Income in respect of a decedent, almost always shortened to IRD, is money a person had earned or become entitled to before dying but had not yet received — and which is therefore taxed as income to whoever does receive it. A traditional IRA is the classic example. So are the last paycheck, an unpaid commission, accrued but unpaid bond interest, an installment note payment, deferred compensation, and the accounts receivable of a cash-basis business.
The rule lives in Internal Revenue Code section 691, and it exists to close what would otherwise be an enormous gap. Without it, income a person spent a career deferring would escape income tax entirely at death. IRD makes sure it does not.
The single hardest consequence to accept is this: IRD does not get a step-up in basis. Section 1014, which gives most inherited property a fresh basis equal to date-of-death value and erases the built-in capital gain, expressly excludes IRD. A $600,000 brokerage account and a $600,000 traditional IRA are not the same inheritance, and the difference can be six figures.
This page is built around the decision that IRD forces on a family in the first year after a death, and the options on each side of it.
In This Article
The Decision: Who Receives It, and When
IRD does not choose its own timing. Somebody does. Within roughly the first year after a death, a family typically has to decide three things, and each one changes the tax bill.
Who takes it. IRD is taxed to whoever receives it — the named beneficiary, the estate, or a trust. Marginal rates differ dramatically. An estate or a non-grantor trust reaches the top federal income tax bracket at a few thousand dollars of undistributed income, while an individual beneficiary in retirement may be in a far lower bracket. Distributing income out of an estate or trust to individual beneficiaries, where the governing document and state law allow it, can move the same dollars into much lower brackets. That is a conversation for the fiduciary’s CPA, not a decision to make casually.
When it is taken. A retirement account distributed all at once in a single year can push the recipient into a higher bracket, increase the taxable portion of Social Security, and raise Medicare premiums two years later through the income-related monthly adjustment amount. Spreading distributions across available years is frequently the single largest tax lever a family has. The Medicare consequence in particular is covered at how a lump sum affects Medicare premiums.
Whether the section 691(c) deduction is claimed. If federal estate tax was actually paid on the IRD asset, the recipient may deduct the portion of the estate tax attributable to that item as they report the income. This is an itemized deduction, and importantly it is not a miscellaneous itemized deduction, so it survived the suspension of that category. Many preparers miss it because it requires a computation from the estate tax return. If a Form 706 was filed and tax was paid, ask about it by name.
What Counts as IRD, and What Does Not
The list is more specific than most people expect.
Generally IRD: traditional IRA, 401(k), 403(b) and other pre-tax retirement account balances; unpaid wages, bonuses, commissions and vacation pay; deferred compensation; accrued interest on savings bonds where the decedent used the deferral method; declared but unpaid dividends; installment sale payments received after death; a cash-basis business’s accounts receivable; renewal commissions payable to an insurance agent’s estate; and payments from a non-qualified annuity to the extent of the gain in the contract.
Generally not IRD: a Roth IRA that has satisfied the five-year rule, because the distributions are not taxable to begin with; appreciated stock, real estate and other capital assets, which do receive a step-up under section 1014; and — the one that matters most here — a life insurance death benefit.
The exclusion for life insurance is in section 101(a): amounts received under a life insurance contract by reason of the insured’s death are generally excluded from gross income. That exclusion is why a death benefit is neither IRD nor in need of a basis step-up. It arrives free of federal income tax.
Three caveats sit on that clean rule, and each one is a trap. Interest is taxable. If the carrier holds the proceeds and pays interest between the date of death and the date of payment, that interest is ordinary income and is reported to the beneficiary. A transfer for value can break the exclusion. Under section 101(a)(2), if a policy was transferred for valuable consideration, the exclusion is limited to the consideration paid plus subsequent premiums, unless a statutory exception applies. An installment or retained-asset payout mixes principal and interest, and only the principal is excluded.
The Retirement Account Decision, Since That Is Usually the Real Question
For most families, IRD means an inherited IRA, and the rules changed twice in recent years.
The SECURE Act of 2019 eliminated the lifetime stretch for most non-spouse beneficiaries who inherit from an owner dying after 2019, replacing it with a rule requiring the account to be fully distributed by the end of the tenth year after death. Certain eligible designated beneficiaries — a surviving spouse, a minor child of the account owner, a disabled or chronically ill individual, and a beneficiary not more than ten years younger than the owner — are treated differently.
