1099-R Distribution (Annuity) Upon Death as Part of Family Trust

[cactusjack]

My mother passed away in 2021 and she held a non-qualified annuity in a revokable family trust that was tied to her SSN. When she died, the trust automatically converted to a non-revokable trust that required us to obtain an EIN.

My brother and I are beneficiaries of the annuity. We received a check for the full distribution amount in 2022 (the check was paid to the family trust). Today, I received the 1099-R for the distribution, which is tied to the EIN of the revokable trust, as expected. My understanding is that there is no stepped-up cost basis for the annuity.  The distribution code is "4D" (Death/Annuity Payments), which appears to be correct.

Questions: 

1. Is it correct to assume that we're stuck paying taxes at the federal tax rate for trusts (37% in our case) for the capital gains shown in Box 2a?

2. Is there anything else I should know or do related to this topic when filing our 2022 tax return?

Thanks.

[dmertz]

"My brother and I are beneficiaries of the annuity. We received a check for the full distribution amount in 2022 (the check was paid to the family trust)."

I think you meant to say that you and your brother are beneficiaries of the trust.  If you and your brother were beneficiaries of the annuity, the annuity was not payable to the trust.

You are correct that annuities do not get a step-up in basis.

With the trust being the beneficiary of the annuity and it having been paid to the trust, the taxable amount is reportable on a trust income tax return, Form 1041.  The income would then generally be passed through to the trust beneficiaries as Distributable Net Income for which the trust receives a deduction and would be taxable on the beneficiaries' tax returns.

Whether this ends up being reportable on your 2022 tax return or instead on your 2023 tax return depends on the timing of the distribution and whether the trust uses a calendar year or a fiscal year for its accounting.

[cactusjack]

Thanks for the response.  My brother and I are now co-trustees of the irrevocable trust.

I appreciate the the quick response and information.

Thanks again!