Archive for March, 2008
Entity Structuring vs. Money Structuring
March 27th, 2008
By The XBanker
When we talk about entity structuring we are focusing on the proper use of legal entities to protect your assets. Creating the right structure for you is a correct and acceptable thing to do.But if you engage in money structuring – well, you are headed for big trouble. The case of Eliot Spitzer has certainly taught us one thing: It is getting harder and harder to discretely pay for sensitive transactions. What caught the former governor of New York with his pants down were these new post 9-11 anti money laundering rules.Deposits on withdrawals that total more than $10,000 within the same day automatically prompt a currency transaction report to the federal government. But if you slice up the transactions – say deposit $9,000 into different bank accounts – to avoid detection that is called money structuring, which is strictly illegal.I know – it’s hard to imagine. But take the case of a newlywed couple who received $40,000 in cash at their Greek wedding. Rather than deposit it all at once and wait in lines to provide the bank with a bunch of information, they deposited it over time in smaller amounts. The new Big Brother software caught them and soon they were being investigated by the IRS. After a great deal of money spent in attorney’s fees they were eventually not charged.But here’s the lesson, if you know about the $10,000 requirement and attempt to avoid it, you have committed a crime. And let’s be honest, thanks to Eliot Spitzer, we all know about the $10,000 requirement now.There are still a few ways for untraceable transactions to occur, at least until the feds find a way to shut them down.Eliot Spitzer would still be governor if he had used a prepaid or stored value card. You can buy an American Express gift card with cash at a retail store in amounts as high as $500. For now there is no limit on the number you can buy.Of course, cash is still a good way to go. But remember, if you withdraw more than $10,000 in cash in one day a report is sent to the feds. And once again, if you slice up withdrawals to avoid detection – money structuring – you are breaking the law. The best way to get your cash out is in smaller and more frequent transactions.But listen to what we are discussing: How to get your money out of your own bank account without breaking a draconian law. Will this ever end, or only get worse?
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Credit Crunch and HELOCs
March 26th, 2008
By The XBanker
It’s nearly impossible to pick up a newspaper or tune into the news without seeing a story about the credit crunch (I’ve addressed this issue my post on the mortgage fiasco, where you can get more of my thoughts on the matter.).
The banks are really hurting right now and its important to pay attention to the trickle down effect. This can be a very good time if you have existing credit lines. The rates on your lines should be dropping as the prime-rate decreases. You’ll also notice that lenders are more apt to increase your current lines – especially if you have kept your account in good standing. So now is a good time to ask for a credit increase, just make sure you’ve had your lines for at least 6 months.
If you are applying for new credit, understand that banks have really tightened up their credit requirements. One of the areas that we have seen pop up recently is with HELOCs – home equity lines of credit. If you followed the business financing advice from most business periodicals, you may have shot yourself in the foot for bank financing today. We’ve heard from a couple of banks right now that they will not approve anyone with an open HELOC. It isn’t a major trend, but the fact that it is popping up warrants our warning. We’ve seen HELOCs report a number of different ways: as a mortgage, as an installment loan and as revolving debt. It appears that HELOCs that are reporting as revolving debt are the culprit for this recent round of bank denials – so be aware of what is on your credit report. If you are thinking about taking out a new HELOC – it is worth finding out exactly how it will report to the credit bureaus before you apply.
I don’t think this will be a long-term or widespread trend, but if you are looking for financing in the next 6 months you probably should be aware of its recent treatment by the banks.
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Insurance
March 19th, 2008
By The XBanker
Is insurance enough to protect your assets?
Only if you believe in the Easter Bunny, the Tooth Fairy and commission earning insurance salesmen.
Insurance is the first line of defense in protecting your business and real estate assets. You should always have a reasonable amount of insurance coverage to protect against standard claims.
But you should never forget that insurance companies do not want to cover certain claims. They are certainly not willing to cover every imaginable claim. As well, they are quite clear about excluding these claims from your policy. While it may not be detailed in bold capital letters, and more often than not is in eye numbing miniscule print, the exclusions will be laid out somewhere in your policy.
