October 2004 Archives

When most people receive some extra cash, their first impulse is to spend it. Whether a person won the lottery, received an inheritance, early retirement benefits, or settled an insurance claim, odds are that unless something is done to protect it, the cash will soon disappear.

Structured settlements were developed to help protect recipients from financial misfortune. A structured settlement is an agreement between an injured party and the insurance carrier. It is based on a financial plan for immediate cash and future tax-free payments, which takes into consideration the future needs of the family. It is also a program designed to maximize the injured party’s settlement by providing secure and tax-free payments, for life if requested.

The Internal Revenue Service considers lump-sum cash settlements tax-free. However, any money earned from this settlement is taxable unless invested in municipal bonds. With a structured settlement, the injured person receives a tax-free accrual and payout of interest.

Most structured settlements include up front cash and for attorney fees, if applicable. The insurance company purchases one or more annuities from a highly rated life insurance company, which in turn makes the periodic payments to the injured person.

These guaranteed payments can be made for virtually any length of time, even for the recipient’s lifetime. In the event of the individual’s death, a guaranteed portion of the settlement may be made to the estate or a named beneficiary such as a relative or child. The plan may even defer funds in cases involving minors or be designated to a beneficiary such as a scholarship fund or religious organization. Including periodic increases in the benefit package or providing lump sums at future dates can counter inflation. A structured settlement may be designed to include educational funds, retirement income, or even mortgage payments.

One of the most important benefits of structured settlements is the protection they offer. Regardless of what happens to the stock market, the economy, or interest rates, the benefits from a structure are guaranteed.

Settlement funds can disappear in a number of ways, including bad investments, loans to friends and relatives, and unwise or frivolous purchases. Because a structured settlement is a guaranteed source of tax-free funds, it is very difficult for even the sophisticated investor to match the guaranteed rate-of-return generated by a structured annuity. It is a win-win concept for the family.

More than 80 percent of divorcing couples cite "debt and financial distress" as the primary factor in the dissolution of their marriages; Freedom Financial Network helps divorcing couples manage debt

(PRWEB) October 4, 2004 -- Whether it comes before or after the papers are signed, economic hardship is all too familiar to many couples who divorce. Following a few financial guidelines can ease the burden during this difficult time.

Each year, 1 million Americans will divorce. More than 80 percent of divorcing couples cite "debt and financial distress" as the primary factor in the dissolution of their marriages, according to an American Bar Association survey, and studies find that most families suffer a financial decline following a divorce. By taking steps to protect credit, families can come through in much better shape. Freedom Financial Network, LLC, a national consumer debt resolution service provider, encourages divorcing couples to take the following steps:

1. Accurately assess debts and liabilities. First, see yourself as your creditors do. Online (see www.myfico.com) or by phone, you can request a "tri-merge" credit report (a summary from all three major credit reporting bureaus). Note all of your existing shared and individual liabilities. Settle (or get a judgment) on how you'll allocate these responsibilities.

2. Plan how to handle your home. If you own a home, the mortgage is likely your most significant monthly payment. Be certain you understand how you'll resolve monthly mortgage payments, and how you'll divide the home's value - whether one partner buys out the other now, or the home is to be sold after children are grown.

3. Budget for payments. Create a detailed budget, based on your new income level, and use free cash flow to pay off debts. Most people find the most efficient way to pay off debts is to first pay off smaller bills - starting with under $100 - then pay off loans and unsecured debt, such as credit cards, beginning with the account with the highest interest rate.

4. Make sure your ex-spouse is making his or her payments. If possible, make provisions in the divorce agreement for reporting on resolution of significant debt. There are important implications for you personally if your spouse does not meet his/her end of the bargain on liabilities allocated through the divorce proceedings.

Call all creditors for shared accounts (credit cards, gas cards, department store cards, phone cards, etc.). Close the accounts if you are not carrying balances, or remove your name from jointly held accounts. Remember that for jointly held credit cards, and for any other debts incurred during the marriage in community property states, you have shared liability - and thereby share any potential negative credit rating impact. This means that if your spouse does not make payments after the divorce, it could come back to haunt you - and your credit rating.

If you owe back taxes, be aware that the IRS does not have to honor a decision from a divorce judgment. Consult a tax expert to help with your divorce tax planning.

5. Focus on rehabilitating your credit and financial health. Begin a savings plan. Reinvest any proceeds or equity that come out of the divorce proceeding, and be especially cognizant of building yourself a retirement fund for the future.

If you find yourself in trouble during this stressful time -- in which you must make many financial decisions -- seek help immediately from a reliable, professional debt resolution firm. Be sure to investigate the company you choose to assist you, and seek out a company that operates for the consumer, which is markedly different from credit counseling, debt consolidation, and debt management firms.

About Freedom Financial Network
Freedom Financial Network, LLC (freedomdebtrelief.com) provides comprehensive consumer debt resolution services through three divisions: Freedom Debt Relief, Freedom Foreclosure Relief, and Freedom Tax Relief. Helping consumers resolve their debts for the least possible personal cost, the company's services offer an alternative to bankruptcy, credit counseling, and debt consolidation.

Freedom Financial Network represents the consumer exclusively, and serves in a position of mediation and resolution to help clients minimize monthly payments, cut total debt balances, protect credit ratings from bankruptcy, and re-establish solid financial footing as quickly as possible. The company's 33-month Debt Resolution Program negotiates with unsecured creditors, often resulting in resolutions that save clients nearly 60 percent of debt balances.

Based in San Mateo, Calif., Freedom Financial Network serves more than 2,000 clients nationwide. The company manages more than $70 million in consumer debt, and is a member in good standing with the Better Business Bureau.

