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Legal Maneuvers to Consider in a Down Economy

Every rain cloud has a silver lining and even amid the gloom of “The Great Recession” opportunities abound. Put simply depressed valuations present opportunities for those with cash or access to it. Moreover, from an estate tax perspective, historically low interest rates and a looming increase in tax rates makes 2010 the best year in a long time to implement tax efficient wealth transfers using trusts and other vehicles to keep strings attached. Indeed, many distressed business and property owners are finally facing the inevitable and opportunistic investors who have been waiting for the right moment are beginning to rush into the market. Whether it’s a matter of cutting your losses or jumping on a bargain before someone else does, here are a few legal maneuvers to consider before the economic situation improves.

Wealth Transfers at Discounted Valuations. The estate tax is technically dead in 2010 (so far), but it comes back with a vengeance in 2011 hitting estates over $1,000,000 with a maximum 55% rate. Many planning techniques are designed to remove businesses and properties from the taxable estate while reserving some form of control and/or right to enjoy the asset. Depressed valuations justify transferring a larger portion of these assets to trusts and other tax efficient structures now, so that more of the assets true value passes tax free when valuations come back to normal and begin to rise again. Historically low federal benchmark interest rates provide for further discounting. Click here for a related article.

Buy Out, Squeeze Out or Freeze Out of Disgruntled Partners. Too many closely held and family businesses, especially those with poorly structured shareholder/operating/partnership agreements, have had to endure the harassment of a disgruntled partner at some point or another. Certain strategies can force or at least encourage a negotiated buyout, especially if the seller needs the cash. Should litigation become necessary and an appraisal is ordered, current values will likely favor the buyers. Even if a minority owner is not being a pest, now is also a good time to increase your percentage in the business since many partners will find a cash buy out offer very tempting these days. Click here for a related article.

Settle Judgments for Pennies on the Dollar. Some judgment holders are desperate for cash and everyone is taking a closer look at collectability before investing in collections efforts. An olive branch with a check attached may go a long way toward achieving closure if executed carefully.

U.S. Estate Tax Avoidance for Foreigners. Estate taxes must be paid before a foreigner’s estate can sell or transfer U.S. real estate to the foreigner’s heirs. Such transfers can avoid estate tax if ownership is held using the proper foreign company structure. Those foreigners who unfortunately purchased their properties in their individual name can still transfer the property to this foreign company structure, but must pay capital gains tax on any appreciation. Today’s valuations can be used to justify the lowest possible appreciation and thus save capital gains taxes on the transfer and ultimately save much more in estate taxes when the foreigner dies. Click here for a related article.

Work Out Loans / Leases. Times are very tough for lenders and commercial landlords many of whom have themselves defaulted on their obligations to their lenders and investors. In some cases these “bailouts” provide them more flexibility to work out a loan or lease with their borrowers and tenants on more realistic terms. However, a “strategic default” is often required to bring everyone to the bargaining table. From the perspective of a landlord suffering high vacancies, it’s normally better to accommodate a paying tenant with carefully documented and enforceable lease amendments. Similarly, lenders prefer modifying a loan over a costly and protracted foreclosure to recover an asset that is rapidly depreciating, expensive to carry and difficult to sell.

Buy Distressed Property & Businesses. Cash is king. No one knows when values will begin rising again and therefore how long assets must be held before being resold for a profit. The quick flip has become a very rare thing. However, those who have the capital and desire to buy into a business or simply diversify their portfolio are finding very low barriers to entry, but due diligence remains as important as ever if not more. For those home buyers with a down payment waiting for the “bottom” to buy their dream home, now might be the time to make your move.

Buying Out Competitors for Strategic Advantage. In many industries, stronger and less overextended players are taking advantage of their weaker or failing rivals to increase their market share. Even though the other business’ assets may not alone justify the purchase price, a purchase can be structured to cover other considerations such as the access to their employees, customers, location, brands and other intellectual property, or just the right to exclude them and their key personnel from competing when things pick up again. Click here for a related article.

Settling Tax Debts. Although the IRS requires taxpayers to make quarterly estimated tax deposits based on what they anticipate their tax bill will be, some taxpayers are unaware of that obligation or simply unable to comply. Instead, many businesses having a banner year receive a rude awakening when they finally get around to completing their tax return the next year. This naturally leads to a spike in unpaid tax bills following a boom/bust cycle, and the IRS has been in a hiring frenzy to staff increased audit and collections efforts. Strict IRS rules designed to ensure taxpayers are treated equally make it difficult to actually negotiate a settlement in the traditional sense, but one criteria they use to support the reduction of a tax bill is the taxpayer’s inability to pay the tax voluntarily or otherwise. A current snapshot of an individual’s or business’s present economic situation may therefore be quite convincing when presented properly to justify why the IRS should be more lenient.

Hiring Key Employees. It’s obviously a buyer’s market when it comes to talent, but the pendulum can move quickly in the other direction. Employers should take advantage of their current leverage to secure more lasting benefits such as enforceable non-compete obligations and others that provide more protection and/or incentivize the employee to stay when the grass starts to look greener on the other side again. Click here for a related article.

Lock in Low Prices and Favorable Terms with Suppliers/Vendors. Some vendors/suppliers are bending over backwards to accommodate their paying customers. If you are already operating under terms and conditions that are better than what your current contract actually provides, consider an enforceable amendment that locks in these terms for the foreseeable future. If your agreements have never been reduced to writing and you are somebody’s “good customer”, now is a great time to push for a written agreement covering favorable arrangements such as, for example, exclusive manufacturing/distribution rights.

Pull the Trigger on Commercial Lawsuits. There is a lot of truth to the saying that a bad settlement is usually better than a good lawsuit, which is why we always try to work things out when permitted to do so. However, the advantage a well funded litigant has against a cash-strapped opponent may be too good to pass up. Ethical yet aggressive litigation tactics can sometimes result in a legal knock out or quick settlement when the defendant is unable to fund a proper legal defense.