Health (scare) Care Reform and an Insidious Tax it Releases

The new Health care reform bill includes a 3.8 percent Medicare tax on unearned income including annuities, and possibly income recognized from the surrender or sale of life insurance.

Many clients have asked how to get out of annuities they don’t need to minimize a potential huge tax hit. This is only if you don’t think you’ll need this income as we can move it to an insurance policy that is free of the tax, leaves a legacy and still provide some income for you and your family.

This strategy spreads out potential tax payments over a 7-year period and moves funds from an existing annuity where funds are trapped and destined for taxes to efficiently transfer your wealth through life Insurance.

The benefit to you is that you keep more of what you earned and leave more to your family who should be the recipients of all your hard work.

Don’t fail to plan or get information on how this might affect you as the outcome could be disastrous.

James Burns

Finance Insurance With Other People’s Money (OPM)

Succession Capital

Using other people’s money (OPM) with the intent to realize a financial gain is a financial concept that has been practiced by real estate developers, investors, business owners, and entrepreneurs for centuries. Most recently, this concept is being utilized to purchase life insurance, and has raised the eyebrows of insurance promoters and financial professionals alike. But, does this concept offer economic substance or is it just another sales tool to sell life insurance?[1]

Life insurance is an important part of any high net worth individual’s financial picture. Since adequate life insurance usually requires significant premium payments, the premium financing strategy can be an effective solution for clients who do not want to liquidate assets to fund their life insurance premiums.

Premium financing is a method of funding the purchase of life insurance for those individuals who have significant net worth and the insurable need, but do not have or want to use liquid capital to pay the premium on a life insurance policy.  By borrowing the money to pay the life insurance premiums with a loan, the insured individual frees up capital that can be used more efficiently.  The use of premium financing may lower out-of-pocket costs and potential gift taxes.

Most lender’s in this space base 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. There was once a yen version that eventually went disastrous when markets changed and if an exit strategy was not built into the plan it could have cost the insured significantly.

There additional fees, such as loan origination fees (commonly 0.5 to 1.25%) of the expected total loan balance), associated with the loan that can offset any savings related to a low interest rate? Often times these fees must be paid up front while some lenders allow them to be financed with the policy premiums. In addition, is the interest variable or fixed, and if variable, how often does it reset? Typically, in most arrangements the interest is a variable rate, with a portion of the interest determined by an index resetting each year, but the spread on top of the index may be fixed for the life of the loan. The 12-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 for a certain time period such as five or 10 years. A cap will 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 8%. When the loan interest has both a cap and a floor it is said to have a “collar.” The lender limits how high the loan rate can go, and the borrower agrees that the rate may never go a below a certain amount even if the index with the spread is below that rate. A cap by itself is more expensive than a collar, and the expense is usually expressed in a loan origination fee or in the amount of spread placed in the offer. Caps and collars are generally offered only in fairly sizable loan arrangements, generally in excess of $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 $5 million estate and a 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 within the same simple concepts related to the leveraging of permanent life insurance for estate liquidity and wealth transfer planning. The key is to evaluate premium financing not as a stand-alone transaction, but as an alternative to the traditional funding of life insurance using the same capital base.

The single greatest misconception is that the client must have an arbitrage opportunity for the financed transaction to provide a benefit over traditional funding. The power of premium financing is based on the leveraging effect created by combining the financing piece with a properly designed life insurance policy so one of the Secret Pillars predominates over the other.[2]

I have been involved in cases where it made sense to not drain cash flow and 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 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 with over $10,000,000 of net worth without an estate plan and they have an illness, you can have them give my office a call.

Asset Protection Concerns for Hedge Fund Managers

We are currently in an economy where people are running scared and are uncertain. I also think there is a jaded perception where we never give thanks or gratitude for what we have and our fear and panic is all about loss of greed which is not useful. This type of environment leads people to always be dissatisfied with services and investments and many will go to the 12 person lotto (jury) via a lawsuit before you know it.

If anyone thinks I’m speculating just go to the web link at the end to review some of the ridiculous lawsuits and you’ll know we have become a country of whiners who expect to get paid from someone else based on our mistakes. Every month I go here because unlike much of the legal profession I’m for reducing lawsuit abuse Faces of Lawsuit Abuse.

Since my legal work is more about wealth creation or transfer than wealth deletion, we speak with many of the top financial firms and hedge fund managers. I have found in speaking to these financial professionals that many are concerned with being a victim to either a baseless lawsuit or one that could have been settled between the individuals. In times like this you can never satisfy investors when the market goes down or the investment does not work out as expected. It is difficult to perform your profession while a huge black cloud hangs overhead or you try to sleep after an investment tanks and you know the clients will be calling and accusing you of their financial demise as if you personally made the investment go down.