As such, you will always need a second line of defense, which is the proper use of LLCs, LPs and corporations to protect your assets. The use of a second line of defense may be at odds with your insurance agent, who may stridently assert that your policy completely covers you. Such agents may further assert that with such a bulletproof policy you do not need to implement asset protection strategies.
First and foremost, you need to know that many commissioned insurance agents are less concerned with your asset protection needs than their need to sell lucrative, commission laden policy. Secondly, you need to know that they are not licensed to give legal advice. So feel free to questions their motives when they practice law without a license by saying you don’t need asset protection because insurance is enough.
Insurance policies may cover most situations, but there is no absolute 100% guarantee that you will be covered in every imaginable situation.
Which is why you need to use the proper mix of entities to supplement your asset protection planning. And, why you need to steer clear of insurance ‘professionals’ who would tell you that insurance is all you need.
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Don’t Make This Credit Mistake!
March 18th, 2008
By The XBanker
I get more argument over this advice than any other I give. But I assure you, I am not making this up.
When you get your credit report, you’ll find old accounts listed on your report you don’t use anymore — and have no intention of using anymore.
You know what I am talking about. The Best Buy “instant credit” card account you opened to get a discount on that stereo system? The retail card you opened in college when you were broke and needed that 20% discount to get the clothes you had to have?
Here is my advice:
Don’t close them!
Do not tell the credit reporting agency to list the credit cards you don’t use any more as closed on your credit report. Just let them be.
Rarely are credit cards listed as closed on your credit report unless you ask the lender to close them. (They hope you’ll use them again.) Once you tell the issuer you want an account closed, however, it must report the account as “closed at your request” to the credit reporting agencies.
Closing all your old accounts may cause your credit score to drop. It’s true, and I have talked to a number of people who have seen that happen.
Why should cleaning up your credit hurt it?
While closed or open accounts are both counted in calculating your credit score, once an older account is closed it may drop off your report, and that may shorten the overall length of your credit history. When it comes to credit reports, older is better.
Secondly, if you do use your cards quite a bit, you’ll want to have some extra available credit. That’s because the credit score does look at how close you are to your available credit limits. If you’re maxed out (even on just one card), your credit will suffer. Ideally, you want your debt to add up to no more than 10 percent of your available credit if possible.
So your next question is, “Doesn’t having too much available credit hurt my score?” The short answer is “no.” Just ask my friend Scott Bilker at DebtSmart.com. Scott has more than eighty (!) open credit card accounts and a credit score in the 800s, which is excellent as far as a score is concerned. That doesn’t mean you want to open a bunch of cards — doing so can also hurt your credit.
Having said all that, if there is an ex or a cosigner who might run up a bill you would be responsible for, by all means close the account. And if you just can’t stand to have all those old accounts listed on your credit, close just a few at a time. Start with the more recent retail accounts and accounts with smaller credit limits. And leave some of the older ones open for good measure.
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Would You Rather Be Rich or Right?
March 10th, 2008
By The XBanker
Would you rather be right than rich?
It’s a question my friend and colleague Phil Laut asks in his books Wealth Without a Job and Money is My Friend. I love Phil’s straightforward advice for entrepreneurs, and I agree with him. This particular question is one that comes up time and again when I am answering credit questions.
Here is the scenario: Your cell phone company, or medical insurance provider, or some other company has screwed up your bill. You’re ticked off and not going to pay it. So you tell them to take a hike.
Or maybe you move and you don’t get a bill for a couple of months. When you finally do, it’s been turned over to collections (and the amount is much higher).The problem is that not paying will cost you a heck of a lot more than just the cost of the disputed bill.
When the item shows up as a collection item on your credit — and believe me, it will eventually — your score can drop 50-60 points or more (depending on your overall credit). Your credit card companies, who may be monitoring your credit and just waiting for an opportunity to raise your rates, can double the APR on your existing credit card balances.
