Advanced Underwriting Consultants

Question of the Day – July 14

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Does a nonqualified deferred annuity (NQDA) get a step-up in basis at the owner’s death?

Answer: No.

In general, capital assets owned by a decedent get a step-up in basis at death.  Examples of capital assets include stocks, bonds, mutual funds and real estate.

An NQDA is like an IRA in that it is an income asset, not a capital asset.  Income assets do not get a step up in basis at death.

The beneficiary of an NQDA receives carry-over basis from the decedent.  Distributions from the NQDA received by the beneficiary are taxed under normal annuity taxation rules.

Say that Elroy inherits an NQDA from his father George.  George paid $50,000 for the annuity, and it is worth $75,000 at George’s death.  If Elroy takes a $10,000 distribution from the inherited NQDA, the entire distribution is income taxable since annuity distributions are taxed on a gain-first basis.  The distribution is NOT subject to the 10% penalty tax because it is being paid after the annuity owner’s death.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.