This is when a high quality and legitimate asset protection plan should be integrated into your overall risk management and personal estate/succession plan. All financial planners who advise clients on risk management owe it to their clients to do what they say and be a product of the product by having a proper estate and asset protection plan.

For clarification, asset protection is the use of risk management tools and legal strategies to preserve a person’s wealth so that it is not unfairly confiscated from them in a court proceeding. Because of the litigation lottery where predators go to the 12 person lotto (jury) and other fear and societal norms of solving problems with large pay days in court we see a rise in the abuse of the system and whether you win or not you’re a loser because you’ve had to pay to defend yourself at a cost of time, money and personal unrest.

A recent study of hedge fund professionals revealed that 39.8 percent had been involved in unjust lawsuits or divorce proceedings and 83.3 percent of hedge fund managers had a concern of their own personal wealth derailment through court proceedings. It should be said that it would be very difficult to get a jury of 12 people in this economy that would feel anything but contempt for a hedge fund manager or other wealthy person since they appear filthy rich and easily able to absorb the damages they caused to the poor person who is less fortunate. The case would ready like the quintessential “David meets Goliath” in the eyes of the jury since they are usually comprised of the folks who either don’t work or hate work so they are getting paid to be there by their company through a trial.

The cost of being caught with your pants down can be more than embarrassment and in some instances can wipe 0ut all of the hard work that went into building a business of a family legacy. It most attacks against you it might comes as a Pearl Harbor sneak attack or it might be something you knew was coming but failed to realize the gravity and that someone who thinks you’ve wronged them wants to be vindicated in dollars.

All this can be avoided and what we do every day is help folks incorporate proper tax and risk management strategies into their business, estate and retirement planning because you often do not get a second chance and by the time the complaint is served, it is too late to consider your options to save what you’ve worked for. I have had many professionals with practices they build up over a 20 year period see the light that it all could be lost if this person was to strike a chord with a group of 12 and take away everything.

I leave you with this thought – Q: If you have assets when might a good time to protect them be? A: Right now is the winning answer.

James Burns, Esq.

The Asset Protection Guy

Estate Planning and New Estate Tax Laws

There are three estate tax bills on the table and each one makes  you feel like why bother trying to get wealthy if they are going to take it away when I die.

First there is S.722 which is introduced by Sen. Max Baucus, D-Mont., Chairman of the Senate Finance Committe which proposes a freeze on the estate tax exclusion rate at 2009 ($3.5 million per person). S.722 also provides for reunification of the estate and gift tax credit (use $3.5 towards estate or gift tax) and is indexed for inflation.

Also in the House is H.R. 2032, sponsored by Rep. McDermott, D-Wash., who would like to make the estate tax exemption permanent at $2million per person ($4mil for husband and wife) and index for inflation with progressive estate tax rates of 45% for estates valued between $2 million and $5 million; 50% for estates at $5 million to $10 million; and 55% for estates valued over $10 million…makes you want to go out right now and make over $10 million so you can give 55% back to a government that can’t balance its budget and just put a couple trillion worth of bailout money on the equivalent of a credit card.

Finally, there is Bill H. R. 436 which is introduced by yet another Democrat Rep. Earl Pomeroy, D-N.D. and it would freeze the exclusion at 2009 level (same as above) and reunify the estate and gift tax. However, this nasty pernicious Bill would wack out the opportunities found with Family Limited Parnterships (FLIPs) which is valuation discounts so you can remove highly appreciated assets out of your estate.

You need to contact your representatives and give them a piece of your mind before they rule on some of the most anti-wealth legislation in recent years punishing those who do well and want to leave a legacy for their family or charity.

In order to protect your assets there is a new form of asset protection which is protection against adverse legislation. Every American’s retirement hangs in the balance especially if you have a large IRA that would run afoul of these potential laws.

Untaxingly,

James Burns, Esq.

“Six Secrets of How Wealthy Landowners Protect Themselves From Lawsuits”

I recently read that a lawsuit is filed every 13 minutes of every working day in California and this disease is proliferating throughout the country.

In addition, the toxic substance and mold litigation is on a rise with multi-million dollar verdicts against the landowners.

Over 80 million lawsuits are filed each year in the U.S. Each year trial attorneys create new causes of action aimed at the perceived deep pockets of businesses and individuals. For instance, most people are familiar with the infamous McDonald’s hot coffee case and lately, the mold cases. The San Francisco Chronicle reported on January 22, 2003, that tenants of an apartment building in Hayward are suing the owner for five million dollars for mold related injuries. Mold damage awards in recent cases have been so great that the major property insurance companies are reluctant to write policies in California. It may be a limitation or exclusion in your policy.

