XBanker

Entity Structuring vs. Money Structuring

March 27th, 2008

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

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

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

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

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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