Viatical Settlement In IRA
A custodian for a self-directed IRA lists a viatical settlement as an asset held in an IRA. My understanding is that life insurance in any form within an IRA is a prohibited investment in the eyes of the IRS. Regardless, this contract was entered into using a medical report stating that the insured was expected to live another 3 years; consequently, over 15 years has passed. The initial purchase was made through the IRA, but subsequent premiums were paid directly to the insurance company.
If the contract owner stops paying premiums and the policy lapses can the initial investment be written down to $0 and simply close out the IRA? If the write down is allowed by the custodian (either with or without a 3rd party opinion) how might the IRS get involved?
Thanks!
Permalink Submitted by Eric Fuhrman on Mon, 2018-04-30 18:04
Is the post not relevant given the absence of contribution?
Permalink Submitted by Alan - IRA critic on Tue, 2018-05-01 00:28
It is very possible that a viatical settlement in an IRA is not a prohibited transaction as long as the policy does not cover any disqualified persons with respect to the IRA. However, the payment of premiums on a contract owned by the IRA that were not paid directly from the IRA are a prohibited transaction. This is analagous to paying the property taxes or repair bills on an investment property owned by the IRA from personal funds. I assume that the self directed IRA custodian holding the viatical was not aware of these premium payments or they would have declared the IRA distributed and issued a 1099R. The amount of that 1099R valuation as of 1/1 of the year the first premium was paid by personal funds OR the value of a lapsed contract from non payment of premium is the responsibility of the self directed IRA custodian, and I am not aware of what valuation methods they would use.I have not heard of any successful viatical investments, but there must have been a few. Conversely, I have heard of several major disasters and viaticals of course have earned such an infamous investment history it is surprising that they still are able to locate buyers.
Permalink Submitted by Eric Fuhrman on Tue, 2018-05-01 17:09
Thank you very much for your insights. I actually found a post you wrote back in 2014 dealing with this type of issue which was also very helpful. Thanks agian.