Mistake Number One – Not understanding the implications of how you own your real property.

The inexperienced landowner holds all their property as themselves, jointly, or as “joint tenants”. In some cases this can work, but in many cases it can be the cause of an expensive and devastating mistake.

With the proliferation of mold cases mounting, it is a best practice to not hold investment property in your own name because insurance will not cover these claims.

The wealthy and experienced real estate investor knows that they have to use a limited liability entity to hold the property creating a prophylactic between themselves and any liabilities stemming from the property.

Mistake Number Two – Not knowing which estate-planning document to use so you’ll avoid lawsuits

Should I use a revocable or irrevocable trust and should it be domestic or foreign?

A lot of folks don’t know that a revocable trust is only for avoiding probate but offers no creditor protection.

Depending on timing when a person is sued, there are great opportunities with the right irrevocable domestic trust. On the other hand, there are some really great offshore solutions that allow you to participate in the global equity markets and are experiencing much higher gains than the U.S. market.

There is also one super investment tool that is protected and avoids capital gains providing far better returns than mutual funds and independent stock investments.

The experienced real estate investor knows that they should put their home into a plan that will not affect their tax benefits but still render solid protection from a creditor by using the right tool.

Mistake Number Three – Holding Too Much Equity in Your Home.

If a creditor can’t get at cash, they go after real estate. The best place to start is with the roof over your head. Most states are experiencing record appreciation which means there is a lot of equity in many homes.

But how much interest is this equity earning? There are products where you could be investing some of the equity proceeds and earning more than you’re paying for the loan. The wealth minded landowner leverages everything, earns on that leverage and tries to reduce ownership.

Some superior mortgage products are on the market that will keep your equity down while you live in the home. At first blush, it sounds contrary to common thinking. Nonetheless, the wealthy person puts everything at their disposal to work to create extraordinary wealth, even home equity.

Doesn’t it make more sense to tie the money up in investments that earn and keep your home safe?

Mistake Number Four – Not Keeping Adequate Property Insurance

A good insurance policy can provide a solid first line of defense. However, you must be aware of its limitations.

General business insurance policies insure against accidents on the business property such as slip and falls and fire and equipment malfunction. These policies often exclude accidents occurring outside the scope of employment, an intentional act by an owner or employee, contract claims and working at home.

Liability policies for professionals such as doctors, dentists, attorneys, architects, engineers and accountants also have exclusions from coverage such as grossly negligent acts, willful or wanton misconduct, punitive damages and liability related to product liability.

Personal liability insurance policies include auto, homeowners and umbrella coverage. If a plaintiff’s damages exceed your auto policy limits, you will be personally liable for the balance. Homeowner’s insurance policies provide insurance for damage to the residence caused by acts of God, insects and often construction defects. The policies often exclude coverage for any business activities at the home. Umbrella insurance policies are a relatively inexpensive way to supplement auto and homeowners policy limits, but they are not complete. Umbrella policies generally exclude coverage for dangerous sports, dangerous equipment such as guns, trampolines, swimming pools and sometimes lawn mowers, chain saws and power tools. In addition, such policies may exclude dog bites, intentional acts and business activities.

Another problem with relying exclusively on insurance is the risk that your insurance company may not be in business when you file a claim. The Wall Street Journal reported on January 30, 2003, that a rash of insolvencies among insurers is resulting in hundreds of thousands of consumers at risk of not collecting on their claims. The problem is growing as more and more insurance companies are filing for bankruptcy.

While insurance is a good first step, it not always reliable. The experienced real estate investor never relies on one tool but uses all tools in their tool belt to protect themselves.

Mistake Number Five- Not Avoiding Probate

Multiple Probates. If you have real property in multiple states, then you will have to probate the property in each state.  That means attorney fees in each state, potentially larger probate fees in other states, and the administrative burden of multiple state probates. The average is 3% to 8% of the gross estate, if you compound this by five or more states your estate is in trouble.

Along with protective features, a good plan should tie into your estate plan so that you avoid multiple probates. Our office and the tools we use on a daily basis to take care of clients can accomplish this very easily.

Mistake Number Six - Procrastinating

This is likely the biggest and most costly mistake the novice real property investor makes. The wealthy real property investor always takes out time to do proper planning because the alternative could be catastrophic.

If you want to avoid these outcomes, you need to take a little bit of time out of your schedule and plan.

The truth is with proper planning almost anyone can dramatically improve their estate, business and retirement plan.

