Consolidated Liquid Asset Management Account (CLAMA)

Putting It All Under One Roof

This Preventive Law Study was written by:  John Goodson, Colleen Manley and Christine Goodson Forakis.

Summary

A clear example of the Consolidated Liquid Asset Management Account (CLAMA) is the story about my father who was President and Chairman of the Board of Arizona Refining Company, a subsidiary of Union Oil Company. This company was very successful in Arizona and had average daily balances at the Valley National Bank of over $1 million. Dad was concerned that the banker never came to visit his company and never showed appreciation for the company’s substantial deposits. He came up with an idea which he suggested to the president of Union Oil Company. Union Oil acted on his recommendation and moved all of the accounts of their hundreds of offices and subsidiaries to a bank in Maine. The bank would sweep the account every day, invest the funds, and return funds the next day as they were needed to cover checks. Over twenty years ago, Union Oil Company was able to make over $7 million on the “float” from this Consolidated Liquid Asset Management Account and reduce the number of times they had to borrow funds from banks and other financial institutions.

Even though all of the offices of the Union Oil Company were running everything through one bank account, there was no commingling, because each office had its own number on its checks and deposits. At the end of every month, they could print monthly financial statements for every subsidiary, and at the same time, document how much “cash” or liquid assets were available for the entire company.

What we recommend for large families with many bank accounts and significant investments is that they open up a Consolidated Liquid Asset Management Account with a brokerage firm and run all of the family and business accounts through that so-called “family bank.” The stock brokerage CLAMA has these benefits:

• All checks may be written through the account and earmarked with numbers.
• All investments may be made through the brokerage firm as with any “street name” account.
• At the end of the month, the brokerage firm will print out a detailed summary of all checks and disbursements with the payee and other information needed by the accountant.
• The brokerage firm will download to the client or his CPA, at any time, the information on the computer, broken down by profit centers, without having to re-enter the checks or deposits.
• The monthly reports will give a total of all cash and liquid assets available to the family at any time.
• Because there are multiple accounts in the same checking account, there is more “float” to invest and less chance of any one of the accounts exceeding the cash available for the whole account.
• If there is insufficient cash in the account, there is an automatic margin loan at a very low interest rate for whatever is needed. This permits maintaining high-yield investments without having to sell them when cash flow is down.
• With computerized calculations, it is easy to determine the average daily balances of each sub-account and to allocate the earnings from the total account to each of the sub-accounts.
• The account will reduce the accounting and bookkeeping fees, because all the information is available in one place. At the end of the year, the CPA, after downloading the information from the CLAMA, may then make adjusting entries as necessary, and very quickly have a financial statement on a cash basis for the entity making accrual adjustments to prepare an accrual financial statement.
• By having all the cash and liquid assets in one place, it is possible to enjoy greater diversity and balance with investments and to hire investment advisors to maximize the returns on a larger account. The investment advisor might otherwise not be eager to deal with multiple small accounts of the separate entities of the family.
• The single CLAMA eliminates having to deal with the mailing and reconciliation of multiple bank accounts.
• The CLAMA allows automatic wire crediting of dividends and interest without the necessity of receiving these by mail and then depositing same.
• The CLAMA also allows the client to arrange for automatic payment of routine checks, such as mortgage or rent payments, electricity payments, gas payments, and by doing so, reduce dull administrative time.
• The customs of the brokerage business allow you to move money in the CLAMA in a brokerage firm instantaneously by making contact with your personal broker.
• In dealing with the broker at the brokerage company, you are dealing with only one person, whereas, with multiple bank accounts, you may be dealing with the manager of the bank and then someone else in the trust department, making it more difficult to coordinate.
• By having all the liquid assets in one place, it is possible to have reduced brokerage fees, opportunity to make larger wholesale purchases of securities, and to enjoy other benefits and amenities from having a larger size account.

In talking with bankers about this arrangement, they are quickly adapting their systems to provide something similar – creating bank accounts where there are automatic sweeps into the bank’s trust investment department and automatic sweeps back to the accounts as needed. At the present time, the bank arrangements are a little more awkward than the brokerage accounts. The bank trust accounts charge a percentage for managing the money, but they do not charge brokerage fees for the transactions – just a small transaction fee much lower than what brokerages charge. On the other hand, the brokerage companies will charge for the transactions as they are made and basis points on money and mutual funds. Comparing both sets of charges, they probably result in nearly equal expense amounts.

If you are doing a lot of borrowing from the bank, you may want to use the bank so as to have preferred customer status. You also may want to have one bank account in order to utilize ATM and credit cards. Formerly, if you had employees, it was difficult to pay them with checks of brokerage firms, but that may be eliminated with automatic deposits of payroll checks

Some of the negative aspects that we have seen with the CLAMA are:

1. You must be very careful with debit cards because you have all the family money in one place. A debit card used by a fraudulent person who may obtain your debit card number might deplete the entire account. However, brokerage firms have protective measures in place to prevent any large amount being removed without careful scrutiny. Their computer automatically directs large withdrawals to a careful inspector.
2. Some accountants are fearful of commingling; however, they withdraw this objection after we have spoken with them at length. We point out to them how accountants keep track of profit centers and how the banking industry works, where all the funds from depositors are kept in one big account at the bank. It is from this consolidated fund that the monies come when depositors write their checks. In other words, the banks are doing what we recommend for the family – have the family go into the banking business with a mini-bank, using their Family Partnership or Family Limited Liability Company.

