Viatical & Life Settlements
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IRAS and Viatical Investments

Many people ask, "Why do you say that life insurance is prohibited in IRAs? The IRA trustee told me that viaticals are legal, approved, and do qualify as IRA investments."

Although the warning is oft-repeated in Viatical Settlements: An Investor's Guide (along with citations from Internal Revenue Code), I passed this question on to the advisory committee for the nonprofit viatical advocacy organization that I am forming. The advisory committee consists of people who are CPAs, attorneys, financial and estate planners, insurance and securities professionals, a medical doctor, an actuary, and viators. Following are explanations two of these specialists.

From  Internal Revenue Code Section 408 (a) Individual retirement account:

"For purposes of this section, the term ''individual retirement account'' means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements . . .
(3) No part of the trust funds will be invested in life insurance contracts."

From J. J. MacNab, Certified Financial Planner (C.F.P.):

I would imagine that the viatical company is justifying the investment because the IRA trustee is not investing in the contracts, he/she/it is investing in a pool of contracts. Naturally, I don't think this holds water for two reasons:

1)  First of all, you can't use the excuse that the pool is a security rather than just a bunch of contracts if your pool isn't recognized as a security by the SEC, and

2)  The IRS has ruled in PLR 8439026 that an IRA can't invest in an annuity if it includes a substantial element of life insurance. If you can't buy an annuity because it has two much insurance, how can you buy a pool of contracts (incorporated or otherwise) which contains nothing but insurance.

And the penalty for investing in life insurance? The IRA loses it's qualified status and the entire account value becomes taxable in the year of disqualification.

Tell investors to
1)  ask the viatical company for legal precedence and

2)  suggest that investors obtain a private letter ruling if no precedence exists.

And finally, have the investor carefully read the small print on the retirement account Viatical Investment Form, especially the part where investors agree to the following:

"I have sought independent legal tax counsel regarding such matters and  attest that any ownership of property and any entitlement created by the transaction authorized hereon does not constitute ownership or investment in an insurance policy or contract as described in Section 408(a) of the Internal Revenue Code which would disqualify my IRA and create adverse federal tax consequences for me."

                                                            and

"I understand that I may direct (IRA trustee name) to invest my self-directed IRA assets into any lawful investment and that (IRA trustee name) shall have no responsibility in the event that I fail to comply with any legal or plan requirements governing the investment of self-directed IRA assets."

                                                          and

"I understand that according to Section 408 (a) of the code that no part of my IRA funds may be invested in life insurance contracts. I understand that there are many other types of transactions that could constitute prohibited transactions, and I warrant that I have either sought independent legal or tax advice regarding such matters or I have waived that right. I understand that (IRA trustee name) shall not be held liable for losses resulting from improper investment of IRA account assets or diminution of IRA account assets resulting from changes in the market value of such assets."

Bottom line, the IRA trustees may have told your investor that it's legal, but they bear absolutely no liability for that recommendation if they're wrong.

Cheers,

JJ MacNab
San Francisco, CA
http://www.deathandtaxes.comBio

Contributed by Paul Maffia, Certified Financial Planner (C.F.P.),   Certified Internal Auditor (C.I.A.) Certified Fraud Examiner (C.F.E.):

The law is clear, one cannot invest in an insurance policy in an IRA. So the Viatical sales clerks have a problem.

If the investor is buying the policy as sole investor, that is a prohibited investment for an IRA.

Now IF they are merely buying a piece of a policy along with other investors it might be possible to have that in an IRA if  the pieces have been registered as securities under both SEC regulations and applicable state laws. In other words, someone could create the equivalent of or something similar to a mutual fund investing in viaticals and selling shares in the fund.

But if that were true, then these salesmen selling such investment policies are in violation of the law because they do not comply with securities law when they sell them.

Either way, anyone who claims that one can buy a viatical contract inside of an IRA is a crook, pure and simple.

Don't dismiss this as theory or interpretation.