Using Other People’s Money to Create Wealth

We all love the idea of creating something out of nothing but this is usually fantasy and does not exist…right? A famous saying in business is that you should always use ‘Other People’s Money’ (OPM) which is great way to get ahead with no money out of pocket and no personal risk.

There are strategies to create wealth for you and your family using other people’s money in the same way you used the bank’s money to purchase your home or investment properties and that is by using leverage.

Using other people’s money, or leverage, to increase your own financial gain is an established practice. Today, though, leverage is being used to purchase life insurance, and has gotten the attention of insurance promoters and financial professionals. It’s important, though, to examine all the angles before trying something like this.

The technique is called Premium Financing and allows a wealthy family or a corporation looking to create a continuity plan by funding an insurance policy can do it using the bank’s money. By borrowing the money to pay the life insurance premiums with a loan, the insured individual/s free up capital that can be used more efficiently. The use of premium financing may lower out-of-pocket costs the potential gift taxes.

The lender bases the current loan interest rate on the one-year London Interbank Offering Rate (LIBOR), adding a profit margin spread of 175 to 250 basis points. Essentially, lending rates are determined on a case-by-case basis, taking into consideration the loan amount and the lenders’ risk exposure. Loan interest rates can be fixed on an annual basis, but may vary from year to year, based on fluctuations in LIBOR or changes in the borrower’s financial conditions, which must be updated annually.

The twelve-month LIBOR is a common index as well as the prime rate. If there is a fixed interest rate, it is important to determine how long it will be fixed. In many instances, the fixed rate is only fixed for a certain time period, such as five or ten years. A cap will be set on how high the loan interest rate can go during the loan term. So, while the loan interest might be variable, there is a cap that will limit how high the interest rate can grow, such as eight percent.

You can also secure what’s called a “collar,” which is when a loan has both a cap and a floor on the interest rate. It basically keeps the interest rate from spiraling too high but ensures that the lender can charge a minimum in exchange for that security.

Caps are more expensive than collars because caps protect only the consumer, while collars offer some protection to the lender. Because of this, the extra costs are usually built into a loan origination fee or into the amount of spread placed in the offer. Caps and collars are usually only offered on loans greater than $1 million.

The best candidates for premium-financed life insurance typically have a minimum net worth of $5 million. Collateral for the loan usually consists of personal assets and can be reduced by the cash value in the policy being financed.

Plan highlights include:

· Target market: at least $5million estate and minimum of $100,000 annual life insurance premium.

· Frees up business or personal investment capital for more efficient usage.

· Leverages available assets to provide needed insurance coverage with minimal out-of-pocket expenses.

· Potential to reduce gift taxes.

· Loan rate typically tied to a published rate like LIBOR, plus a spread.

· Required collateral can be offset by cash values growing tax-deferred in the policy.

· Can provide substantially greater internal rate of return on the life insurance policy death benefit over non-financed payment methods.

The power of premium financing lies with the same simple concepts related to leveraging of permanent life insurance for estate liquidity and wealth transfer in uncertain financial and political times. It also provides an excellent tool to insurance key executives of a business so that unwanted family members do not become partners. The key is to evaluate premium financing not as a stand-alone transaction, but as an alternative to the traditional funding of life insurance.

I have been involved in cases where it made sense not to drain cash flow and instead use leverage to accomplish payments of the life premiums. If the structure is designed properly, it can have an exit strategy built in. There is also one planning technique for families that have done no estate planning but are uninsurable and have healthy children. This planning tool is too technical to discuss here, but if you’re reading this and know someone who has an illness, no estate plan and over $10,000,000 of net worth, you can have them give my office a call.

James Burns, Esq.

(949) 440-3243

Tax Free Income for Life

I’ve been working on my new program which is going to be essential as Congress is likely to shift the entire marginal tax rate making your deferred plan (IRA or 401(k)) obsolete. You’ll want to take a look at our two vehicle system to build up tax-free.