Due to the complexities of estate preservation planning (“Asset Protection”) and the many changes slated to occur, it’s extremely difficult to explain each application of these strategies here in print.

While one client may be able to benefit from a strategy by using it one way, another client may be able to benefit from a different application of the same strategy. Everyone’s situation is like a snowflake, no two are alike.

If any of these strategies make as much sense to you as they have for America’s wealthiest landowners, then we invite you to contact us for more information on how to do the same.

You can also find out more by reading the “The 3 Secret Pillars of Wealth” which is sold at Amazon, Barnes & Noble, Borders and other fine book stores.

James Burns, Esq.

www.jamesgburns.com

It’s A Shame For You Not To Find Money — When These People Do It So Easily

Times are tough and without money it can be a long cold winter until we have economic recovery in this country.

Enter the life Settlement – this is a strategy to take a non-productive or useless insurance policy and turn it into cash today so you can get in on the opportunity that is out there.

WHO BUYS THESE LIFE INSURANCE POLICIES?

Institutions continue to provide the majority of funds to purchase life settlement contracts.  Some more notable players who have participated include Berkshire Hathaway (Warren Buffett’s firm), Citibank, Credit Suisse, Goldman Sachs, Deutsche Bank, and Morgan Stanley.

WHAT KIND OF LIFE INSURANCE POLICIES ARE THE MOST DESIRABLE?

Universal life and term life insurance policies are the most desirable.

Term policies should still be within their conversion period for maximum value.  Whole life policies are also considered.

HOW SMALL CAN THE POLICY AMOUNT BE?

An amount of $250,000 and greater is preferred, however.

WHAT CAN I EXPECT TO RECEIVE FOR MY POLICY?

Life settlement offers have ranged between 10% and 40% of the policy’s face value. Some offers have been less and some higher—always dependent upon the health of the insured and premium costs.

WHO’S ELIGIBLE?

Eligibility is fairly straightforward:

• The insured must be at least 65 years of age (Age 62 if health is significantly impaired).
• The insured is not terminally ill or have a catastrophic illness.

HOW LONG DOES IT TAKE TO COMPLETE A LIFE SETTLEMENT?

It generally takes 6-8 weeks from the time a completed application package is received until funds are wired into the policy owner’s account.

If you would like to have your policy assessed for settlement please contact my office.

Some of the most common reasons for a life settlement are:

• The premium payments have become too costly
• You may no longer require the policy
• You may be considering the surrender of the policy or the policy may be about to lapse
• There may be a change in your estate planning needs
• You may have a need for liquidity
• You want to give a gift to a family member
• You may need to retire other debt
• You may want to purchase a new less expensive policy
• You may want to generate funds for charitable giving

Common Business Reasons:

• The “Key Man” insurance no longer needed
• The Buy/Sell insurance taken out for the business partners is no longer needed
• Increase liquidity needs for the business
• Eliminate company debt

Untaxingly,

James Burns, Esq.

Invest Like the Wealthy and Wise

When a judgment is won against a person for a particular amount, the first choice is cash. The next choice would be the quick sale value of real estate, including forcing foreclosure on your home. One of my colleagues still does this work to this day and while he does not enjoy having people removed from their homes, he has to get paid along with his client and that means every asset is up for grabs.

If the bank and other friendly creditors own the property then there is nothing to turn over. At the end of the day, the creditor or their counsel is looking for how much equity you have in the home.

If you are in business or have a sizable estate, you may want to keep your equity lean so that it is off the negotiation table. Stripping equity makes sense on so many accounts. First, we’ve all heard the cliché that it is unwise to have all your eggs in one basket. Why? Because if you drop the basket with all your eggs they are all finished. The old adage is not just for the sake of it but is a wise wealth-making concept. Do you think the folks in Laguna Beach whose homes slide down the side of the hill were better off if the home was completely paid or outside of that home earning interest somewhere or invested in another piece of property? I hope the answer is obvious to you that you would want it outside of that now demolished home so that you had access to it.

Where should I put it you ask? Many readers are using real estate in multiple jurisdictions and this makes sense. You should not keep more than 10% of your equity in the properties unless that would not pencil out properly in having the renter cover your loan. The other significant asset many clients are using is savings grade life insurance because this contract can be structured to not provide for creditors of the beneficiary during a period when you are under attack. You can also put a large amount into a single premium immediate annuity (SPIA) that is irrevocable and you divest your control over it while it pays directly to the insurance company to fund your tax-advantaged savings account, better known as the investment grade life insurance.