The Family Bank

We recommend that the “family bank” (Consolidated Liquid Asset Management Account) be placed in the Family Limited Partnership or the Family LLC or, conceivably, a Family Corporation. The family LLC, Limited Partnership or Corporation could charge the other entities in the family an override for the service and by doing so move income advantageously to the entity holding the family bank.

The family Revocable Trust, Irrevocable Trust, Limited Liability Companies, family Corporation, and checking accounts of the children and grandchildren could all be operated out of the family bank. If any family member or family entity overdrafted his account, there would be an automatic loan from one of the other accounts or from the family entity holding the family bank.

The Cash Power Interchange

In order to understand the cash power interchange, we must understand how the electrical companies intercircuit from one city to the next, and with the various companies. The power grid in the United States is engineered so that, at any time, one city or power company with extra power may transfer power to another city needing power. For instance, in the summertime more power is needed in the southern states, and in the wintertime more power is needed in the northern states. When power is shifted from one place to the other, it is done very expeditiously with a switch, and the power used is automatically measured. The using city is charged for the power used, based on an accurate metering system.

With a CLAMA in the family bank, you have all the cash in one place, ready to move hither and thither, instantaneously.

We accomplish this shift of cash from one family entity to the other by using what we call “Reversible Credit Line Promissory Notes.” Sometimes we call them “back and forth promissory notes.” These promissory notes permit loans to be made either way – from one entity to the other or back the other way. To the extent that they are reversed, the payee becomes the maker, and the maker becomes the payee automatically out of the same promissory note. The same interest is charged both ways, usually 10% (the legal rate), from one entity to the other as they use the credit line.

Our reversible credit line promissory notes have, attached to them, schedules of payments and advances, whereby every transaction between the units of a family may be documented, at the appropriate time, by the CPA with adjusted journal entries on the schedule attached to the note and on the books. For every transaction, whether it is an advance or a payment, the interest accrued is recalculated so that the balance owing on principal and interest is always determinable.

One of the manifestations of this system is the prevention of cash claustrophobia. We found many matriarchs and patriarchs of families hesitant to gift to their children or set up other entities for fear of losing control, particularly, losing control of the cash. They want to be able to draw cash as they need it, at any time.

In these instances, we put the liquid asset management account into the partnership or limited liability company, usually with the matriarch or patriarch as the General Partner, Managing Member, or as CEO of the corporation. This allows the matriarch or the patriarch of the Revocable Trust to withdraw or transfer into the entities whatever cash they need. Usually we will secure that credit line promissory note with a deed of trust on the home of the matriarch or patriarch, on the second home, on the household goods, on their corporation stock, and on their General Partnership interest or membership interest in the family LLC entities.

When a creditor looks to levy on the matriarch or the patriarch, they will find that every one of their items of property that would otherwise be subject to levy has on it a first lien in favor of their family partnership, family limited liability company, or family corporation. There is no apparent equity upon which to levy. The family partnership, family limited liability company, or family corporation is the first lien holder. It could at any time foreclose on the assets of the matriarch and patriarch to bring those assets into a protective limited liability company or protected limited partnership where creditors cannot levy except for the so-called “charging lien.” This tactic is called a “creditors’ screen.”

Asset Protection

By putting all of the CLAMA (family bank) into a Limited Liability Company or a Limited Partnership, the liquid assets are protected from creditors, save and except for the charging lien. The charging lien, however, does not allow any interference with the cash flow of the Partnership or Limited Liability Company except insofar as there is a decision to distribute cash out of the Partnership. No General Partner or Managing Member in his right mind would distribute cash out of the Limited Liability Company of the Limited Partnership when they know that a creditor with a charging lien would receive those funds! Consequently, the creditor is faced with an “attribution of income,” but no cash distribution. The creditor with the charging lien is beat over the head with phantom income until he pulls away from the Limited Partnership or the Limited Liability Company.

It is our opinion that every large estate like yours must set up its checking accounts into the CLAMA or family bank. Then it must arrange to have multiple reversible credit line notes which allow the cash power interchange of funds from one entity to another, instantaneously, as needed. All of the promissory notes will be secured by family assets so that the Family Partnership or Limited Liability Company owning the Family Bank will be the first lien holder on all assets of the family and the business if they were attacked by a levying sheriff

Our challenge is to train clients like you, their CPAs, chief financial officers, and bookkeepers to understand how this arrangement works and to integrate the mechanics onto computers so as to minimize the maintenance costs and the chance of error.

We hope that by having this explanation in written form, it may be more understandable and easier to think through so as to motivate you to implement all or some of this arrangement as soon as possible.

The only accounts that we would exclude from your Family Bank would be the charitable entities which are more carefully scrutinized by the IRS and are more subject to claims of commingling or other complications under the laws regulating charities.

For additional information, please call (602) 252-5110.

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