Retirement after the great recession – will it still be possible?

I wrote an article a few years ago that was published in the OC Metro in Orange County, California called “Uncle Sam’s Snake Oil.” This article was designed to wake up all the sheeple (that is a half person half sheep) that is just following along and believing that what you’ve been told to be true is true.

There used to be the 3-legged stool for retirement but then the company funded pension went way and the last two legs which were only supplemental have been used to fund a lifestyle after work and has become disastrous. The other two legs are Social Security and the 401k plan which was designed to supplement your retirement and can be decent if you get a significant company match but those are going away.   The real key here is that as our deficit rises beyond $14,000,000,000,000 trillion that is a long number isn’t it? As things rise ever second, we know the only solution is to raise taxes and most likely back to the tax brackets of the 1990s where the top was at 39.6%. If you add your state tax, in California it is another 9.3%, your at 48.9% of your income just to taxes to pay this incredible debt down. That means anyone earning $250,000 or more was taxed as this rate and we hear a lot about that $250,000 income today. However a family of 3 or more needs at least that much just to stay above water in their live in various parts of California s housing and goods and services are explosively high. The proposed Obamacare or the Patient Protection and Affordable Care Act (PPACA) is going to send our taxes to at least these levels. We now have Homeland Security costs, War, underfunded benefits (Social Security, Medicare, Medicaid) and this is a recipe of inevitable higher taxes. In 1993 the family filing  jointly and earning $89,000 to $140,000 was taxed at a 31% rate which is just 4% shy of the highest current tax bracket for multi-millionaires and we are destined to go back to such a rate.

All of this legwork does not even account for how things really work on deferred pension plans and few Americans realized how they are going to be taxed on their retirement plans until they arrive at retirement only to be horrified. Millions run out of money and end up work in their eighties in fast food restaurants or as greeters in front of discount department stores.

So here is a break-down of an average person putting away $4,000 per year for 30 years and reaping that huge tax-deductible benefit and how he ends up paying 10x in taxes back to the government.

Break down of taxes on deferred program

This link depicts what it would look like to save $40,800 over the 30 years prior to retirement only to pay $532,800 in taxes over the time from age 65 to 85. As you can see that little savings in tax was no where near what you still end up paying, hence the perception of the deferred plan is snake oil.

How do these numbers stack up

We want people to know you have to start finding some form of tax-free strategy or you’ll be penniless in a few years into retirement and back out looking for work just to make ends meet. Most do not qualify for a ROTH and you can only put away $5,000 per year which takes forever to get any real build up but there are strategies for the small business owner or solo practitioner to use 401k ROTH strategies…this is way too long of a conversation for this article.

There are muni bonds but which municipality do you feel comfortable with? Most of them are running their budgets like a ponzi and robbing Peter to pay Paul. Even though the interest paid on a municipal bond is tax-exempt, a holder can recognize gain or loss that is subject to federal income tax on the sale of such a bond, just as in the case of a taxable bond. I see a little too much risk in these going forward but a few might not be a bad thing. Unfortunately some folks have turned 95% of their wealth holdings into these which could give a whole new meaning to the word “junk bond.”

The last frontier is exploring tax codes to find access to places to build tax-free and we find that in 7702a which is for life insurance. Now contrary to popular opinion, insurance is not all about you dying. In fact it can provide one of the last vehicles to grow money tax deferred and access it tax-free if designed properly. The caveat is that you must fund for a few years and be consistent like anything else in life. Many let their policies lapse and then the cash values go to paying insurance costs rather than being allocated to a savings component linked to one of our stock indexes.  As I’ve shown before, if you understand the equivalent taxable yield, you’ll understand that if you only did 5.5% in return tax-free that is the equivalent of 7.65%, depending on your tax bracket…it could be a little better if your in a higher tax bracket.

The insurance approach also allows you to pass on a death benefit to loved ones and if you don’t have anyone who loves you then think about it as a final expense policy to cover the costs of sending you to the great beyond which can cost anywhere from $15,000 and UP.  You can be covered for disability and terminal illness and have supplemental tax-free retiree income all with one policy. For folks who don’t qualify for ROTH IRA, can’t do the solo 401k ROTH or have already done as much muni bonds as you’re going to risk; the properly structured ‘savings grade’ life insurance policy may provide a unique combative tool to slay the retirement dragon.

Unpoverishingly,

James Burns

Tax Free Now

Why Sabotage your Retirement?

There are five destroyers of wealth.

1. Taxes

2. Inflation

3. Procrastination

4. Expenses

5. Debt

So if we know these five exist that eat away our gains and slow our progress, then we know where not to invest. Debt and procrastination are personal things but the other three can be avoided. The typical vehicle most people use are mutual funds. There are now more mutual funds than there are stocks on the exchanges so one has to ask why. This is because of the tremendous money that is harvested off of them by greedy financial institutions.

How do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return. When you hear that, don’t you feel like you’re taking one or two steps back instead of going forward?