If you’re not sure about investments, you can also get personal equity lines from family and friendly companies. A good idea is to get a loan from family members, create a functional promissory not that has flexible payments and higher interest rate for the premium of having the flexibility e.g., pay in lump sum 5 years from now. Then they put a deed of trust on the property and that encumbers a portion of the equity.

This process involves:

A friendly third party that holds a lien on your property.  This friendly party may be a corporation, which you control.  The “friendly” corporation places liens against your real estate and other immovable assets to strip the valuable equity.

HIGH ASSET PROFILE

Before:

Appraised Value $200,000

- $40,000/Mortgage             

+ $160,000 = Equity (at risk)

Now this same asset with an equity strip.

After:

Appraised Value $200,000

- $40,000/Mortgage

- $150,000/ Lien

+ $10,000 = Equity

Real estate is immovable.  Therefore, there are specific challenges to reducing the amount of equity accessible to abusive creditors.  We reduce the equity, through equity stripping.

This process works wonders along with a Delaware Series LLC because you can have a property seeded in one of the Series and another Series that has its own bank account and name as a creditor on the property with a filed deed of trust on the property. You have to create a credible document to substantiate the financial substance but this is done all the time with businesses and real property to keep the ownership reduced.

What if I lose a case and a creditor finds out I control the entity that has a lien against the property. This is one of the little risks but is difficult to lose as long as you run your entity like it has a real business purpose and respect the transaction like it is a true arm’s length dealing.

You can always use a global solution as many of my clients have using a foreign bank to take out up to 90% of the available equity and then settling the money on a trust that has an agreement with the bank to oversee it. The capital never transfers out of the jurisdiction, costs about 1.5% per year on the loan amount to maintain, offers a rate of return on the CD that offsets other fees so it is a wash but it protects property like nobody’s business. There are so many interesting ways to provide for estate taxes, create wealth abroad that is legitimate and protects the money that we can explain them all in this article but we invite any of Rick Stuart’s readers to request an appointment if they have any concerns in their financial and estate planning strategy. Even that little hairline fracture left untreated over time can have cataclysmic results in your financial planning structure.

James Burns

Law Office of James Burns

Guaranteed Modification

A lot of people tell me about companies that offer a guarantee for modification services and my reply  is: “who do you know that has called them on it?” There is usually dead silence because how good is a guarantee? It is only as good as a company is prepared to honor it so examine all the small print. There are not many companies that can afford to expend resources on a modification win or lose and not get compensated.

From the law office standpoint I liken it to the same set of circumstances as if I was to represent a person in court, I cannot guarantee the outcome and to do so is unethical because you, the client might not give me all the facts or can withhold information about trying to do it on your own previously and then we try and encounter huge obstacles. I’ve had clients that did their own submissions and failed (because they gave too much or wrong information) and they don’t tell us and then we meet with resistance. Now we’ve been able to get them through but because this happens there is no way to guarantee the outcome and we expend thousands of dollars of time and effort in each case so we just cannot offer a refund. Our guarantee is best efforts and if your situation is modifiable you’ll get modified and we don’t even need to go there about rejection and if that happens, maybe it is exactly what needs to happen because not only does the person not qualify for the home now, they won’t be able to afford it with any program so they should think short sale and move on. Many properties will not make sense and most banks do not offer a principal reduction because they cannot get permission from their investors to eat that much of their expected profits. The old adage of when does a negative -30 + 43 = 0 and that is any time the market goes down 30% it has to get back to 43% just to put you back where you were before it dropped.  I see many instances where the properties are down 50% and the borrower might now recover the home value in their life time and getting out with a short sale really makes financial sense.

On the fees, if you’re using a law firm and they are going to give it to you for a fixed fee, grab that and run if it is around $3,000 to $4,000. When I was at a law firm we had software that started to calculate our hourly from the time the phone was picked up until we hung it up and we were taught to keep the client on the phone and run it up. Every fax that went out was $1.00 per page and every photo-copy was .30 cents per page.  The hourly of an experienced real estate or finance attorney is going to be $375.00 per hour or more and they may have processors or paralegals that are going to be $100 to $150 per hour. When you average 40 to 100 hours per file you are going to get your money’s worth because it takes hour upon hour and constant follow-up with the banks…more than most people who work will every have. I can’t see a modification starting out less than $5,500 under typical law firm billing and the client could expect to get a back-end invoice for about the same because of the time and expenses for faxing, photo-copying and FedEx that takes place. Therefore, a completed modification would normally be upwards of $10,000 by the time it is done. Grab a modification for a fixed $3,000 to $4,000 because it is a super deal.

