Could estate beneficiaries subtract lump-sum survivor annuity death benefits from Virginia taxable income?

Subject

Beneficiaries; Death benefit payment: Survivor annuity benefits

Plain-English summary

Virginia allowed the beneficiaries to subtract the lump-sum survivor annuity death benefits from Virginia taxable income. After their mother died in 2008, the beneficiaries received payments from four life-insurance annuities and claimed the Virginia subtraction.

The ruling applied three requirements under Va. Code § 58.1-322(C)(32): the payment had to come from an annuity contract between an annuitant and an insurance company, be awarded to the beneficiary in a lump sum, and be subject to federal income tax.

The submitted information satisfied all three conditions. Virginia therefore said the payments qualified and ordered correction of the subtraction disallowed for the audited beneficiary, with the appropriate refund to be issued.

What this means for you

• Confirm that the payment comes from an annuity contract with an insurance company.
• Verify that the beneficiary received the death benefit as a lump sum.
• The payment must be federally taxable to meet the Virginia rule applied here.
• Keep contract, payment, beneficiary, and federal-tax records to support the subtraction.

Common questions

Did every payment made after a death qualify?

No. The ruling required all three statutory conditions for the annuity death-benefit subtraction.

What happened to the audited beneficiary's refund?

Virginia said the disallowance would be corrected and the appropriate refund issued.

Citations and references

• Va. Code § 58.1-322(C)(32).
• P.D. 09-36 and P.D. 10-63.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-14

Original ruling text

January 25, 2011

Re: Request for Ruling: Individual Income Tax

Dear *:

This will reply to your letter in which you request a ruling on behalf of the beneficiaries of the * (the "Estate") regarding a deduction of death benefit payments. I apologize for the delay in the Department's response.

FACTS

The beneficiaries of the Estate received lump sum death benefit payments from four life insurance annuities (the "Annuities") following the death of their mother, * (the "Annuitant"), in 2008. Based on the information provided, each beneficiary subtracted the death benefit payment from his 2008 Virginia individual income tax return.

One beneficiary was audited and the subtraction for the death benefits was disallowed, which resulted in a reduction of refund claimed by the beneficiary and his wife on their 2008 Virginia return. You request a ruling on behalf of the beneficiaries of the Estate that each beneficiary was entitled to subtract the death benefit payments in accordance with Va. Code § 58.1-322 C 32.

RULING

Pursuant to Va. Code § 58.1-322 C 32, a taxpayer is allowed a subtraction of "the death benefit payments from an annuity contract that are received by a beneficiary of such contract and are subject: to federal income taxation." In order to qualify for the subtraction allowed under Va. Code § 58.1-322 C 32, a death benefit payment must meet three requirements. First, the source of the payment must be an annuity contract between a customer (the "Annuitant") and an insurance company. Second, the annuity payment must have been awarded to the beneficiary in a lump sum. Finally, the payment must be subject to taxation at the federal level. See Public Document (P.D.) 09-36 (3/31/2009) and P. D. 10-63 (5/7/2010).

Based on the information provided by you, the survivor annuity benefit payments in this case satisfy all three of these criteria. The information demonstrates that the survivor annuity benefits were derived from a contract between an annuitant and an insurance company, received as a lump sum, and subject to federal taxation. Therefore, the survivor annuity benefits paid to the beneficiaries of the Estate qualify for the Virginia income tax subtraction for death benefits pursuant to Va. Code § 58.1-322 C 32.

Accordingly, the Department's disallowance of the subtraction for death benefit payments claimed by the one beneficiary will be corrected, and the appropriate refund will be issued.

The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.virginia.gov. If you should have any questions regarding this ruling, you may contact * in Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

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