Selling Your Home: 5 Deal Killers That Are Lurking In Older Homes

You’ve listed your home for sale, you have a Buyer and now their Inspector is performing an inspection. You think you have a pretty good home, but do you really know for sure? What is he finding? Why is it taking so long? Here are 5 deal killers to watch out for when selling your home.

Deal Killer #1: FPE Breaker Boxes. These breakers and breaker boxes are known to have performance issues. They are no longer made, however they were very popular between the 1950′s and 1980′s. Many homes still have them.

Some of the problems were that the breakers would trip but still allow electricity to pass through the breaker. Another issue was that the breaker would not trip at all causing an over current condition which could lead to fires.

Just because the home is 30 years old and you’ve had no problems, don’t expect any Professional Real Estate Inspector to look past a FPE breaker box. The time theory does not hold water with electrical components. In my market, the cost to replace the box with a new 150 amp breaker box is anywhere from $1000 to $2500 depending upon the company and the extent of the work.

Deal Killer #2: Aluminum Wiring: The problem with aluminum wiring is that it expands and contracts more than copper wiring. So the components meant to be used with Copper wiring did not work well with Aluminum. The Aluminum would work its way loose over time and cause arcing, which lead to excessive heat, which leads to fires.

Even after the alloy was changed in Aluminum wiring, problems still persisted with the wiring.

Special outlets have to be used. These are marked CO/ALR. This means that the outlet is designed to work with either Copper or Aluminum.

“Pigtailing” the Aluminum wiring with Copper so that the Copper wiring can be attached to the outlets (remember, less expansion and contraction” is allowed by the National Electrical Code. No one is sure why. The Consumer Product Safety Commission does not see ‘pigtailing’ as a safe alternative.

Rewiring the home can be costly. The total price depends on to many variables to give you a price range here.

Deal Killer #3: Asbestos: Asbestos was used in many building materials and is still used in a very few even today.

Areas a Seller or Buyer will have to worry about it are in a few places. Pipe insulation on older heating pipes, vermiculite insulation, some paints and to a lesser extent, on roof and siding shakes.

Asbestos causes the most problem when it is in a loose state (friable) where particles can float around. We’re all aware of the health problems concerning Asbestos, so I’m not going to go into them here.

If you have Asbestos siding or roofing shakes/shingles, then there is a lesser worry because these are not friable unless broken.

Asbestos removal can be very, very costly and not likely a cost a new buyer will want to tackle shortly after moving into their new home.

Deal Killer #4: Composition Wood Siding: Some of this type of siding is known by it’s generic terms like Masonite and LP siding (there are other brands). This type of siding was (and some are still) involved in class action lawsuits.

This type of siding is basically constructed from pressed and glued wood particles, some as small as sawdust.

Some of the problems arise from poor installation techniques that allowed this siding to get wet. It would then start rotting and letting more water into the structure.

There have been many homeowners who joined the class action lawsuits, received money to replace the siding, but instead pocketed it and put their homes up for sale.

Composition wood siding companies only pay once for siding on a home. If a claim has been filed and paid out on a home, there’ll be no more money coming down the pipe for siding replacement on that particular home!

Deal Killer #5: Polybutylene (PB) plumbing lines: These are water supply lines that are grayish in color.

The problem was that this type of piping is known to burst, especially at the seams. Many of the class action lawsuits have been closed and it may be difficult, if not impossible, to receive any money for replacement if the home you are buying has PB plumbing.

Replacement cost can be in the thousands of dollars. Any good home inspector will call this out on their inspection report and likely recommend a licensed plumber to investigate. I don’t know of one reputable plumber who will recommend keeping the pipes in your home.

Granted, many of these Deal Killers only exist on older homes. However, especially in rural areas, we’ve seen these components show up on newer homes. How, I don’t know unless someone had a stockpile of these materials.

A pre-listing inspection by a reputable and qualified home inspector will bring these Deal Killers and other potential deal killing threats to you attention before listing your home. Playing ignorant about what is in your home (like some real estate agents recommend) will not save you from having to fork over some greenbacks before you home will sell.