You can always go to a non-lawyer but you are really putting yourself in a position to have your documents used against you since a broker or any other helper cannot afford you the attorney/client privilege. You need to make sure your submission is not used as a smoking gun against you especially if you were a stated income loan and you and your broker or loan officer expanded your income for the purpose of qualifying on the loan.

If you want solid assistance at a fixed legal fee price, please contact my office.

Sincerely,

James Burns, Esq.

“Buying Foreclosure Without the Exposure”

Start your retirement planning early

Real estate investing is exciting because we get the opportunity to use wealth pillars like leverage which allows ordinary people the ability to considerable wealth in a short time; I know because I’ve seen it happen. Another exciting aspect is there are always opportunities to make strong returns, regardless of how the market is doing and right now that is especially true as we bear witness to hundreds of thousands of foreclosure nationally per month. But like other forms of investments, real estate investing takes discipline, education and smart decision making to become successful. I’ve met with clients who made impulse purchases and the result is usually disaster.

There are fundamentally at least eleven reasons why real estate deals are always available no matter what the real estate market is doing. There is no magic here, just human circumstances that create opportunity if you know how to look for them.

1. Divorce
2. Job loss
3. Job relocation
4. Bankruptcy
5. Health problems
6. Incarceration
7. Reduced income – market conditions
8. Death
9. Failed business
10. Military duty or activation
11. Adjustable rate mortgages – on stated income that was unreal

Right now all eleven of these personal circumstances are widespread since American is in two military conflicts, unemployment expands monthly, record business failures and layoffs and numerous professional incomes reduced due to market conditions. In my own practice of modifying loans I see that there was a serious abuse of the stated income loan that has now come to boil and are popping left and right leaving folks unable to make the payments. The inability to make adjusted payments should be no surprise as there was no way for them to ever afford the home with their current income.

Enter the REO. An REO (real-estate-owned) is a form of distressed property and is similar to buying a short sale (sale of a home for less than the owner owed), except the property is already back in the possession of the lender or bank through the foreclosure process. In an REO situation the banks end up owning the property when no one bids to cover the amount owed against the property at a public auction. REO homes are often considered the best way to buy a distressed property because the seller is already out of the picture. It’s just the investor or their agent, the bank or the bank’s agent negotiating the transaction. Some REOs can be purchased directly from the lender for pennies on the dollar especially for those who can buy them in bulk. However, if you combine the purchase of an REO with a system for investing where you don’t have to do anything but collect your checks then you can leverage your time and resources to make and find more opportunities.

Normally REOs are purchased on what is referred to as tapes and the more money you have to spend the better the tape but on these large tapes there are the good, the bad and the ugly which are properties that you wouldn’t want because the fix up costs eat into the profits. Also, to get really good deals or the actual pennies on the dollar you have to come in with millions if not billions the way the hedge funds do who typically have purchased most of the good deals by the time the individual investors or small investor pools can get a hold of the REOs. Nevertheless, there is an old fashion way of acquiring these properties if you have the time to fly all over to numerous states and get into the underground or you can rely on a systematized approach to investing in this distressed market where you’re able to not only get all good properties (bedroom communities), the system operators actually cherry pick and buy properties that are livable, fix them up bring you not only positive monthly cash flow from your systematized property but also has built-in exit strategies that put a cash windfall on top of your positive cash flow.

All the most successful business in America follows a system. Once you have real estate you are in business in a sense, you’ve become a real estate entrepreneur and why wouldn’t you want a system to take care of your investing? To make sure we understand what a system is specifically here is a great definition: System (from Latin systma, in turn from Greek systma) is a set of interacting or interdependent relationships, real or abstract, forming an integrated whole. The concept of an ‘integrated whole’ can also be stated in terms of a system embodying a set of relationships which are differentiated from relationships of the set to other elements, and from relationships between an element of the set and elements not a part of the relational regime.[i] Now this is just a very technical way of saying things that work together or “special sauce” if we were to look at Kentucky Fried Chicken (KFC™).

The system works like this, you buy the property, management places a new buyer in the home that will pay you the going rate for rent is in the area as their new mortgage payment to you, and you’ve just become the bank. For example, say rents at the local apartment are $500 and you only make $1,000 to $1,500 net after taxes. If I came up to you and said hey, “how would you like to own a home for $500 down and $500 per month,” the same you’re paying right now in rent, what would the reasonable person do? They are going to want to own and you have them on a land contract, no landlord/tenant relationship here so you don’t fix sinks, toilets or anything else…it is their home. You just hold this contract like the bank and are akin to the note which is reverse engineered at $500 at 10% time 10 years amortized. Did you get a deal? Of course you did and until this person repairs their credit so did they because we made it affordable just like a car dealer would…it’s all about the payment.

