Taxable income from an insurance policy with multiple beneficiaries

[pchicke]

My wife was 1 of 4 sisters (beneficiaries) to their mother's life insurance policy.  They all filled out the 8-page company document to have taxes withheld and payments distributed, but the company issued ALL of the taxable income to 1 sister, along with a 1099 for the entire amount.  There is only 1 SSN on the tax form, so the other sisters cannot separate their shares, even though they live in different states which have different tax brackets.   Can the insurance company do this?  Are there IRS regulations for the insurance companies to separate the proceeds and report income to all 4 beneficiaries?

[NCperson]

@pchicke normally, life insurance proceeds are not taxable.  How much is listed in Box 2a and what is the code in Box 7? depending on your response it may not matter.   How much was withheld in box 4 and 14? 

[pchicke]

Box 4 was $3,840 (10% federal) and Box 14 was $8,446 (22% in New York State).

[pchicke]

p.s.  We live in South Carolina where the state income tax is 6.4% vs. the 22% in New York.  So the bottom line is that the insurance company sent $2,111 to New York instead of $614 to South Carolina.  But, because my wife's SSN is NOT on the 1099, she cannot recover the money from New York.

[NCperson]

@pchicke yes, she can get it back.... two options

1) contact the life insurance company and see if they will re-issue. the problem is they sent the withholdings to the IRS and NY already, so they may not

2) alternatively, each of the 4 sisters create a dummy 1099-R for their respective tax returns.  Each will report 1/4 of Box 1 and 2a.  I am assuming each sister is entited to 1/4 of the proceeds.  Each sister will report their share to their respective states and to the IRS.  

3) for box 4 and 14, the sister whose SSN is on the 1099-R needs to report this in its entirety on her tax return.  This sister sends 1/4 of box 4 and 1/4 of box 14 to each of her three other sisters; she just sends each a check. 

4) This way each of the 4 sisters is reporting their fair share of income on their respective federal and state tax return.  Yes, three of the sisters may owe federal and state, but they have the check from the 4th sister to cover it.  The 4th sister would get a large refund from both federal and NY which is how she is able to pay the other three sisters.

5) if the one sister ever gets audited by the IRS or NY State, she just explains what occured and that the other three sisters reported on their respective income tax returns.  It's messy, but it should all work out.  No one is underreporting income. 

6) it could be the insurance company is willing to create 4 1099-R's and correct the reporting on Box 1 and 2a, but can't adjust the reporting on Box 4 and 14.  As long as they put the contents of Box 4 and 14 on the 4th sister's 1099-R, and y'all follow the steps above, it'll still work out.   I'd suggest this to the insurance company as it's the most elegant way to solve this problem.  

7) I wrote all that assuming the code in Box 7 (which you didn't post) aligns with what I wrote.  WHAT IS IN BOX 7 - probably won't change what I wrote, but would be good to know 

does that make sense?   

[pchicke]

yes, it all makes sense, BUT it's too complicated.

The insurance company says that they do NOT create separate 1099's for each beneficiary, despite the fact that they require all the personal information including SSN and current address.  Now, here's the kicker - they sent separate CHECKS to each sister, but did NOT send separate 1099's.  It seems like their business practices could use an overhaul.  

I was under the impression that the IRS required them to send an individual 1099 IF THEY SENT EACH ONE THE MONEY.

In addition to that I asked - If you don't use the SSN to create a 1099 to be sent to the IRS, why do you require the Social Security Number at all??

I'm waiting for an answer from them.

[NCperson]

@pchicke  I know it's complicated but the Insurance company already sent the withholdings to the IRS and NYS.  and that can't be fixed.  

When you state they sent 4 checks to each of the 4 sisters - did each sister receive EXACTLY the same amount - - if yes, then THAT is complicated in any event because the one sister is going to get a fat refund that belongs to the other there in any event. 

The insurance company requires the SSN to report to the IRS.  While paying taxes is voluntary and we are all supposed to the right thing, those 1099-Rs (and other similar forms) is the way the IRS keeps everyone honest.  They check those forms against your tax return, if your tax return shows more income than the sum of the forms (1099s, etc.) (and it would for 3 sisters), they do not care!  But if your tax return shows less income than those forms (and it would for the one sister), THAT is where the IRS focuses its reviews and audits).  

[pchicke]

Well, I've spent too much time on this over the past year.  It has caused family arguments and hard feelings.  I just want the insurance company to do the right thing.  I will keep pushing them.  

Thanks for your advice.

Paul