Discussion:Tax Implications of an Inherited non-qualified annuity
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Discussion Forum Index --> Tax Questions --> Tax Implications of an Inherited non-qualified annuity
| 18 February 2006 | |
| My fahter-in-law passed away in 2004. He had $150,000 invested at UBS. $30,000 was a standard IRA, the other $120,000 was in two "non-qualified" American Skandia annutities. (The "non-qualified" term is what UBS told us it was.....I have verified that these two annutites were not part of his IRA, and were NOT purchased with tax-deferred money). The beneficiary of all of this $150,000 was a Trust he had set up at a local bank, which had other funds in it. From the UBS investments, the bank distributed $50,000 to each of the trust beneficiaries during 2005. My wife is one of the 3 beneficiaries. In Sept., 2005, we receieved an IRS K-1 form with $50,000 on line 5.....which from what I see, means all of the $50,000 is being treated as taxable income to us.
I understand that the $30,000 in his IRA will be taxable to the beneficiaries. My question is this.....since the $120,000 invested in the annuities was not part of the IRA, should it also be taxable income to the beficiaries? I would appreciate any advice someone might be able give us on this. Thanks so much! | |
| 18 February 2006 | |
| The $120,000 from the non-qualified annuities will be taxed under the "income in respect of decedent" rules. Therefore, in order to determine the taxable portion of the amounts received from the annuities, the executor would need to know the decedent's basis in the annuity contract. Any amounts received in excess of basis will be taxed as ordinary income. | |
| 18 February 2006 | |
| Riley2....thanks so much for the response. Not being 100% sure of your terminology, by "basis", I assume you mean the original amount he invested to purchase the annuities.....is that correct?
Thanks. | |
| 18 February 2006 | |
| How about the cash value of a life insurance policy (insuring the life of someone other than the decedent)? If the beneficiary terminates the policy, is this also IRD? The cash value of a life insurance policy doesn't seem to fit the definition of IRD. | |
| 18 February 2006 | |
| The cash value of the policy would be IRD to the extent that the policy was owned by the decedent and the CSV exceeds the decedent's tax basis in the contract. | |
| 9 May 2007 | |
| I have a client who has inherited a taxable (i.e. non-IRA, non-pretax) annuity from her mother. My question is, why would the heir's basis be the decendent's original cost? Wouldn't it, like other assets, have a basis equal to the FMV of the annuity as of the date of her mother's death? I have no experience in this area and would appreciate some guidance on this. | |
| 9 May 2007 | |
| TaxGal, check out IRC Sec. 1014(c). It basically says items which are "income in respect of a decedent" under Sec. 691 (which is what your client's annuity probably is) do not get the "step up/down" to FMV upon decedent's death. | |
Hoovlangjr (talk|edits) said: | 10 January 2008 |
| I have a client who inherited an annuity from his mother last April 2007. His mom took rmd each December. The annuity company has sent him a lump sum check. My client wants to know if he will be penalized since his mother didn't take the rmd before she died and if the annuity he received is taxable to him. We're confused on it being part of his monther's estate and the taxability since the estate is under $600K. Thank you. | |
| 10 January 2008 | |
| There is no income tax on inheriting property, but the cash he received was taxable to the extent it exceeded his mother's basis. There were no required distributions post-death since he received the entire value within 5 years. | |
Hoovlangjr (talk|edits) said: | 11 January 2008 |
| Thank you LH I thought as much but my client got conflicting advice from the insurance company. | |
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