One of the vehicles is the Solo-401(k) ROTH self-directed plan. This vehicles does not have income limitations on the $165,000 for a couple filing jointly the way the ROTH IRA does. It is designed for solo-practitioners, those without employees or contractors or part-time people.

Since it is ROTH you pay your taxes up front but never pay again on the build-up or when you take monies out in the future. Traditional deferred plans allow you to defer taxes but get hammered when you retire if you are in a higher tax bracket and without tax deductions to offset which is uniformly the case for a retiree.

You can contribute up to 25% of compensation and additional catch-up is available for those 50 or older. A $41,000 annual limit applies and is indexed in the future up to 2010 unless the new regime changes things when they are sworn in as President and one could be higher than the other. A cap of $205,000 on compensation  was in force as of 2004 and is indexed up to 2010. The benefit is that you can set aside more tax-free money in the solo-401(k) ROTH than other plan choices and if it is self-directed, you do have to remain victim to what the market provides as you can have numerous choices for guranteed returns that are not connected to the market at all.

Remember this is just one half of a dynamic duo that provides for tax-free income for life. You’ll want to examine the seld-directed arena so that you’re not held to just mutual funds and other market connected investments that are roller coaster driven because they are up and down according to whimsical financial and political events.

If you have questions or are looking to set one up or need information on the “Dynamic Duo” you can find our e-book “Tax Free Income for Life” available on the website.

Untaxingly,

James Burns

California’s New Foreclosure Law

As a result of the subprime loan market collapse, numerous bills were introduced this year in the California Legislature, including the recently enacted SB 1137.  Within this highly charged political environment, the California Land Title Association (CLTA), along with trustees, escrow companies, and lender groups originally opposed this legislation, which subsequently underwent a series of significant amendments before being signed by the Governor earlier this week.

SB 1137 became effective July 8th as an urgency measure.  However, requirements pertaining to the notice of default and the posting and mailing of an entirely new notice will not become operative until 60 days after the effective date.

The provisions of the new law outlined below apply to loans secured by owner occupied residential real property and made between January 1, 2003 and December 31, 2007.  These provisions will remain effective until January 1, 2013.  The requirements are extensive and the full act text should be consulted for details.

1. A Notice of Default (NOD) may not be filed by the trustee or lender until 30 days after contact is made in person or by telephone with a borrower to asses their financial situation and explore options to avoid foreclosure, or until 30 days after satisfying specified due diligence requirements.
2. During the initial contact the borrower must be advised of the right to request a subsequent meeting.  If a meeting is requested then it must be scheduled within 14 days.
3. An assessment of the borrower’s financial situation and discussion of options may occur at the first contact or at the subsequent meeting, but in either case the borrower must be provided a toll-free number for HUD certified housing counseling agencies.
4. A NOD must include a declaration that the borrower has been contacted or due diligence has been used to try to contact the borrower or that the borrower has surrendered the property.  Due diligence includes having a link to information on the options to avoid foreclosure on the web site of the beneficiary or their agent.
5. If a NOD was filed prior to the effective date of the new law, without a subsequent notice of rescission, then a new declaration must be included as part of the notice of sale.  The declaration must state that the borrower either was contracted to assess their financial situation and explore options to avoid foreclosure or that no contact occurred; in which case the efforts made to contact the borrower must be listed.
6. A NOD may be filed when a borrower has not been contacted as required by the new law if the failure to contact the borrower occurred despite the due diligence of the lender or their agent.  The actions that constitute due diligence are listed in the new law.
7. A new notice has been created by the law and must be posted and mailed at the same time a notice of sale is posted.  The notice advises residents that the property may be sold and that their right to continue to reside in the property may be affected, along with certain other information.

If you have questions please send us an e-mail or if your facing a personal crisis with your mortgage because it has spiked out of control with the interest rate or you owe more than the home is worth and will be worth for years to come we may have legal solutions for you that can put you on the track to recovery. Please download the form on this page and fax it to us available Right here.