Save Taxes – Basics of an Irrevocable Life Insurance Dynasty Trust

For US persons, an irrevocable life insurance trust (ILIT) is arguably the most efficient structure for integrating tax-free investment growth, wealth transfer and asset protection. An ILIT comprises two main parts: (1) an irrevocable trust; and (2) a life insurance policy owned by the trust. An international (or offshore) ILIT is a trust governed by the law of a foreign jurisdiction that owns foreign-based life insurance. An offshore ILIT is better than a domestic ILIT because it is more flexible and less expensive. Regarding US tax laws, a properly designed international ILIT is treated virtually the same as a domestic ILIT.An ILIT becomes a dynasty trust (or GST trust) when the trust’s settlor (or grantor, the person who establishes and funds the trust) applies his lifetime exemption for the generation skipping transfer tax (GSTT) to trust contributions. Once a dynasty trust is properly funded by applying the settlor’s lifetime exemptions for gift, estate and GST taxes, all distributions to beneficiaries will be free of gift and estate taxes for the duration of the trust, even perpetually. The individual unified gift and estate tax exemption and the GSTT exemption are both $5 million ($10 million for a married couple) during 2011 and 2012, which are the highest amounts in decades.Under the US tax code, no income or capital gains taxes are due on life insurance investment growth, and no income tax is due when policy proceeds are paid to an insurance beneficiary upon death of the insured. When a dynasty trust purchases and owns the life insurance policy and is named as the insurance beneficiary, no estate tax or generation skipping transfer taxes are due. In other words, assets can grow and be enjoyed by trust beneficiaries completely tax-free forever. Depending on how a trust is designed, a portion of trust assets can be invested in a new life insurance policy each generation to continue the cycle.Private placement life insurance (PPLI) is privately negotiated between an insurance carrier and the insurance purchaser (e.g., a dynasty ILIT). Private placement life insurance is also known as variable universal life insurance. The policy funds are invested in a separately managed account, separate from the general funds of the insurance company, and may include stocks, hedge funds, and other high-growth and/or tax-inefficient investment vehicles. Offshore (foreign) private placement life insurance has several advantages over domestic life insurance. In-kind premium payments (e.g., stock shares) are allowed, whereas domestic policies require cash. There are few restrictions on policy investments, while state regulations restrict a domestic policy’s investments. The minimum premium commitment of foreign policies typically is US$1 million. Domestic carriers demand a minimum commitment of $5 million to $20 million. Also, offshore carriers allow policy investments to be managed by an independent investment advisor suggested by the policy owner. Finally, offshore policy costs are lower than domestic costs. An election under IRC § 953(d) by a foreign insurance carrier avoids imposition of US withholding tax on insurance policy income and gains.Whether domestic or offshore, PPLI must satisfy the definition of life insurance according to IRC § 7702 to qualify for the tax benefits. Also, key investment control (IRC § 817(g)) and diversification (IRC § 851(b)) rules must be observed. When policy premiums are paid in over four or five years as provided in IRC § 7702A(b), the policy is a non-MEC policy from which policy loans can be made. If policy loans are not important during the term of the policy, then a single up-front premium payment into a MEC policy is preferable because of tax-free compounding.An offshore ILIT provides much greater protection of trust assets against creditors of both settlor and beneficiaries. Courts in the US have no jurisdiction outside of the US, and enforcement of US court judgments against offshore trust assets is virtually impossible. Although all offshore jurisdictions have laws against fraudulent transfers, they are more limited than in the United States. In any case, an offshore ILIT is necessary to purchase offshore life insurance because foreign life insurance companies are not allowed to market and sell policies directly to US residents. An international trust, however, is a non-resident and is eligible to purchase life insurance from an offshore insurance carrier.An international ILIT may be self-settled, that is, the settlor of the trust may be a beneficiary without exposing trust assets to the settlor’s creditors. In contrast, in the United States, the general rule is that self-settled trusts are not honored for asset protection purposes.In Private Letter Ruling (PLR) 200944002, the IRS ruled that assets in a discretionary asset protection trust were not includable in the grantor’s (settlor’s) gross estate even though the grantor was a beneficiary of the trust. The trustee of a