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.

“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.

“THREE WAYS YOU CAN AVOID GOING BROKE IN THE NEW ECONOMY”

The first thing you can do as illustrated in “The 3 Secret Pillars of Wealth” book is take ownership of your monthly expenditures by having a family budget and a family balance sheet you observe with conviction. If you’re desirous of change, you have to do the work since the only place success comes before work is the dictionary.

Number two, if your home payments are too high because you’re job or industry has fallen off, seek a loan workout with your lender or use a law firm to assist you that has a success rate.

Mr. Burns also states that if you are carrying too much bad debt like credit cards and you’re slowing sinking into the quicksand, think about debt settlement or management services that don’t have an upfront cost and can get you from point A to point B in terms of eliminating this debt. While it may have a temporary blemish on your credit score, at least you get back to the surface where you can breathe.

Lastly, if you’re crunched for cash to invest or pay down bills, look if you or your parents have an old universal life or convertible term life insurance policy that has underperformed or is not really needed and consider having it sold in the secondary market as a life settlement.

More power solutions are available right here so stay tuned, get involved and please send in comments so we can save or pick up lives in this down economy. In numbers we are strong.

James Burns, Esq.

Tax Free Retirement Cash Flow

Overfunding is a strategy that focuses on accumulating cash in the policy rather than paying for the death benefit which is the payout to your loved one’s when you pass away. This approach leverages the highest policy premium that is allowed with the lowest life insurance death benefit so that your cash accumulation exceeds your policy net insurance costs over at least 10 years. There are fundamentally 4 steps to determining the combination of maximum premiums and minimum death benefits necessary to selecting the most leveraged indexed universal life policy:

4. Finally, you must pay close attention to the maximum premiums allowable under the  Internal Revenue Code which is referred to as the seven-pay premium limitation.[1] As long as the total premiums for any seven-year period are equal to or less than the maximum allowable premiums for the seven-pay test,[2] you’ll be able to access the cash values in the policy at any time, tax-free and relatively liquid.

In essence, a life insurance contract that fails to meet the seven-pay test will be classified as a modified endowment contract (MEC). The seven-pay test is not met if the accumulated amount paid at any time during the first seven years is more than the total of the net level premiums that would normally have been paid on or before such time if the contract provided for paid-up future benefits after payment of seven level annual premiums

Want to see if this is a fit for you? If you’re healthy it may very well be a great tool in your arsenal to slay the bailout dragon for your retirement.

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