Articles

What have we learned (so far) from this recession and economic crises?

By Earl H. Cohen
Attorney at Law
Mansfield Tanick & Cohen, P.A.

In the last eighteen months most Americans have been hit hard with a combination of financial blows ranging from unemployment, income reduction for those with jobs, increased medical premiums, calls or reductions of credit lines, losses sustained in retirement accounts and taxable portfolios, loss in value to the largest investment for most Americans-their homes, and a series of losses suffered by individuals and nonprofit institutions as a result of the collapse of several Ponzi schemes including the "investment funds" operated by Bernard Madoff. Few would deny that these "financial blows" have created a serious crisis in confidence in the entire financial system. Many wonder who can they trust and what they should do going forward? Here are 10 tips on what we have, or should have learned, so far and what you can do with what we have learned.

1. Planning, or updating your plan for flexibility, is vital for your estate: If your plan has not been reviewed in the last year it needs review and updating. Consider the following: As part of the review process you should examine how your estate will be distributed and how your plan may need to be updated to reflect your current distribution intentions. With estate values decreasing, does your plan efficiently and flexibly deal with minimizing both federal and state estate tax? Has your plan been drafted to provide flexibility to deal with current uncertainty as to the future of the federal estate tax? Does your plan make use of current, relevant planning strategies? With interest rates, including the Applicable Federal Rates (AFRs) used for calculating taxable amounts of certain gift strategies, does your current plan address the strategies that benefit from low interest rates? Does your plan address strategies to protect your assets from creditors for the benefit of your surviving spouse, your children and other beneficiaries? And does your plan have the flexibility to allow the use of strategies, including disclaimers, based upon what your family and advisors learn after your death? If you operate a business or own rental real estate, is your family protected from the claims of creditors?

2. Planning or updating your financial plan is more important than ever: As important as, or even more important than your estate plan, is your financial plan. This includes plans for educating your children and funding your retirement. These plans should be reviewed with your financial advisor each year. The dramatic changes in portfolio values make it even more important to have professional assistance in meeting your short and long term goals. Your plan should address your intentions regarding retirement-will you retire completely or continue working part time?

3. Life insurance may play new importance in your plan: If you are married and/or have children or significant personal or business debt, you need life insurance. No matter how you feel about life insurance there is often no way to build enough capital to provide income replacement for your family, educate your children and cover your debts. Your coverage should be reviewed at least every 3-5 years. It is important that you work with an experienced insurance professional to make certain that you own the right type of coverage and correctly plan for the ownership and beneficiary designations. Use of irrevocable trusts can reduce estate taxes and provide long term protection of the insurance proceeds for your beneficiaries.

4. If you're an owner of a business, correctly organizing the business can reduce exposure to the businesses debts: Businesses do fail and when they fail creditors look to the owners to pay the remaining debts. If your business is correctly organized as a liability limiting entity, you can't be held responsible for its debts. It is important that you work with an experienced business attorney who understands not only the organization of an entity but how it must be operated to assure that maximum liability protection.

5. Every family and business needs a disaster recovery plan that includes the preservation of important documents to establish and protect your personal identification: Fire, flood, storm, theft and other catastrophic losses occur. How will you establish your identity in the event of the loss of your important documents? Use of an on-line secured data storage system, like the system provided by Legal Logic® can ease the restoration of important documents.

6. Every family needs sufficient cash reserves: 2 or 3 months of expenses as a cash reserve are no longer sufficient. Layoffs, salary reductions and other unexpected financial problems may leave you unable to meet monthly expenses. Cash reserves invested in money market or other short term instruments covering 6 to 12 months of expenses are now the minimum norm.

7. Who will you trust to provide financial/investment management? As numerous Ponzi schemes, masquerading as legitimate investment funds have been uncovered, investors have rightfully been unsure whom to trust with the investment of their hard earned money. Several rules have emerged: work with Registered Investment Advisors (RIA) and preferably those with certifications including CFP® or ChFA®. Be certain that custody of your securities remains with a licensed securities broker dealer so that you receive separate periodic statements from the broker dealer and the RIA.

8. Don't let "the tax tail wag the dog": For many years, investment assets including real estate have been bought and sold often based largely on tax considerations. Tax considerations are important but only one factor to be considered in making a buy or sell decision.

9. Your credit rating and banking relationships are more important than ever: As financial institutions suffer from significant credit losses, affordable credit will be reserved for those with the best credit and those who have had the foresight to build both their credit and relationship with a lender or lenders. If your credit is less than sterling, work with a professional to repair it. Begin a relationship with a bank or banks by opening depository accounts even if the bank doesn't pay the highest rates on deposits and by borrowing and repaying small loans in a timely manner.

10. Size really does matter: We're learning that "too big to fail" really only applies to a small chosen few and rarely to privately held businesses. Chrysler, as a brand, will receive help, but its bankruptcy will wipe out most if not all of the equity of the current owner, a private equity group. The business survivors of this economic crisis will be those with tight fiscal management, controlled fixed expenses (in comparison with revenues), moderate debt and a business plan that most would view as conservative. And the same holds true of consumers. Those consumers who live within their means, build and retain strong cash reserves, continue saving for important life goals and use credit wisely will not only survive but thrive in a post crisis economy.

Feel free to contact our office about the tips raised in this article or any issues of importance to you. You can reach us at 612-339-4295.