And you still get hounded by debt collectors!
Here’s my advice — do what you can quickly to dispute the bill, go up the ladder, etc. You may be able to get help from your state consumer protection office, your Senator or Congressional Representatives (I spent a semester interning in a Senator’s office where all I did was help resolve constituent complaints), your local Call for Action office, a consumer reporter at your hometown newspaper or television station, or a consumer law attorney.
But don’t let it drag out too long. Before it ends up on your credit report as a collection item, consider paying it under protest, with a note that you believe it is incorrect but you don’t want to ruin your credit over it. Then take them to small claims court if you are really serious about getting your money back.
As an entrepreneur, your credit is worth far more than a few hundred dollars!
Again, as Phil said — Would you rather be right than rich?
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Offshore?
March 10th, 2008
By The XBanker
I am constantly amazed by the number of asset protection ‘gurus’ who advocate the use of offshore asset protection trusts or “APTs.”
My incredulity is further stretched when these so-called experts claim that APTs are the right choice for U.S. real estate holdings.
If you own real estate in California, for example, will holding title in either an LLC owned by an APT or directly in an APT provide you with any greater protection?
The answer is no.
If you get sued over an accident on the real estate a California court will have jurisdiction over the case. California law – not the law of the Caymans, Belize or your promoter’s favorite island – will govern the case. The California court is free to ignore the tens of thousands of dollars you spent on your ‘bulletproof’ APT.
If you get sued personally on a claim unrelated to the real estate a domestic LLC (set up at a fraction of the cost) will protect you as well as any overblown APT will a judgment creditor will have the same trouble collecting from a properly structured and maintained Wyoming or Nevada LLC as they will from an APT.
So what have you accomplished, besides spending a lot of money by going offshore? Well, you have probably angered the judge in the case. Let’s be very clear: judges do not like to deal with people who set up offshore structures. They are immediately suspicious of a citizen who would go offshore for legal protection. And in a court case, you want to do whatever you can to keep the judge on your side. An APT is at least one strike, perhaps two, against you.
As well, after 9/11 there is a much greater scrutiny of offshore transactions. Many promoters will not tell you about the new filings that must be made when you use an APT, or the consequences of failing to file.
Going offshore presents many traps of the ill informed. Don’t be another future audit. Wyoming and Nevada entities can protect you as well as any APT at a fraction of the cost and without raising any eyebrows.
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Should You Loan Your Business Your Retirement $$?
March 9th, 2008
By The XBanker
Increasing numbers of consumers are tapping their retirement accounts by taking out loans against their 401(k) plans. For entrepreneurs, it’s often considered a no-brainer. There is no credit check, it’s easy to qualify, and there is no banker scrutinizing your loan ap. And the loan won’t be reported to the credit agencies either.
But that doesn’t mean it’s a good idea.
For one thing, depending on your retirement plan, one of these loans may not even be available to you. If you have a traditional IRA, for example, you cannot borrow against it.
If you take out a loan against your 401(k), 403(b) or pension plan, while you still have a “day job” and then leave work, you may be required to pay back the balance immediately or treat it as a withdrawal (which could result in taxes and penalties). The same thing may happen if you can’t keep up with your payments. Because there is usually a five-year repayment schedule for most retirement loans, the payments can be much steeper than credit card minimum payments, for example.
Here’s the biggie — retirement plan assets are usually safe in bankruptcy. Creditors can’t force you to use retirement plan money to repay debts. If things don’t work out with your new venture, you may lose one of the last pieces of financial security you have.
You may be a risk-taker, but make your risks calculated ones. Try to leave your retirement funds alone and focus on building strong business credit instead.
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Why Nevada and Wyoming?
March 5th, 2008
By The XBanker
When I give a speech on incorporating and asset protection I always ask the audience: “Why Nevada and Wyoming?”
And I always get a laugh when I answer it with: “Because I have offices there.”
But in truth, the reason I have offices in Reno and Minden, Nevada, and in Jackson Hole, Wyoming, is because the two states offer truly excellent corporation and LLC benefits.
