Viatical Settlement held in Self-Directed IRA
Does the law allow for a viatical settlement to be held in a self-directed IRA. This appears to be the case with a client of ours; however, I was under the impression that Section 408(a)(3) and subsequent private letter rulings forbid IRA funds from investing in any type of life insurance contract. Assuming the client can hold the contract in an IRA, can they make premium payments from the IRA? They are currently paying the policy premiums directly to the insurance company. Thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2014-12-11 23:02
Life insurance is a prohibited investment in an IRA, and efforts to structure viaticals in pooled funds has never been approved by the IRS for IRA accounts. Very few self directed IRA custodians will allow viaticals in their accounts, and those that have have passed all responsibility on to the IRA owner. Further, starting next year IRA custodians must disclose the nature of IRA investments on Form 5498. I would avoid viaticals overall given their infamous investment history, but if a client insists on adding a prohibited transaction risk to the mix, at least the IRA should not hold any other investments. If client can find a custodian who will hold a viatical in the IRA, then the custodian should know the current landscape and explain the risks.