Death Benefit with loan

[Guest CGBS]

Does it make sense that the beneficiary be issued a 1099R for the outstanding loan of a Participant? Somehow this doesn't seem right but this is what the Insurance Co. says is correct! Thanks for any help.

[Jon Chambers]

Sounds right to me. Someone needs to be taxed when the loan accelerates, and the beneficiary is the natural party. Assume participant borrows $50,000, doesn't spend it, and dies before making any payments. Further assume that the beneficiary is the participant's sole heir. The beneficiary inherits the $50,000 that's in the deceased's checking account, tax free (assuming no estate taxes apply). Thus, the $50,000 has never been taxed. But then the loan isn't repayed, so is reported as a taxable distribution. Hence, a 1099-R is issued, and taxed to the beneficiary.

FYI, this is merely a logical flow without any review of the regs.

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Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004

[cathyw]

You are making an assumption that the plan beneficiary is also the estate beneficiary or heir of the decedent. This may not be the case, and you would then be taxing the wrong party. I think the defaulted loan should properly be reported as income in respect of a decedent (IRD), thereby reportable on the decedent's final tax return.

[Michael Devault]

I believe that the proposed regulations pertaining to section 72 refer to participant and BENECIARY in several instances. It infers that a beneficary can initiate a loan, so I would wonder why a beneficary couldn't continue a loan.

A complete distribution of the decedent's account will have to be made within 5 years, since the beneficiary is not the spouse. Until distributions begin, I would argue that acceleration of the loan is not a requirement.

Hope this helps.

[Guest CGBS]

Thanks for your replies - in this instance the beneficiary is not the spouse and the insurance company assures me the beneficiary should be taxed on the outstanding loan at time of death...Should I pursue or accept?