Taking what we now know, the best place to avoid expenses would be an index fund but if we buy the index inside a life insurance chassis, then we can eliminate the taxes under the Internal Revenue Code Section 7702 which allows tax-free build-up and tax-free distributions back to yourself because it is characterized as a loan. Now that we’ve eliminated two more destroyers the only one is inflation. As long as you can earn an internal rate or return that out paces the 3% of inflation which is possible when you have the right product you can eliminate all 5 destroyers of wealth and get so much further ahead.

If you want more information look for the book “The 3 Secrets of Wealth” on Amazon or contact the author of this blog.

Save Tax Free Now

Tax-free Retirement Planning that is hard to outlive in Orange County, California

Due to the rise in our deficit (paying $1 trillion per year on interest only) we are headed for higher tax brackets. The only way you’ll NOT run out of money is if you have some tax free strategies in your retirement plan. As you can see from the graph, sometimes tax-free is actually more when you consider how much you need to make just to cover the taxes and the haircut it gives your funds. To find your equivalent taxable rate you take the rate of return and divide that by your tax bracket (e.g., 28% etc.) and viola you have your equivalent taxable rate. In the example if you’re earning 4.5% in a tax free vehicle, and are at a 28% tax bracket…you’re earning the equivalent of 6.25% because you’re tax free and that is significant.

I have seen several clients retire on their IRA or 401(k) and they get hammered at ordinary tax rates usually in a higher tax bracket if they’ve been deliberate in being successful. You can always retire poor and live on the system while it is available but I don’t think people set out to do that…at least I hope they’re not going into retirement poverty by choice. Out of 100 people turning 65 right now, only 4 of them will be financially independent and the rest will be reliant on family, charity, government or a large portion are still working. In fact there was an article about octogenarian’s having to go back into the work force because they’ve run out of money. The typical deferral for all those years only lasts 18 to 24 months of your retirement as taxes ravage your income and usually without the tax deductions. Also, if you don’t take the distributions (MRD) by the time you’re 70 1/2 there is a penalty of 50% + the ordinary tax, about 70 to 75% of that distribution is devoured just because you didn’t need it and the government forces you to or they’ll penalize you.

Here are a few thoughts if you don’t want to end up as a greeter for a convenience or department store, you know the places I’m talking about. Also some are working as fast food window servers, tele-marketers, night watch persons, seat attendants at stadiums and I was at a restaurant recently and saw one on one knee with knee pads scrapping gum off the floor and this was not a hobby. Think about how difficult these things really are to do when you slow down and the body and mind don’t function like they used to. You are supposed to be doing other things…my people like to go on trips and send me post cards from exotic places. Some like to volunteer and give back to charity…but no schedule of showing up 8am to 6pm with an hour lunch.

So what do I need to be thinking about? Well, I’m glad you asked because here is the personal inventory:

1. What are my current retirement assets earning?
2. How much are the costs/fees associated with my current investments?
3. Are they tax-free?
4. Do I qualify for ROTH IRA or a self-directed solo-401(k) ROTH since I’m self-employed?
5. Are there any Municipal Bonds I could use?
6. Do I have savings grade life insurance that builds up tax deferred and is accessed tax-free and carries a death benefit and final expense?

Most people do not follow or track their portfolio and know what they’re earning, they just know it is down or up but don’t even know by how much. The old adage of when does a negative -30 + 43 = 0 does not seem to resonate with most and there needs to be more accountability on our future retirees to know what they have and what it is doing. We know one geo-political event like terrorism can knock our market down by 50% and they are trying something every few months. The market was devastated for a long time after 9/11 and many people lost millions over night and never recovered since stocks tanked in March 2003.

Are there any municipalities we can rely on that are not running their budget like a ponzi scheme since they are taking in tax dollars to pay for last year’s expenses and just raising taxes. It is only a matter of time before things catch up with some of these local governments and a scary domino effect starts. While I like real estate there have been some many pirates schlepping that stuff and the only one making money is the pirate because they are buying low and selling really high to unsuspecting people because it is hard to really get into the numbers on a property unless you visit the area and bring in all the factors.

We are running out of time before some of the nastier taxes tucked into the Health Care Reform act take effect as well as The Deficit Reduction Act gets full swing for people to start taking back their retirement and stop the bleeding that will occur on your nest-egg when you start taking out the income at the higher ordinary income rates.

In your service,

James Burns, Esq.

Learn Tax-free now

(949) 231-9979

The Expenses in your Retirement Plan are Blowing your Financial Independence

While incomes have gone up the cost of living has gone up much faster and in California the sales tax on your goods is through the roof. The idea of financial independence may be just an idea but it is supposed to be about replacing your current income so that you’re not working forever. Only a few tools will be reliable enough going forward to get you there. Everyone must simply have some tax-free retirement funds if they are going to survive and tools that might not be subjected to the Mandatory Retirement Distributions (MRDs) which require you to take funds out of your retirement plan whether you need them or not and if you don’t, you are penalized 50% on that distribution + the ordinary tax which usually equals 70%.

