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Marine loans & tax advisors...A letter to a client...Regarding his experience with a marine lender and his financial advisor. Sometimes clients don't understand how the financing process works--here's a step by step explanation of the process. Ever wonder if your financial advisor really took the time to find out if something was right for you? The safe thing for them is to say no--then they have no responsibility and they can't be found to be at fault no matter what happens--but this isn't always the right answer for you! Learn more by following this letter sent to one such client. |
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Dear Dr. Seddon, First of all, thank you for sharing your thoughts with me Wednesday. As I sit here this Thanksgiving thinking of all I have to be feeling thankful for, and responding to all of the clients who are asking about last minute tax advantages I started reflecting on you and your situation. While my wife is putting the finishing touches on a wonderful Thanksgiving meal (I already told her she wins the prize for “Best smelling house in Annapolis!”), I thought that I would put down a few thoughts to share with you. I have a good, long time friend, Dr. Ralph Sweeney. (We affectionately refer to him as Skip)—he’s a spine surgeon, who, among other things has fixed my Mother-in-Law—and yes, this is a good thing!). We’ve skied together, sailed together and share New Years Eve every year up at his house in NJ. The last several years, Linda (his wife) keeps telling me about all of the difficulties that she has dealing with all of the government and insurance issues regarding Skip’s practice—she manages the business side. The profits get less and less and the work load keeps increasing, while she, more and more, has to deal with incompetent government people—not to mention employees, as it takes more and more effort to manage the business, and Skip is robbed of doing what he enjoys most—simply being a good doctor, while at the same time he earns less and less! Reading between the lines, I heard about the same story from you. Skip has decided to start planning his retirement. He’s very aware of quality of life issues and he’s looking for a place on the water, near Annapolis. A boat is probably in his near future—for him, an exciting new adventure… But more than anything he wants to end the constant haggling with government regulations and insurance companies. He feels that he’s given enough—more than his share. Mike, businessmen, doctors and other professionals face the same issues. What I love about what I do is that I help people to get something back. To hold on to some of their hard earned income, fairly and legally-and convert it into equity in a boat that they can enjoy. Believe me, it would be lots easier to just sell boats. I still have to do what everyone else does in that regard, but I have this entire extra layer that I have to support—being knowledgeable about, and having the support systems to help people set their boats up as a business that qualifies for substantial tax advantages. I end up kissing a lot of frogs in order to find the few who really qualify—but I think that I help a lot of people clarify their thinking along the way—if they’re open to new ideas. I strongly believe what Chief Justice Leaonard Hand said, “Over and over again courts have said that there is nothing sinister in so arranging one's affairs so as to make taxes as low as possible. Everybody does so, rich or poor, and do right, for nobody owes any public duty to pay more taxes than the law demands. Taxes are enforced exactions, not voluntary contributions.” Now, your tax advisor may be great with figures and in his area of expertise—but does he really understand the importance of a boat to you? Does he regularly do business with marine finance institutions and understand their inter-workings? Let me digress for a minute. Concerning marine financing… Back in the late 80’s when the economy was slipping and record numbers of people were declaring bankruptcy, many owners of small power boats--run-abouts and so on, were defaulting on their “marine loans”. The marine department of the few banks that offered marine loans, were a very small part of the banks portfolio—especially compared to real estate. So the banks closed their marine departments left and right. Without looking at the quality of specific loans, or seeing that the loans for larger yachts, and especially sail boats were performing admirably—these just didn’t represent enough business to justify keeping the departments open because 80% of the loans were, and are, small power boats. Gradually as the economy improved, some of these banks came back into the business—cautiously. Many of the people who had staffed the marine loan departments, and really had some expertise in the area of marine loans, had gone on to other things—so it was like starting from scratch. Banks started from the premise of being cautious and selective. The underwriters for marine loans were given very limited power. Initially any loan over $100,000 had to go to a special committee that analyzed the entire financial situation of the applicant. This loan authorization finally increased to where it is now—around $300,000 in most cases, but often less. But, what this means is that for a loan, like you’re contemplating, here’s what happens: 1. You apply to a loan broker (like Scott Financial, Coastal Finance, Essex Credit, etc.). These loan brokers are not the bank. They work as an agent for a number of banks, all of which have their own criteria. One may accept lower down payments. One may place more emphasis on earnings and less on net worth. And on and on. After reviewing your application, the loan broker chooses a bank that is a closest match for your situation. (Keep in mind, this is probably not the bank that your original loan on your power boat was with so your past performance earns you nothing.) 