Would like to confirm my understanding that when beneficiaries ( exclude spouses ) receive their benefit from a non qualified variable annuity they are only taxed on the portion of the benefit that exceeds the basis of the owner of the policy. So...if $ 50,000.00 was the owner's original investment and the beneficiary received $ 60,000.00 only $ 10,000.00 would be taxed as ordinary income. And if the above is correct, when a 1035 exchange is made between annuity contracts does the receipent insurance company track the basis from the prior contract? And, finally, if I am comletely off base on my understanding of this issue, can someone help straighten me out? Thanks.
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My understanding is the same as yours. Only $10,000 of the distribution would be taxed, and if it is exchanged for another contract, the new contract would have to track basis. -
You are correct. But sometimes the basis is not tracked properly. I have seen this happen when 1035's are done, but it most often occurred a number of years ago. Today, this is usually done correctly. You won't know until the 1099 comes down.Comment
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