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CPA called me.. has a client that wants to invest in the following type of investment:

Plan invests $200K into a LLC and becomes a limited partner. LLC purchases senior life settlements. Plan will receive a K-1... only participant in the plan is the sponsor... no other participants.

There is no reason this investment will not fly.. correct? Am I missing anything. It is simply a limited partnership investment. NO risk to other participant $$ since there are no other participants.

Thanks for everyone's thoughts!

Its not easy being green

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Guest b2kates

will the client also have an interest in the LLC?

is the LLC debt financed, which may then result in unrelated business income tax

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Debt is not the only way an LLC can generate unrelated business income. If the the LLC is a pass through entity, all the operating income (e.g income from making widgets or performing services) is unrelated business income. Only specifically identified income is exempt. I have no idea about the character of the income from the business this LLC will conduct.

One line of inquiry about prohibited transactions is whether or not there is some reason for the transaction or indirect benefit to the account owner other than the economic benefit to the account of the investment. b2kates has provided a specific example of a question in this line.

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Guest gdburns

Which is your client, the Plan or the Plan Sponsor?

If the Plan is the Limited Partner, will there be a GP ? What is the relationship? What about the Managing Member and that relationship? Since the Plan cannot operate the LLC who will?

Does the Plan's investment policy allow investment in entities such as the LLC?

Does the Plan's investment policy or other document allow speculative investments?

Investing in life settlements could be regarded as speculative.

Additionally $200K does not seem like much or adequate funding for this venture, so I wonder if the LLC will be getting funding otherwise, such as debt financing.

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No debt financing... situation is this...

An LLC willbe established and it will have 2 general partners

*Pensions and other investors will become limited partners

*the LLC will use the $ invested to purchase senior life settlements

*when the settlements mature profits and return of income will be paid to the limited partners

* The pension investors will be sole participant plans or participants with segregated accounts

My client will be the plan. The plan will not be apart of managing the LLC, simply a monitary investment.

I am certainly no expert ... hence I am asking what people know and think

Its not easy being green

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I assume that you are talking about viatical settlements. If that is true, I think that gdburns is understating the risk when he described them as speculative. Here is a snippet from an article that I saved on my computer:

The North American Securities Administrators Association added four scams to its annual list of the 10 most egregious frauds perpetrated on investors when it released the compendium Aug. 26.

New to the list are analyst research conflicts of interest, unscrupulous brokers, charitable annuities gift scams, and oil and natural gas schemes.

The four join these holdovers:

unlicensed individuals selling securities;

promissory notes;

prime bank schemes;

viatical settlements;

affinity frauds; and

equipment leasing.

Kirk Maldonado

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Viatical Settlements... sounds like what this investment is. Not an illegal investment... but very speculative. I am not a financial advisor. I have purposly kept away from the investments. I will pass on this information to the ones who have asked me if these investments are suitable.

Thank you for the lead to the viatical information. Exactly why I come to Benefitslink... to bounce quesitons off of everyone. Some very knowledgable people here!

Its not easy being green

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PATA:

If you do a search on Google for viatical settlements, you'll find that they have been in the news a number of times in the past year or so, and all of the articles that I've seen were negative. But I will admit that I've not done any research on this point; I'm just commenting about what I've seen in the press in connection with my general background reading.

So you (or your client) need to do your own research because my knowledge is limited to what I've gained from skimming a few articles on the topic. Thus, my expertise on this topic is extremely attenuated.

Kirk Maldonado

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Guest gdburns

So there are in reality 2 investments to consider.

1. Equity in the LLC.

2. Purchases of life settlements by the LLC.

Your client (a pension plan) is going to make an equity investment in an entity over which it will not be able to do any due diligence and over whose activities it will have no control (as a Director or otherwise). Who will have the needed expertise to oversee acquisitions and service providers? That there is no track record and no expertise raises questions about prudent management of plan assets.

The LLC is going to be purchasing life settlements using money raised from misc sources. Aside from the speculative nature of these life settlements, there is also the issue of bieng able to raise adequate funding on an ongoing basis to reach and maintain minimum solvency. What and How much that will be, I do not know, and I wonder if any forecasts have been made using actuarial input.

Has anyone other than a mega company like CNA, done this successfully?

All said, this seems too speculative to be prudent.

