do you have that kind of time left? If you don’t like the way you answered those questions for yourself, perhaps it’s time to take a good look at how you are structured and what kind of stop-loss measures you have in place. In many cases it is not too late to make some positive changes and “buy and wait” is not the right answer for every investor or every investment.

NOW is always the best time to act on preventative legal planning.

Over teh last six year in particular we have seen many successful people who always meant to complete essential planning like Asset Protection and advanced Estate Planning precluded from doing so either wholly or completely. In some cases their unexpected legal exposures made the planning ineffective or illegal, in others their financial positions in terms of debt, credit and cash flow changed so rapidly they were locked out.

We understand that doing this kind of planning takes time, energy, and resources that are already scarce for the dynamic individuals we work with, and that it seems to lack the kind of time sensitivity that other matters, like responding to a lawsuit, would justify. The real truth however is that every day that passes without these issues being properly addressed jeopardizes your net worth and your family’s security, the thing that many of you are working so hard to create.

We have countless stories from the last 6 months alone of fortunes lost because of the way easily protectable assets were held and exposed to creditors; families thrown into crisis when the bread winner passes away in an accident without adequate estate planning and life insurance or is disabled without disability coverage in place and unexpected liabilities taking away dreams.

We equate this lack of attention to these issues to driving to work every day on a busy freeway without auto insurance or operating without a malpractice policy in place. These are odds that most cannot afford to bet on. Take the time and make the investment in YOURSELF and the years you have put into your current level of success and address these issues now. Preserving what you already have when money is harder to make is a good first step.

No program lasts forever, when the door is open seize the opportunity. Many of the most productive and sophisticated wealth preservation techniques have disappeared or slowed to a crawl as the banking and insurance industries continue to be devastated. Even clients with nine-figure net worth levels are having trouble obtaining the kind of low cost financing that was available for them to help leverage their wealth and avoid estate taxes just a few years ago. Add to that increasingly stringent underwriting by insurance companies and you have the worst possible storm for the affluent. We are now in the unfortunate position of having to tell many of those we counseled on these issues a year ago and who skeptically heard us say that there was a time pressure involved that the programs are not available or that they are no longer qualified under more stringent underwriting guidelines.

We like leveraging wealth and using credit, but you must have a disaster plan. Those in the real-estate business are the most obvious example of what a lack of credit and financing can do, but all types of industries have been crippled by current economic conditions. We have many of the most successful real estate professionals in the country as clients and have felt and shared their pain. What has been less obvious is the impact on other businesses like shipping, dining, small businesses that rely on services and discretionary income, banking, appraisal services, elective medical procedures, health and beauty businesses, the list is infinite.

We have seen that those who have weathered this storm most effectively and with a minimum amount of trauma shared several characteristics:

- They and their advisors were aware of potential exposures and were proactive in addressing them;

- They are able to make their personal, family overhead commitments from existing resources for an extended period of time, even without additional cash flow;

- They were willing and able to adjust their lifestyles and expenditures to current economic conditions;

- They lived very well, but well within their means, as opposed to at the limits of their means;

– They had assets that allowed them to meet existing business financing burdens and other fixed costs in a form that they were able to liquidate at minimal delay and expense;

- They had top counsel in place on tax, business and estate issues, and that counsel used a variety of BOTH legal and tactical financial strategies that not only served the primary goals but also protected those assets for the family. Some examples are the use of Insurance and Annuity Products and ILITs and Split Dollar agreements that preserve certain assets for the family by statute;

- They had great credit and relationships with banks that allowed them to agree on terms that were best for all parties involved, and had these relationships with several institutions;

- They had long term assets that were able to be made liquid with minimal penalty and delay, despite that liquidation not being part of the original plan, i.e. long term investments with an escape or liquidity plan built in;

No business is recession proof. Diversify and properly insulate your income streams if possible and be ready to be flexible and spot ways to identify new opportunities for your business and your skill set.
Realize that your niche, as you have defined it, may come to an end and know when to direct your assets and energy to those new opportunities. As examples, some of our clients who were major players in single family housing are now in the “economy” apartment market segment and are doing well. Doctors are expanding their practices and adding high value cash services like medically supervised weight loss to practices that were focused solely in other areas. Others have created booming new businesses like debt and credit repair that directly reflect the current economy.

Don’t take your market position for granted. In a down economy discount solution, product and service providers emerge in every market. These competitors will be selling price first and many consumers won’t see the differences until they have been poorly served and you have lost the business. Some steps to fight this:

- Make sure that your network and professional relationships are as strong and developed now as they were before you reached your current level of success;
- Look for ways to distinguish yourself and your business and maintain the highest standards of professionalism and service;
- Look for every way to add value and collaborate with other top services providers you work with so that you are a natural and logical part of every project or client they are involved with. Become part of a best of class team of teams that delivers the highest value to the consumer. This is true of everything from medical services to commercial contracting;
- Continue to be the best, or at least great at what you do. “Good enough” should not be part of your vocabulary.

