commuted value to beneficiary of a non-qualified annuity
The owner of a non-qualified annuity passed away. The annuity pay-outs were for 5 years and the owner passed away after 24 months. The beneficiary wants to take the commuted value instead of continuing the pay-outs for 36 months.. Since it is the present value of future payments ,the commuted value could be less than the cost basis. In such a case, there may not be any taxable amount although there is a distribution.
Will the beneficiary receive a 1099 R for the distribution he takes? How the distribution will be coded?
Permalink Submitted by Alan - IRA critic on Wed, 2016-04-06 18:39
There will be a 1099R and it should include the taxable portion in Box 2a. Box 7 should show code 4.
Permalink Submitted by Ponni Nainar on Wed, 2016-04-06 20:04
Thank you for your reply.
I am looking at a scenario where the discounted cash value of future payments is less than the cost . In such cases there will not be a taxable amount. The discount factor is 6% and interest earned is 3%. In that case, they get less than the cost. Will a 1099R be issued in such cases when the taxable amount is 0? Is it mandatory for the annuity company to issue a 1099 R if the taxable amount is 0. Please clarify.
Permalink Submitted by Alan - IRA critic on Wed, 2016-04-06 20:32
I am not aware of any exemption, and would expect a 1099R. To correct prior post, the Box 7 coding should show D4, D being a new code introduced a couple years back for NQ annuity distributions.