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Viatical settlements risky, especially for older investors.
Q. I have an interest in two viatical settlement investments purchased several years ago. Every year I get a bill saying I must pay a premium to keep the policies in force, which I cannot afford. My income is less than $1,000 a month and I have a hard time making ends meet. What am I supposed to do? From what I understand, these guys are well, living and working in New York. I am 86 years old and I am not doing well.
A. The situation you describe is one of the reasons viatical settlements are a high-risk investment. Viaticals are insurance policies purchased from people who supposedly have short life expectancies. The shorter the life expectancy, the more the investor has to pay. When the insured person dies, the investor collects the death benefit. But as you have discovered, life is unpredictable. Not only have these men outlived their life expectancies, they may be on their way to outliving you!
If the premium is not paid, the policy will lapse, and you will lose your investment. But since you own only a partial interest, it is possible that your fellow investors will step up and pay your share of the premium in order to protect their own investments. If this occurred, you still would share in the death benefit, but they presumably would seek reimbursement of the costs paid on your behalf, said Scott Page, president of Page & Associates, sponsor of the program in which you invested.
"We understand that it's a very unfortunate situation," he said. "A medical life expectancy is a prediction, an estimate, based on medical knowledge at the time original prognosis is made."
Page said that you and others who invested in viaticals through his company signed documents saying the risks had been disclosed. He said his company is not legally required to continue helping investors beyond the time period specified in the contract. However, I still think it might be worthwhile to call the company and discuss your situation.
Unfortunately, I cannot tell you whether mailing in the premium payment will pay off for you.
Q. If I sell a holding within a traditional IRA and then withdraw the cash, is the withdrawal ordinary income or will some of it be a capital gain or loss?
A. Withdrawals from traditional IRAs are ordinary income, although they are partly tax free if you made any nondeductible contributions to your accounts. A traditional IRA generates a taxable loss only if you have closed all your traditional IRAs and the total withdrawn from all these accounts was less than your nondeductible contributions. Likewise, to claim a loss on a Roth IRA, you must close all your Roth IRAs.
The loss generated from closing out IRAs is treated as a miscellaneous itemized deduction, not a capital loss. That means it is actually deductible only to the extent that all your miscellaneous itemized deductions combined exceed 2 percent of your adjusted gross income. Unless you already itemize on your tax return and have other miscellaneous itemized deductions, you probably are going to be out of luck.
Q. My husband and I each have children and grandchildren from previous marriages. Most of our savings are in our IRAs. Is there a way that we can allow a surviving spouse to use a percentage of our savings until his or her death and then have the remaining savings go to each spouse's choice of heirs? Can a trust be the beneficiary of the IRA? In that case, would the IRAs be treated as withdrawn on the date of death or would the trust be able to use the same minimum distribution table as any other beneficiary?
A. A trust can be the beneficiary of your IRA, but this is not a do-it-yourself project. Talk things over with a lawyer who has expertise in this field. New York lawyer Seymour Goldberg recommends using a trust drawn up solely to hold IRA assets and nothing else. He suggests that the trustee be required to pay out the required distributions, not simply the trust income, to the primary beneficiaries. Required distributions are calculated based on the age of the oldest trust beneficiary.
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-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
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