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There are two main risks to consider before investing in viatical settlements:

Investment risk- investing in viatical settlements requires estimating how long the insured who has a particular disease will live. If the insured lives longer than expected, the investment return will be reduced because of the time value of money. If the insured lives 4 years instead of two yrs the investment return is reduced by 50%. The investors will be required to pay the LI premiums until the insured's death. The longer the insured lives the more cash will be required which reduces the return.

credit risk- The LLC has to provide operating funds for expenses and must have sufficient assets to pay claims to investors. Several viatical settlement entities have filed for bankruptcy because they did not have enough cash to cover their operations or because the insurance company rejected the death claim because of fraud committed by the insured.

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Guest gdburns

A few years ago, when viaticals started getting hot, CNA then had a subsidiary that was probably the largest purchaser. I would have to look up my old records for the exact name. Or if I pass a large library, I can look up an old AM Best for the full page ads that they used to run in the late 1990s.

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Guest gdburns

Kirk

Easy Google search:

http://www.viaticus.com/

Effective July 16, 2001 Viaticus, Inc. is no longer accepting applications for new business. Viaticus is a wholly owned subsidiary of CNA.

Viaticus, Inc.

CNA Plaza, 42 South

Chicago, IL 60685

Toll Free: 800-390-1390

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Another issue that hasn't been mentioned [presumably because it isn't an issue], but I'll point it out anyway. If the general partners of the LLC have connections with the fiduciary of the plan that directs the investment, you could have a prohibited transaction. I run into situations in which a sole proprietor with a pension plan wishes to invest plan assets in related entities, such as an LLC in which the sole proprietor is the general partner or a corporation in which the sole proprietor is a director or owner. Generally not allowed because of the conflict of interest.

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Guest gdburns

Kirk

The more that I think about it is the more I wonder why you asked the question and the tone of the question.

Were you thinking that I was making some sort of blind unsupportable statement or being libelous or something?

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gdburns:

You were reading something into my question that wasn't there.

I have no idea why you were offended by the tone of my question; I was just posing a factual question. There was no value-laden judgments expressed or implied in it.

I was just asking for sources of information about viatical settlements. I've not seen anything about them written up, other than a few short articles involving bad characters.

I am always interested in accumulating more information and that was all that prompted my question. I only directed it to you because you are the only person that I've encountered that has any degree of familiarity with viatical settlements. In retrospect, I should have asked the question to everybody.

Kirk Maldonado

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Guest gdburns

You picked on my reference to CNA rather than ask for companies in general.

I wonder what you would have picked on if I had referred to others instead, such as Viaticare (financed by Cargill Financial), Living Benefits (financed by Berkshire Hathaway) or certain Fortune 500 companies.

And those were for now discredited viatical settlements. There is even more big money involvement in plain "Senior Settlements".

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Senior Settlements is what this post is all about... I should have mentioned it from the start. That is the term I was given. The LLC will invest in these senior settlements. The plan participant would invest in the LLC.

What if the LLC grouped say 2 or more of these settlements, called them "SS Group 2" and the client invested into the SS Group 2 as a limited partner. The investment wouldnt be in the LLC but rather the investment... SS Group 2. Would that make it a cleaner investment?

Now I am not saying it is a good investment or a bad one.. but, if someone wanted to take the chance and invest in this type of investment, who is to stop them? This person has asked me if the investment is allowed in a pension. I have seen precious metal investments that fell flat... even stocks. Investing is a gamble. If there is a black and white answer pointing to no, then I will convey that to this financial person. My experience, exposure, knowledge is simply not there regarding this subject.

Thanks for everyones help.

Its not easy being green

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gdb: Maybe Kirk was looking to you as an honest broker of information regarding viatical settlements since you were the only poster with knowledge in this obscure topic.

PATA: Investing in the LLC or in a security issued by the LLC is the same type of investment in a private security that may be subject to state securities laws. Investing in private securities is permiited for IRAs. However, most IRA custodians will not accept investments in non publicly traded investments.

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Guest gdburns

mjb

That thought had never entered my mind, mainly because of having spent so many years on BenefitsLink.

PATA,

Keep in mind the posts by Locust and QDRO.

Senior Settlements are no less risky than Viaticals. The only thing that has been removed is the significant coverage fraud factor. However, this has been replaced by valuation fraud. Both still have the life expectancy risks.

It is still new early to tell how viable this secondary market will be. It might very well end up just like Viaticals.

It still should not meet the prudency requirements, even if the other issues of possible prohibited transactions are satisfied. Prudency includes the ability to obtain expert advice on the actuarial and underwriting issues. These most likely will not be readily available and without which due diligence would be lacking.

So structure (ownership) of corporate entities, relationships between parties and prudency are the issues.

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