Management collects your $500 per month minus a 10% servicing fee for collecting and disbursing your money and making a website available to you on line where you can manage your property and check on it and see pictures both interior and exterior.

The lynchpin in this type of investing is the land contract. A land contract (sometimes known as a “contract for deed” or an “installment sale agreement”) is an agreement between the owner of a property and a person who wants to buy the property for an agreed-upon purchase price.

What are the Benefits of using the land contract you might ask? Well, there are plenty but they include, not having to fix anything, you don’t pay taxes or insurance, payments are predetermined and there are minimal liabilities (asset protection).

Finally, for the first time you have multiple exit-strategies inherent in your real property investment. I usually ask real estate investors that come in to my office two questions – #1 what is the exit strategy? And #2 did you buy retail, wholesale or discount? In both cases they give me a look like I spoke a foreign language at them. In this system these two threshold concerns are integrated because you have the exit strategies and you are definitely buying discount.

You or your new buyer could choose to refinance as it behooves them to get conventional financing which may be lower than structured in your land contract. For example, if you had an investment entry point of $23,900 and a $37,900 sales price fixed in your land contract. After a year of timely and seasoned payments the land contract Buyer’s credit is restored. Buyer can refinance property to lower interest rate and cashes out your $37,900 note which creates a high return on investment (ROI).

Alternatively, since you own this note you might choose to sell it to a note buyer. For example if you have an investment of $29,900 which you sold for $90,000 ($500 down@ $500 per month @ 12% interest) and after the loan seasons for 12 to 18 months you have the option of selling your note in a marketplace that is a trillion dollar industry. So you sell your note for $67,500 (25% discount). But you’ve also received the $5,400 in monthly income for the past year. The combined profit is in Excess of $40,000 or more with the monthly payments and the note sale even though it is discounted. That’s another hard to find ROI particularly if you’re accustomed to market returns from mutual funds and the like.

You can always just hold because you have an investment of $29,900 with a documented sales price of $60,000 via the land contract.

This system has been a huge success with waiting lists of approved applicants nationwide just waiting for properties to come available as the secondary buyers. We are watching this program transform families, neighborhoods and communities. In addition to the socially redeeming value of this program, it provides investors with massive advantages. Some of those include:

1.       Triple Net – Your buyer is responsible for taxes, insurance and maintenance

2.       Pride of ownership – Your buyer typically improves home and maintains well

3.       Lower Default – Owners paying the same amount as they would for rent rarely default

4.       Socially redeeming – You can help a hard working family become home owners

5.       Cash flow between $450 – $650 – for properties purchased all under $30,000.

The next five to ten years will be defining and you have the power to change your financial future if you only get off the sidelines and in the game. I played football in college and whether you were at a real game or a practice scrimmage, while you were on the bench at the sidelines you were helpless to change the outcome of the game. It was only when you got in the game and you knew you placed your entire being into the game that you hand control to change an outcome and in effect, you can only take control of your own personal destiny by getting in the game.

To prove the point that you can be more victorious in a down market you’ll want to take a lesson from the playbook of Floyd Bostwick Odlum. He has been described as “possibly the only man in the United States who made a great fortune out of the Depression.”

After struggling as a corporate attorney in Salt Lake City, Odlum received an offer to a law clerk at a New York firm, and in 1921 became Vice-President of his primary client, Electric Bond and Share Corporation.

About 1923, Floyd Odlum and friends along with their wives pooled together a total of $39,600 and formed the United States Company to speculate in purchases of utilities and general securities. Within two years, the company’s net assets had increased 17 fold to nearly $700,000. If Mr. Odlum got started with $39,600 during the Great Depression, can’t you get a few friends or family together and pool funds to get in on this once in a lifetime historical opportunity to purchase discounted REOs at a modern price-point of $29,900? We only see great declines once or twice in our lifetimes and who can predict the next one as this one came without warning; will you have done something by then?

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” — Thomas Edison, Inventor

Success Driver,

James Burns, Esq.

(949) 440-3243

“How to Save Your IRA from Destruction”

If you have an IRA and you’re concerned about how to pass it on to your loved ones, an approach of naming a trust as the designated beneficiary has several benefits over directly naming the beneficiaries. The issues that can affect the named beneficiary to name a few are they could be a minor, they might not be careful with money, or they may have marital or creditor issues, and could be disabled to the extent the inheritance would affect their governmental benefits. Next, if the beneficiary dies before distribution, the alternate beneficiaries may not be accurate. Another condition we often see is the beneficiary may purposely or accidentally withdraw monies from the IRA causing adverse tax consequences. Additionally naming the client’s revocable living trust as the beneficiary, even with the appropriate language that extends payout called “conduit provisions” may create issues with the age of beneficiaries in order to “stretch-out” the required minimum distributions.