2. Your loan, being a relatively large one by marine loan standards, first goes to an underwriter who looks at the ratios, does a credit check—in other words, acts as a clerk. He reports back to the Loan broker (Scott financial in your case) that everything looks good (which is what they pass on to you—if you ask before the process is done—often mis-leading the client (you) into believing that the loan is already approved at this point—and 98% of the time it is—the committee usually accepts the underwriters recommendation—but not formally—now it goes to the committee). NOTE: At this point, you may be told that you have a tentative approval, and 98% of the time, this turns out to be an approval! 3. The committee assigns the loan to one of its members who reads the underwriters report and then pulls out his check sheet which is revised from time to time. He now wants to verify everything that’s on the application or on the tax returns. He reports back to the underwriter who reports back to Scott on anything further needed to verify what’s on the application. Generally this stuff, like your retirement account, has nothing to do with your credit worthiness. Remember these guys are just bankers. Much like bureaucrats , they’re just protecting their back so that if ever a loan goes bad, they can demonstrate that they had every back up to every item reported on the application—they completed the check sheet. They’re just crossing the T’s and dotting the “I’s”. They’re truly not much more than glorified clerks, another kind of bureaucrat—and I mean this in the nicest way. 4. Please remember: The marine loan is looked at totally differently than real estate loans. This is a very small, conservative wing of large financial institutions—the bank is much more strict and bureaucratic in this division. The banks get tougher when things slow down—things are slower now because the Lauderdale show was cancelled and the banks had set aside a large amount of funds for this and are disappointed in the Marine loans division performance—while you would think this would make them more likely to liberalize their procedures—they’re bureaucrats and can’t break out of their established procedures. You can’t apply logic to their activities. NOTE: If you are given an approval--it is generally good for from 60-90 days, depending on the bank. It's up to you or your agent to get it reapproved within this time period counting back from the time when the boat is going to be delivered if the settlement is going to be more than 60-90 days from the time that you get the approval. There is still, often an advantage to getting an early approval--if the rate goes up, you can generally negotiate better terms than someone coming in later with no approval. Having said all of this, I feel really badly that you are being short changed from doing what you really want to do. In addition, the government is winning yet another time because you’re not getting the tax advantages that are due to you when you set your boat up as a business in order to promote your personal goals. I feel like I have let you down personally because I have not helped you sufficiently to understand the situation—but I hope that I have taken a small step here to right that over sight. Of course you can get tax advantages some other way—some way in which your financial advisor is no doubt more familiar—but my question to you is a very important one: “should you be deprived of following your personal dream-- Because your financial advisor doesn’t understand the way marine loans work? Or, has never bothered to explore the unique way that our program works? Haven’t you really earned the right, at this stage of your life, to you’re your life the way you enjoy, and to take legitimate tax breaks that promote your personal goals? Why not instruct your tax guy to simply provide what the banks want now that you know they’re just one more bureaucratic obstacle that you have to deal with. But, by dealing with them on this relatively minor point, you win the bigger battle—you get the tax deductions due to you for doing what you really want to do. Your tax guy should be helping you, not standing in your way. (And believe me I understand that I’m taking a huge chance here because you have a long history with him and very little with me. I’m just asking you to see if what I say makes sense—check it out. He just doesn’t understand, he’s making a judgment without having all of the facts—and it’s a safe judgment (from his perspective) by saying no, he can’t possibly be wrong. But, this doesn’t take into consideration what’s best for you—only what’s safe for him! I’m sure that in most ways, he sincerely feels he’s looking out for your best financial interests—but he is just not putting your personal goals and desires first. (I recently had a client come to me whose accountant told him that the 179 expense allowance was phased out this year—it was for certain automobiles—but not for everything else including boats—this accountant applied something he vaguely remembered as fact and didn’t bother to go the extra step for his client. I was curious and so went on the web to see how long it would take to get the facts. Answer: 2 minutes and 22 seconds flat.) Sandy Botkin is an expert on helping people to set up small businesses that help to optimize their tax breaks. Here’s one of his statements from a recent interview:
“What amazes me is,
say you look at your credit card statement and there's a $200 charge you
never saw before. Aren't you going to call the credit card company and
find out what's going on? And you might spend an hour on the phone doing
that. Yet taxes are the number-one expense in this country. They exceed
what most people pay for food, clothing, lodging and transportation
combined. [But] 99 [percent of people] give it a 10-minute thought. And
the reason http://www.bayacht.com/aaa/nl-artic/ArticleWhyaBusiness.htm Mike, I urge you to take this one step further. Don’t let the government take advantage of you yet one more time. Don’t let your accountant get away with following the easy path. You deserve more. Let me know if we can help… Sincerely, Eric Smith 410-263-2311 P.S. “The taxpayer (is) someone who works for the government but doesn't have to take a civil service examination.” (Ronald Reagan) “The United States is the only country where it takes more brains to figure your tax than to earn the money to pay it.” (Edward J. Gurney) |
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