Client is the beneficiary along with his brother of a non-qualified annuity purchased by the mother (annuitant) in 2013. The annuity start date was August 9, 2019. The mother (age 90) died in January, 2020. Annuity when purchased is a five-year guarantee period. Purchase price in 2013, $16,000; withdrawals, $6,000, account value at December 31, 2019 $12,000. I have read IRS Pub. 575 and other sources to find out if the sons take lump sum payments, what are the tax implications since the original cost has not been recovered. How is the amount subject to tax determined and who calculates it? Thank you!
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A non-qualified annuity is generally purchased from an insurance company with after-tax money (premium/cost).
Under post August 1982 rules, any regular withdrawals (including monthly systematic) are made LIFO.
If however the contract was annuitized over the 5 year period, the insurance company would prorate cost vs gains paid out on each payment.
If the son's have a lump sum option available, I would think the insurance company would be able to tell them what cost remains in the contract.
The resulting 1099-R would show gross vs taxable, and show the cost basis. Gains are ordinary income to the benes. No 10% IRS penalty.
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