Guard your credit like gold. 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. On a personal level this could mean that your VISA ay 8.9% jumps to 29.99% APR if your spouse sends in the check late.

On a business level it is much 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 or drastically reduced 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 – consider drawing 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.

Check your business and personal credit reports and see if they are accurate.
We are also seeing that banks that are in financial trouble and which need to reduce their outstanding debt balances are playing dirty tricks like re-appraising property they financed over 18 months ago to “current market value” at ridiculously low valuations then going back to the borrower and saying they need more collateral or they will call they note as the “fine print” entitled them to do. How bad can this be? In one case the bank re-appraised my client’s multi-million dollar commercial property at about 50% of current fair market value and wanted an additional seven figures in collateral. Fortunately, this client had sterling credit and good professional relationships that allowed him to re-finance at a lower rate with a more solvent and ethical bank.

Keep more of every dollar you earn. There are many things each of us could do to maximize our retained earnings. Again, now that money is harder to make, another way to increase revenue is to devote a small amount of resources to increasing efficiency.

These are just a few of the most obvious ways we see clients successfully achieving this goal:

– Cost segregation Studies. These studies allow huge tax deductions now when you need them most as opposed to spread over 30 years at about 3% per year the way they are typically taken. Most commercial property, even leased, qualifies for the study and the deductions and we can even arrange for a free feasibility study for commercial property with an aggregate value of at least $1MM, an easily attainable entry level. As a bonus, you can ever re-capture lost depreciation for as much as the last 20 years!
Energy Studies. Again, owners of commercial properties are seeing energy tax credits of up to $1.80 per square foot when the study is completed and simple low cost changes are made. Would that kind of recurring savings be valuable enough to you to change the kinds of light bulbs you use and add a skylight? In most cases it is.

Increasing Business Tax Structure efficiency. You walk around turning off lights, but is your business tax structure maximized? One of my Associates, Mr. Tom Maguire of MCguire and Associates, as just one example, routinely saves both public and private corporation clients a significant amount of money on a re-occurring basis by refining and perfecting the choice of corporate formation, stock ownership options and identifying the most efficient business succession and executive compensation models. This goes far beyond the CPA taking the right deductions.

Increasing personal tax efficiency. We deal with high net worth clients every day and are continually surprised by the amount of money that they leave on the table for the government by not maximizing their legal options. For most, “just” a 401K is not adequate tax planning. Even if the money you save is “long term” or retirement money that cannot be used now, you still get to keep it. Many of the most sophisticated programs provide multiple benefits and may also serve or support goals like estate planning and asset protection.

One glaring example is the use of special life insurance policies with high cash values that grow tax free, allow withdrawals tax free, and which offer statutory protection against creditors in many states. As an example, in Arizona that creditor protected amount is “unlimited” after 24 months in a plan. Other examples of planning to consider includes section 79, post retirement medical reimbursement, 412i defined benefit programs. Don’t know where to start? Don’t worry, the right pofessionals can help show you which plans apply to your unique situation and which are guarantee of principle, no market risk, tax deductible and/or Asset Protected programs.

Attorney Mike King, Gammage & Burnham

HOW CAN A DEBT RESTRUCTURING WITH NEW COLLATERAL POSSIBLY BE A FRAUDULENT TRANSFER?

 ANSWER:            LIENS MAY BE SET ASIDE AND DEBT PAYMENTS DISGORGED IF THE PARTIES PLEDGING THE ADDITIONAL COLLATERAL DID NOT RECEIVE VALUE REASONABLY EQUIVALENT TO THE OBLIGATIONS INCURRED.

You would think that curing a $2 billion loan default, restructuring loans and preventing further monetary defaults would be valuable to borrowers.  After all, being placed in loan default is seldom a good thing.  Nevertheless, certain lenders were chagrined to have their liens set aside and to be required to pay money into the bankruptcy estate of Tousa, Inc. because the entities providing new collateral did not get “reasonably equivalent value” for the new liens.  Tousa, Inc. v. Official Committee of Unsecured Creditors, 680 F.3d 1298 (11th Cir. 2012).

How did that happen?  Well, in 2006, Tousa was the thirteenth largest homebuilder in the country.  It grew rapidly in the expanding economy.  It acquired many smaller homebuilders and paid for the acquisitions with borrowed money. 

Unfortunately, by January, 2007, Tousa had defaulted on over $2 billion in loans!  The subsidiaries of Tousa were not responsible for the $2 billion in loans and had not pledged any collateral to secure those loans.  Nevertheless, Tousa was in danger of having a judgment entered against it for the indebtedness.  Such a judgment would have constituted an event of default on more than $1 billion of debt that was guaranteed by the subsidiaries.  Triggering a $1 billion default by the subsidiaries seems like something to be avoided!