However, in 2005, the IRS issued Private Letter Ruling 200537044 (the “PLR”) that approved a new type of revocable trust created solely to be the beneficiary of an IRA account. As a result of this PLR, it is now possible for you to create an individual trust known as an IRA Beneficiary Trust® which provides maximum protection and flexibility for your retirement investments.

This IRA Beneficiary Trust® insures that your beneficiaries will extend (“stretch-out”) their taxable Minimum Required Distributions (MRDs) on the IRA over a much longer period of time. By using this trust, the age of each beneficiary becomes the effective age for that beneficiary’s required minimum distribution. As an effect, the IRAs can continue to compound for many years free of income-tax and may literally grow to be worth millions of dollars! This type of trust goes by many names and has also been called an IRA trust, an IRA Inheritance Trust, a standalone IRA trust, an IRA stretch trust or an IRA protection trust.When your loved one/s inherit your IRA fund and they keep the funds in the IRA over their lives and only take the minimum required distributions each year (the “stretch-out”), the amount of money that can accumulate and be paid to them should be massive in comparison to taking the monies directly and facing the immediate tax on them. For example, assume you have a $150,000 IRA account; we will also further assume you have two different ages (10 and 25) for your beneficiaries and presume that the account averages an annualized 7% return. First, for the beneficiary who is age 35[i] and inherits IRA proceeds upon your departure, the total benefit is $1,212,165 of after-tax benefit as opposed to $663,496 for taking the proceeds directly without the stretch-out. For the 10 year old beneficiary,[ii] they will receive approximately $4,589,236 after-tax benefit as opposed to $2,641,198 which is what they would receive lacking the stretch-out because of the immediate taxes due when they receive your funds directly.

Therefore, you can see that this wealth amassing strategy only works if the beneficiaries hold the inherited funds inside the IRA account. If a beneficiary takes all of the funds out of the IRA account (referred to as a “blow-out” because it blows the stretch-out), this wealth accumulation technique is lost. One great reason to create an IRA Beneficiary Trust® is to preserve the stretch-out and prevent a blow-out. Unfortunately, we see this blow-out too often and it jeopardizes wealth that must be saved. Many times your beneficiaries will not be aware of the tax rules and their distribution choices, so they’ll withdraw from the IRA funds at the first opportunity or do a forbidden rollover. Even if you hope that your children or beneficiaries will do the right thing by keeping the funds in the IRA account for their lives to “stretch-out” payments, they may expose it to numerous threats and hope is not a planning strategy as I’ve indicated in my book “The 3 Secret Pillars of Wealth.”

Some of the threats come in the form of a divorce where your beneficiary’s spouse could seek half of the inherited IRA if they live in a community property state. The divorce rate is out of control and a huge numbers of inherited money has become a target for the ex-spouse. Even though inherited property is considered separate property it may become the only thing available and because divorces can be very costly and last for years, your beneficiary may succumb to the pressures of long and nasty divorce litigation and be willing to surrender a large portion of the IRA account just to settle the divorce.

If you have a reasonable IRA you want to pass down or don’t think you’ll need to live on your IRA you absolutely should be thinking about this strategy.

James Burns, principal of the Law Office of James Burns and author of the international best seller “The 3 Secret Pillars of Wealth” shows unassuming investors how naming a trust as the designated beneficiary of their IRA has several very important advantages over directly naming the beneficiaries.

In addition, Burns says: naming the client’s revocable living trust as the beneficiary, even with the appropriate “conduit-trust” language, may create issues with the age of beneficiaries in order to “stretch-out” the required minimum distributions.

Burns’ office is one of few that offer the IRA Beneficiary Trust® which insures that your beneficiaries “stretch-out” their taxable, required minimum IRA distributions over a much longer period of time. And, if you do it right, the IRAs can continue to compound for many years income-tax free  and can literally grow to be worth millions of dollars!

Even if you assume that your children or beneficiaries will do the right thing – that is, keep the funds in the IRA account for their lives to maximize the income tax “stretch-out” of the IRA – the IRA may still be seriously exposed to one or more of the following threats that can arise years after you depart.

If you have a reasonable IRA you want to pass down or don’t think you’ll need to live on your IRA you absolutely should be thinking about this strategy.

The Law Office of James Burns provides debt settlement services, bankruptcies, short sales and estate and wealth planning with emphasis on real estate investing.

Untaxingly,

James Burns, Esq.