First of all, there are no state taxes, either personal or corporate, in either state. Everyone knows why there are no taxes in Nevada – gaming revenues cover the bill. Granted, the casino industry has been charged with privatizing the profits and socializing the problems but for no and into the future no one is complaining too much as long as there are no state taxes.
Wyoming has no state taxes as a result of mining royalties. They are digging up coal and other resources at a prodigious rate, and the royalties have produced a significant surplus for the state.
So you won’t pay extra taxes for choosing Nevada or Wyoming as your corporate home. You will pay an annual fee ($225 for Nevada/$50 for Wyoming) but for that small amount of money you are getting a favorable asset protection law.
Both Nevada and Wyoming have the charging order protection for LLCs and LPs. Nevada just added charging order protection for corporations with two or more shareholders. You can be certain Wyoming will follow suit. The subject of another post, know that charging order protection offers excellent asset protection.
Wyoming and Nevada both allow for nominee officers. By using a person other than yourself (a “nominee”) to be listed as the company’s officers and directors on the public record you can gain a great deal of privacy.
Privacy, no state taxes and excellent asset protection are the three answers to the question: Why Nevada and Wyoming?
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How Factoring Can Benefit Your Business
March 4th, 2008
By The XBanker
Let’s face it – your needs are at odds with your customers. You need to be paid up front for your products and services while your customers want to pay as little as possible and to pay it over time (for as long as humanly possible). This is a particular challenge for small businesses when they compete against large corporations, because most small businesses lack the financial resources to take payments over time. If you extend credit to your customers, factoring might be a great financial solution for you.
When a customer owes you money it is called an Account Receivable; you are going to receive money on an account. Factoring is when a bank or money source agrees to buy your accounts receivable and assume responsibility for the collection of those payments. So not only do you receive money upfront, you also free yourself from the collection process. The factor makes their money by charging a fee of 1-10%. To illustrate how this would go down, let’s assume that you have an outstanding invoice for $5,000 to a customer to be collected over the next 60 days. You decide that cash upfront is your primary need, so you choose to have the invoice factored. The factor pays you $4,500-4,950 (90-99% of the invoice). A huge benefit to this type of cash infusion is that your personal and business credit don’t play a part in the decision to buy your invoice – it’s based upon the creditworthiness of your client, the debtor.
So why would you factor your invoices? The answer is simple: CASH.
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Top Credit Scams to Avoid
March 3rd, 2008
By The XBanker
It’s National Consumer Protection Week, which may not mean a heck of lot to you (after all, there’s no school or work holiday). But for those in the consumer protection world, it’s a chance for us to try to draw some attention to all those scams we hear about on a regular basis. Here are some of the top credit rip-offs that surface time and again:
1. Credit repair scams: There are no “loopholes” in federal law that allow consumers to remove accurate but negative information. That doesn’t mean that kind of info isn’t removed sometimes, but there’s no secret way to accomplish it – short of illegally paying an insider at the credit agencies.
2. Piggybacking: Renting out tradelines to boost someone’s credit is still around, but it’s illegal if you use it to commit credit fraud. I’ll post more about this soon, but in the meantime, you can read this NY Times article.
3. Debt reduction scams: Credit counseling, debt negotiation and debt settlement can be legitimate ways to deal with your debt. But hundreds of new, inexperienced companies have cropped up to take advantage of consumers who are dealing with the credit crunch. Many of these companies will take your money and run. You’ll still be trying to deal with your debt, and they’ll be sipping margaritas on the beach in Mexico, courtesy of your fees. (Or trying to pay off an FTC fine whichever comes first.)
4. Debt elimination scams: Sorry, but debt is not illegal. Given the rates some companies charge, it should be! Steer clear of companies promising you they can legally wipe out your debt. It just ain’t so.
If you’ve been taken by a credit scam, make sure you report it to the FTC and your state Attorney General’s Office. They won’t take action on your individual case, but they do stop companies when they see a pattern of abuse.
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