The news is everywhere
you turn — financial magazines and papers, radio reports and network news. The
economy is down, stocks are falling, and retirement nest eggs are being slowly
drained. However, you can give your prospective investor clients some good news.
They can place their self-directed IRA funds into the potentially
higher-yielding world of mortgage note investing.



Many Real Estate Investment Options

Many people are just now beginning to tap into the benefits of holding real
estate, mortgage notes and trust deeds in their IRAs. The IRS code permits
individuals to invest IRA funds in investment property such as single or
multi-family dwellings, apartments, commercial buildings, raw land, vacation
rental property, condominiums, mobile homes and so forth. Individuals can also
lend money against these types of property. The IRS permits IRA funds to be
invested in trust deeds, mortgage notes and other interest-bearing notes
purchased from private parties or note brokers. These can include back-ends of
notes, real estate lease options, tax liens and discounted notes. Individuals
can also purchase or sell portions of mortgages within their IRAs. In these
cases, the IRA account holds an interest in that portion of the note and
receives the proportionate amount of income due under its terms.



There are some special considerations for mortgage note and real estate
transactions. For example, you cannot buy a property or invest in a secured loan
that involves yourself, a son, daughter, parent, or other disqualified party —
such as a fiduciary or your sole proprietorship. However, this rule does not
apply to siblings or any third party. An individual can hold the mortgage on his
brother or sister’s home or an unrelated third party. If the property is rented
to any qualified party, all income and expenses must first flow back to the
individual’s IRA. If the IRA owner decides to use some of the income produced,
such distributions will always be subject to taxes and possibly penalties if
they are received prior to the age of 59 and a half.



Seller Carry-Back: An Opportunity

Almost everyone knows someone who has sold a piece of property or a home and
held the note. These types of mortgage notes and trust deeds are sold by the
original lender for several reasons. Many of these sellers are not in the
banking business and don’t want the extra trouble of collecting late payments.
Others would like to have the cash, rather than the income stream provided by
the note, for other investments or personal reasons such as college tuition or
medical bills. In any event, these sellers are willing to take a small discount
from the face value of the mortgage or trust deed in order to have the cash.



For example, several years ago, Stan sold a commercial building for $100,000 and
the purchaser paid $25,000 down when they bought it. Stan carried back a $75,000
loan at 9 percent interest with a repayment term of 25 years. The yield to Stan
would be 9 percent if the note paid as scheduled. However, Stan has a daughter
entering college and needs money now to pay her tuition. Stan is looking to sell
his mortgage note at a discount to get this cash.



Considering the payments made by the buyers since the beginning of the loan, the
amount still owed on the property has now been reduced to approximately $72,000.



Stan is willing to sell the note at a discount to obtain the cash now instead of
over the remaining term of the note. You have an investor with a large sum of
money in his IRA who would like to earn a higher, more dependable return than
he’s getting with his stock investments. This is an opportunity for you and your
investor! Your investor rolls his IRA funds into a self-directed IRA account
with a qualified special asset custodian. He then uses those self-directed IRA
funds to purchase Stan’s note for a negotiated sum of $62,000. Stan is losing
$10,000 in principle and interest in the end but is getting the cash he needs
now. Your investor’s IRA is getting an effective 11 percent yield, since the
buyers will continue to pay their originally negotiated monthly payments, except
instead of mailing payments to Stan, they are now mailing their payments to your
investor’s IRA account. You as the note broker negotiate the terms of the deal
and your commission.



The investment made in the mortgage is secure because sufficient equity above
the $62,000 paid for the note exists, and your investor’s IRA is holding the
first position. If the property had not increased in value at all from the time
it was sold until the time when your investor bought the note, he would still
only have a loan equaling 62 percent of the value of the property. Should the
buyers default on their payments, the IRA would take ownership of the commercial
building. It could then be resold at a higher price, generating an even higher
yield on the original IRA investment, or the IRA could retain ownership of the
building and continue to rent out the commercial space with the rental income
flowing back to the IRA account.



What’s the catch?

While there is some paperwork involved, it is not much more than would be
required if an individual were to purchase property or a mortgage note without
IRA funds. There are also specific ways investments must be structured if both
IRA and personal taxable funds are used to make a purchase. Investors should
consult with a tax advisor to avoid complications later on. When purchasing any
type of income producing real estate note for a self-directed IRA, most
custodians will request that a loan servicer be designated for the investment.
They will need a copy of the loan servicing agreement between the IRA owner and
the loan servicing company. If he is qualified, the IRA owner may service his
own notes. In this case, most custodians will provide a standard loan servicing
agreement that must be completed by the IRA owner.



A New Twist on an Old Strategy

As a member of the cash flow industry, you know that the large number of
privately held mortgages resulting from the real estate boom of the late 70s and
early 80s started the cash flow industry. According to the American Cash Flow
Institute®, approximately 50 percent of the total business activity in the cash
flow industry is comprised of the buying and selling of privately held real
estate notes. Your investors don’t need cash out of pocket. They don’t need to
“cash in” their IRAs or 401(k)s, which would result in paying taxes and
penalties. They can invest in mortgage notes using retirement funds within
a self-directed IRA. You’ll end up with more private funds available to you to
broker more real estate notes, and your investors will have the potential to
maximize their IRA return on investment.



Tom Anderson is president and CEO of PENSCO Trust Company. For more information
on PENSCO Trust or self-directed IRAs, call toll free at 866-818-4472 on the
East Coast or 800-969-4472 on the West Coast, or email
penscotrust@mindspring.com, or
listen to a weekly call-in radio show through the Web site at
www.pensco.com.