discretionary trust uses his discretion in making distributions to beneficiaries consistent with trust provisions. Previously, it was questionable whether a settlor could be beneficiary of an ILIT without jeopardizing favorable tax treatment upon his death. The new ruling gives some assurance to a US taxpayer who wants to be a beneficiary of a self-settled, irrevocable, discretionary asset-protection trust that is not subject to estate and GST tax. As a result, the trustee can (at the trustee’s discretion) withdraw principal from the PPLI or take a tax-free loan from the policy’s cash value and distribute it tax-free to the settlor, as well as to other beneficiaries. In other words, a settlor need not sacrifice all enjoyment of ILIT benefits in order to achieve preferred tax treatment.An offshore ILIT is designed to qualify under IRS rules as a domestic trust during normal times and as a foreign trust in case of domestic legal threats to its assets. The offshore ILIT is formally governed by the laws of a foreign jurisdiction and has at least one resident foreign trustee there. As a “domestic” trust under IRS rules, the trust also has a domestic trustee who controls the trust during normal times. If a domestic legal threat arises, control of the trust shifts to the foreign trustee, outside the jurisdiction of US courts, and the trust becomes a “foreign” trust for tax purposes. A domestic trust “protector” having negative (or veto) powers may be appointed to provide limited control over trustee decisions. An international ILIT protects trust assets against unforeseen lawsuits, bankruptcy and divorce.The objective of PPLI is to minimize life insurance costs and to maximize investment growth. The life insurance policy acts as a “wrapper” around investments so that they qualify for favorable tax treatment. Nevertheless, PPLI still provides a valuable life insurance benefit in case of an unexpected early death of the insured.Initial costs of setting up an ILIT are high, but are recouped after a few years of tax-free investment growth. Initial legal and accounting fees are typically in a range of $25,000 to $50,000. Premium “loading” charges are in a range of about 3% to 5% of premiums paid into offshore PPLI (compared to 8 – 10% in domestic PPLI). Annually recurring charges depend on policy value and vary widely among PPLI carriers, so careful comparison shopping is advised. For example, annual asset charges should be in a range of about 40 to 150 basis points (0.4% to 1.5%) of the policy’s cash value. The annual cost of insurance is not substantial and declines over time. Annual costs for maintaining an offshore trust are several thousand dollars. Finally, investment manager fees are paid regularly out of policy funds.Cash may be contributed to the ILIT, which then purchases PPLI. If asset protection of vulnerable fixed assets in the US is a concern, then equity stripping can be used to generate cash, which is then contributed to the offshore ILIT. Of course, stocks and bonds and other assets may also be contributed to the ILIT and used for investing in PPLI. Various value-freezing and valuation discounting techniques can be used to leverage the GSTT exemption.An offshore “frozen cash value” policy is a variation of PPLI governed by IRC § 7702(g). The minimum premium commitment is about $250,000. During the life of the insured, the cash surrender value is fixed at the sum of the premiums paid. Withdrawals up to the amount of the paid-in premiums are tax-free, but cash value in excess of the premium amounts is inaccessible until after death of the insured.Another alternative investment for an ILIT is a deferred variable annuity (DVA). There is no cost of insurance, so investment growth is faster. Tax on appreciation is deferred, but DVA distributions are taxed as income.Generally, for public policy reasons and because the insurance industry possesses strong political influence, life insurance has long enjoyed favorable tax treatment. Over the past two decades, numerous IRS rulings have clarified the tax treatment of PPLI and irrevocable discretionary trusts. At the same time, strong, new asset protection laws and reliable service providers in numerous foreign jurisdictions have enabled safe, efficient and flexible management of international trusts and insurance products. As a result, an international irrevocable, discretionary trust owning PPLI can provide tax-free growth of a global, variable investment portfolio managed by a trusted financial adviser in full compliance with US tax laws. At the discretion of the trustee, trust assets (including tax-free insurance policy loans and withdrawals) are available to the settlor during his lifetime. Upon death of the insured, policy proceeds are paid tax-free to the trust. Thus, a well-managed life insurance dynasty trust perpetually secures the financial well being of settlor, spouse, children and their descendants.Warning & Disclaimer: This is not legal advice.Copyright 2011 – Thomas Swenson

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