The idea of pooling money together for investment purposes seems to have started in Europe in the mid-1800s. The first pooled fund in the U.S. was created in 1893 for the faculty and staff ofHarvard University and on March 21, 1924 the first official mutual fund was born. It was called the Massachusetts Investors Trust. It came to life when three Boston securities executives pooled their money together, not knowing how popular and lucrative the funds would become for the financial companies that peddled them.

In recent commentary, insiders have adopted a more skeptical outlook on mutual funds. Richard Rutner, author of The Trouble With Mutual Funds, said in 2002 that “Most investors in mutual funds have no idea what they are invested in, which is the way the industry wants it.”[1] Others have said that mutual funds are troubled because they are rewarded for the amount of money they attract, not the amount of money they earn.[2]

SEC Chairman Arthur levitt, Jr. warned of growing unfairness in the relationship between individual investors and mutual funds in January 2001. Mr. Levitt made the following comment:

“There are a number of instances that, quite frankly, do not honor an investor’s rights. Instances where…hidden costs hurt an investor’s bottom line, where spin and hype mask the true performance of a mutual fund, and where accounting tricks and sleight of hand dresses up a fund’s financial results.” [3]

What most people don’t know is that there are five separate bills that mutual funds charge.[4] The best way to determine if an investment is effective for you or not is to dollarize the benefit or the burden. When you invest in the typical mutual fund (assuming outside of a qualified retirement plan), you face costs that erode your benefit. Chances are you’re not aware of them, they’re not in your prospectus and your broker isn’t going to sit down and tell you about them. The five costs of mutual fund investing are:

1. Tax costs – excessive capital gains from active trading.

2. Transaction costs – the cost of the trades themselves.

3. Opportunity costs – dollars taken out of portfolios for a fund’s safekeeping.

4. Sales charges – both seen and hidden.

5. Expense ratio, or “management fees” – no end to increases in site. This is a calculation based on the operating costs of the fund divided by the average amount of assets under management.

How do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return.[5] When you hear that, don’t you feel like you’re taking one or two steps back instead of going forward?

According to Richard Rutner, “No one denies that the average mutual fund returns 2% less per year than the stock market returns in general (see below on the breakdown). Yet the mutual fund industry spends billions of shareholder dollars to promote its money managers as experts who can manage investor’s dollars with skill. The vast majority of mutual funds (94% according to a recent five-year survey by Lipper Analytical Services) have underperformed the stock market as a whole.”[6]

James Burns

Retirement Rescue Solutions <click>

Accountability in your Personal Retirement Planning

As the author of “The 3 Secret Pillars of Wealth” I have identified what I think are seven to eight steps all Americans need to respond to and become accountable to right now. Accountability is when you’re going to get serious about what you’re doing and where you’re going. Jeff Combs, a great coach and trainer says “your word is your bond” and what is your word worth to yourself? Do you constantly procrastinate and fail to examine your finances because your fearful, don’t understand them or you are addicted to poverty consciousness rather than prosperity consciousness? Some people are addicted to struggle so much that they get in their own way of success.

It is shocking how many Americans are not accountable for their own retirement and do not do the things it takes to be financially independent. The Wall Street Journal recounted on how much apathy is out there and there is no room for slip-ups or lackadaisical attitude.

Here are the 7 things you absolutely must be doing to get the type of result you’re looking for which is financial independence in your retirement.

1. Build up cash flows
2. Build an emergency fund
3. Eliminate debt – (bankruptcy, short sale or debt settlement)
4. Rebuild credit if necessary
5. Create an emergency fund (all families need this for unexpected events)
6. Protect what you have (protect your principal from market loss
7. Build a plan for long-term income and savings
8. Have an estate plan in place to care for your affairs

It is very effective to just have steps or a checklist. Some of the most complicated machines (aircraft) and computers are run on systems and they have checklists to keep them functioning optimally. Why avoid this evident fact of how to keep things in order and follow a checklist? Everything you need is in 8 steps to financial freedom. Sure, there is a little bit of work in each step but things are now isolated and broken down into manageable pieces and that is problem solving.

To your success,

James Burns

Wealth Strategies – click here

Was Gary Coleman’s Plug Pulled Without His Will?

As Gary Coleman was unconscious in the hospital, his ex-wife, Shannon, gave the order to pull the plug.  Now Coleman’s parents have come forward accusing the hospital of stopping the life support prematurely without the proper permission, saying Shannon no longer had the right as she was not his wife.  The hospital does not seem to be concerned because Gary had his health care power of attorney on file (AKA: living will) giving Shannon the authority as his Agent.  This is a case to get your affairs in order like NOW.  Have you signed your own health care power of attorney?

Get answers:

James Burns, Esq.

(949) 440-3243

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