1099-R line 7 code 4 death benefit taxable?

[DAYDREAMER]

My dad requested payout on a death benefit from zurich after my mom died on what seems to be an IRA my mom had. My dad was the beneficiery on this benefit. He recently got a 1099-R form that showed the amount he recieved was taxable on line 2a, but line 2b is checked for taxable amount not determined, and line 7 is filled in with code 4, and ira/sep box is checked.

My understanding of death benefits is that they are not taxable. However the more research i do, i'm finding all death benefits are not treated the same. I am trying to figure out if my dad has to pay taxes on payout amount.

Has anybody dealt with this issue? Any advice where to look or questions to ask myself would be appreciated.

PS: I used the search function and did not find what I needed.

[DAYDREAMER]

A little tid bit of information I forgot to mention. My mom had drawn the ira amount down to a balance of $800 before she died. The death benefit was in the mid 50k. I have never heard of an ira type account with a death benefit. What the heck is this type of investment?

[GrayHare]

It sounds like an annuity or life insurance inside an IRA. All distributions from an inherited IRA are taxed as ordinary income regardless of their source.

[jebmke]

Assuming there was no basis in the IRA at the time of death, the full distribution is taxable. 1099-Rs for IRAs always check "Taxable Amount Not Determined" since they don't know your individual tax status and they wouldn't know if there was any basis in the IRA.

[kaneohe]

Quote:

Originally Posted by DAYDREAMER A little tid bit of information I forgot to mention. My mom had drawn the ira amount down to a balance of $800 before she died. The death benefit was in the mid 50k. I have never heard of an ira type account with a death benefit. What the heck is this type of investment?

Perhaps you could contact the company and find out. I'd be interested how you can have a living benefit of $800 and a death benefit of mid 50K. My impression is that you can't have life insurance inside an IRA.........if you could,
it would seem almost criminal to turn a tax-free product into one that was taxable as ordinary income.

[ziggy29]

Quote:

Originally Posted by kaneohe it would seem almost criminal to turn a tax-free product into one that was taxable as ordinary income.

I've heard of people who have held tax-free muni bonds and muni bond funds in an IRA.

[Texas Proud]

Life insurance received is not taxable income... a death benefit does not have to be from life insurance...

[DAYDREAMER]

Quote:

Originally Posted by kaneohe Perhaps you could contact the company and find out. I'd be interested how you can have a living benefit of $800 and a death benefit of mid 50K. My impression is that you can't have life insurance inside an IRA.........if you could, it would seem almost criminal to turn a tax-free product into one that was taxable as ordinary income.

I'm of the same opinion as you Kaneohe, that this is totally confusing, thus this thread.

How this came about, is after my mom died, my dad recieved a statement from Merrill Lynch, which showed their investment balances. It had the balance of his stocks, and then had a balance on something separate that was labeled "not held by Lynch" just managed by Lynch. This funky "not held by Lynch" account had a balance of 800, yet said death benefit of 50ish k. The total balance of the Lynch account equaled the stock sum + the death benefit amount.

The statement showed that my parents were drawing down the cash value of this "not held by Lynch" account". I am pretty sure this was an IRA that my mom had from her previous employer. What really confuses is me is, what kind of investment can you have that has a separate death benefit within an IRA. This does sound like some kind of whole live policy within an IRA owned by Zuric and managed by Merill Lynch.

My mom has always believed in whole life policies (never rubbed off on me), so i'm thinking some Merill Lynch salesman sensed this and sold her the bill of goods when she retired and rolled her past employer's IRA into a Merill Lynch account.

I have read of many investments on ER forum, but have never heard of my parents investment situation. It was confusing to me when my dad got the statement, it was confusing to me when I called Merill Lynch, and the confusion continued when we talked to Zurich to get the forms to cash in the death benefit for my dad. And now my dad gets the 1099-r form showing that the death benefit is fully taxable.

Sorry for the rambling, but, now i need to figure out, do i need to find a cost basis of something, and do whole life policies within an IRA even have a cost basis? So confused.

[LOL!]

Maybe this is not an IRA. Maybe it is some illiquid investment or annuity that one cannot withdraw all at once unless the account owner dies.

Even if a previous employer account was involved, it could be that was converted to something else.

[Texas Proud]

I would call Zurich up and ask 'what is this product?'... and if I did not understand, ask them to send me a brochure on it so I can understand it...


From what you say, I am betting it is an annuity of some sort and the $800 on the stmt meant nothing...

Another possibility in how it came about.... there were a number of companies who closed down pension plans and bought an annuity for everybody from an insurance company.... this could be what your mother had... all guesswork unless you actually spend the time on the phone to get the real info...

[DAYDREAMER]

Quote:

Originally Posted by Texas Proud I would call Zurich up and ask 'what is this product?'... and if I did not understand, ask them to send me a brochure on it so I can understand it

Thanks for the advice Texas Proud. My dad called Zurich and found that it was a Variable Annuity with an Enhanced Death benefit rider. My moms investment value within the annuity was worth 50k more sometime during the life of the portfolio. As the annuity was dropping in value, they were withdrawing money to live on. 800 was the value of the annuity that my mom had access too. When she died, the enhanced death benefit rider kicked in, and my dad had access to the peak value excess that the investment once reached.

Since this was an Annuity that was purchased with Money from an IRA, the full amount of the Death benefit rider is fully taxable

What a confusing mess of an investment. Reminds me of taking insurance on your hand of black jack, when the dealer has an Ace.

[Texas Proud]

Quote:

Originally Posted by DAYDREAMER Thanks for the advice Texas Proud. My dad called Zurich and found that it was a Variable Annuity with an Enhanced Death benefit rider. My moms investment value within the annuity was worth 50k more sometime during the life of the portfolio. As the annuity was dropping in value, they were withdrawing money to live on. 800 was the value of the annuity that my mom had access too. When she died, the enhanced death benefit rider kicked in, and my dad had access to the peak value excess that the investment once reached. Since this was an Annuity that was purchased with Money from an IRA, the full amount of the Death benefit rider is fully taxable What a confusing mess of an investment. Reminds me of taking insurance on your hand of black jack, when the dealer has an Ace.

So what you are saying is that since the annuity was in the IRA, all distributions would be taxable.... but, if it were bought outside of and IRA, it would not


If so, then I think that is malpractice for someone suggesting that investment to your mom....

[pb4uski]

Agree - seems very inappropriate product in an IRA - converts tax-free death benefits into ordinary income.

One question though - why didn't Dad roll it into his IRA? Was that an option? Probably water over the dam, but just sayin...

[DAYDREAMER]

Quote:

Originally Posted by pb4uski Agree - seems very inappropriate product in an IRA - converts tax-free death benefits into ordinary income. One question though - why didn't Dad roll it into his IRA? Was that an option? Probably water over the dam, but just sayin...

It was probably an option, but was not familiar with the investment and did not understand what an "Enhanced Death Benefit" even meant. My dad cashed in a different life insurance policy a week before, and that was very straight forward.

Oh well, my dad will pay the tax this year, and move on. I gave him heads up he will probably owe Uncle Sam this year.