Tousa settled with the secured lenders and agreed to pay more than $420 million to them.  To pay for the settlement, Tousa and some of its subsidiaries entered into new loans.  Citicorp syndicated two new loans to Tousa and some of its subsidiaries.  One new loan was for $200 million and was secured by first-priority liens on assets of the subsidiaries and Tousa.  The second loan was for $300 million secured by second-priority liens.  Both loan packages required that the funds be used to pay the $421 million settlement.  Bankruptcy for Tousa and the subsidiaries was averted (for the time being.) 

So why did the original lender have to pay back the money it received and why did the new lenders have to give up their liens? 

The Eleventh Circuit Court of Appeals noted:

Section 548(a)(1)(B) of the Bankruptcy Code provides for the avoidance of “any transfer . . . of an interest of the debtor in property, or any obligation . . . incurred by the debtor, that was made or incurred . . . within two years before the date of the filing” of the bankruptcy petition, if the debtor “received less than reasonably equivalent value in exchange for” the transfer or obligation, and the debtor (1) “was insolvent on the date such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;” (2) “was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;” or (3) “intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured.”

In re TOUSA, INC., 680 F.3d 1298 (11^th Cir., 2012).  The new liens were thus fraudulent transfers and were set aside to the detriment of the new lenders. 

The old lenders were benefitted by that fraudulent transfer because they received the funds to pay the old debt.  Thus, the court made them pay the money back to the bankruptcy estate.  The lenders and the federal district court thought the rulings by the bankruptcy court were crazy!  The district court said that the ruling would be “inhibitory of contemporary financing practices. . . .”

There was a great deal of discussion in the case about the meaning of “reasonably equivalent value.”  Apparently, the bankruptcy court and the court of appeals believed that staving off a $1 billion default was not sufficient value for the loan restructuring! 

The Tousa case brings into question every loan modification or restructuring where a third party provides a new guarantee or additional collateral in order to induce the lender to extend or modify the existing defaulted obligation. 

The lenders in the Tousa case said the ruling “would impose ‘extraordinary’ duties of due diligence on the part of creditors accepting repayment.”  The creditors being repaid would need to make sure that the money for repayment was not somehow obtained through a fraudulent transfer.  The Eleventh Circuit did not think this was a big deal, however. 

But every creditor must exercise some diligence when receiving payment from a struggling debtor.  It is far from a drastic obligation to expect some diligence from a creditor when it is being repaid hundreds of millions of dollars by someone other than its debtor. 

Really?!  I thought the right of a secured creditor to be repaid the money it loaned to the debtor was simpler than that.  I guess next time we won’t allow any extensions or modifications and will simply foreclose on the collateral.  I’m sure that would be better for the debtors! 

If you need help with “diligence when receiving payment from a struggling debtor,” please let me know. 

 ABOUT OUR GUEST AUTHOR:

Mike King is a founding partner at the Phoenix Arizona  law firm of Gammage and Burnham. This material appears here with Mike’s permission. To learn more about him or for help with questions on this issue please reach him at mking@gblaw.com. Mike’s full bio is also available here: http://www.gblaw.com/people/attorneys/?attorney_id=3 where you can read more about his extensive experience on a variety of litigation and real estate related issues.

Lots of people lose or misplace their tax ID Number every year, especially with newer entities or those they don’t use often, Here’s what the I.R.S. suggests if it happens to you.

Lost or Misplaced Your EIN?

If you previously applied for and received an EIN for your business, but have since misplaced it, try any or all of the following actions to locate the number:

• Find the computer-generated notice that was issued by the IRS when you applied for your EIN. This notice is issued as a confirmation of your application for, and receipt of an EIN.
• If you used your EIN to open a bank account, or apply for any type of state or local license, you should contact the bank or agency to secure your EIN.
• Ask the IRS to search for your EIN by calling the Business & Specialty Tax Line at (800) 829-4933. The hours of operation are 7:00 a.m. – 7:00 p.m. local time, Monday through Friday. An assistor will ask you for identifying information and provide the number to you over the telephone, as long as you are a person who is  authorized to receive it. Examples of an authorized person include, but are not limited to, a sole proprietor, a partner in a partnership, a corporate officer, a trustee of a trust, or an executor of an estate.

A Gun Trust Helps Protect Your Client from “An Accidental Felony”

READ IT HERE: http://tinyurl.com/GUNTRUST

We will soon be offering these to our clients as well for a variety of reasons including:

 1. A large number of our clients own guns and exercise their second amendment freedoms;

2. Many of those clients have a significant investment in their gun collections, especially those who have large collections or own NFA or Class III items;

3. Many clients have expressed uncertainty about the way they hold their firearms and their future ability to own and transfer their gun collections given the national assault on the second Amendment (I think it’s pretty clear what side I’m on, don’t you?).

Ike Devji