“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.