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.