Final Treasury regulations issued in July 2024 then resolved the question that had hung over the ten-year rule: where the owner had already begun required minimum distributions before death, most beneficiaries subject to the ten-year rule must also take annual distributions during years one through nine, with the balance out by year ten. The IRS waived enforcement of those annual distributions for several transition years, with the requirement applying from 2025 forward. Confirm the current position with the IRS or your CPA before planning around it — this specific rule has moved repeatedly since 2019.
The practical decision is about pacing. Ten years of level withdrawals usually beats a single lump sum in year ten, because it uses ten years of lower brackets instead of one year of high ones. But that is a projection exercise involving the beneficiary’s other income, and it belongs to a CPA. If the household’s income picture is already thin, our page on closing a retirement income gap covers the broader problem.
| Inherited Asset | Step-Up in Basis? | Income Taxable to Recipient? |
|---|---|---|
| Traditional IRA or 401(k) | No | Yes, as ordinary income when distributed |
| Appreciated stock or real estate | Yes | Only on gain after the date of death |
| Roth IRA meeting the five-year rule | Not applicable | Generally no |
| Unpaid wages or commissions | No | Yes, as ordinary income |
| Life insurance death benefit | Not needed | Generally no, under section 101(a) |
| Interest paid on a delayed death benefit | Not applicable | Yes, reported on Form 1099-INT |
Where Life Insurance Genuinely Intersects With IRD
There are three real intersections and one imagined one. The imagined one first: an ordinary death benefit paid to a named beneficiary is not IRD, is not taxed as income, and does not need a basis step-up. If anyone tells a grieving family otherwise, they are wrong.
The three real intersections:
1. A sale that closes after the seller dies. If a policy owner sells a policy in the secondary market and dies before the transaction funds, the right to the sale proceeds can be an item of income in respect of a decedent to the estate, because the right to the income was fixed before death. This is a genuine and under-discussed issue. It is one of several reasons the treatment of a settlement mid-process requires a CPA, not a rule of thumb.
2. Gain on a policy sold during life. When a living owner sells a policy, the amount above the owner’s investment in the contract is taxable, generally as ordinary income to the extent of any cash value gain and as capital gain above that. The 2017 tax act removed the requirement to reduce basis by the cost of insurance charges for sales after August 25, 2009, which raised sellers’ basis and lowered their tax. The mechanics are at how life settlement tax basis works. This is income to the living seller, not IRD.
3. Liquidity to pay the tax on IRD. An estate that consists mostly of retirement accounts has a real problem: every dollar taken out to pay expenses is taxable. An existing life insurance policy is one of the few assets that arrives income tax free, which is precisely why estate planners position it against illiquid or tax-heavy estates. Whether an existing policy should be kept for that reason is worth asking directly — see when keeping the policy is the right answer.
The Terms It Is Confused With
IRD versus stepped-up basis. These are two halves of one rule. Section 1014 gives a step-up to most inherited property; it explicitly denies one to IRD. Assuming everything inherited is tax free is the most expensive mistake in this area.
IRD versus the estate tax. The estate tax is a transfer tax on the value of what a person owned. IRD is an income tax on money the person had not yet received. The same asset can be hit by both, which is exactly why the section 691(c) deduction exists — to relieve part of the double burden.
IRD versus deductions in respect of a decedent. The mirror-image rule: expenses the decedent had incurred but not paid, such as accrued but unpaid business expenses, interest or state income tax, are deductible by whoever pays them.
IRD versus a survivor annuity. Payments to a beneficiary from a non-qualified annuity are taxable to the extent of the gain, which behaves like IRD, but the basis recovery rules are their own system. Ask specifically.
IRD versus a state income tax question. Whether and how a state taxes IRD, and how a state treats settlement proceeds, is a separate analysis in every state; see state income tax on settlement proceeds.
The Forms and the Order of Operations
The paperwork tells you what you are dealing with.
Form 1099-R issued in the decedent’s name or the beneficiary’s name reports a retirement distribution. Form 1099-INT reports the interest a life insurance carrier paid between death and payment, which is the taxable slice of an otherwise tax-free benefit. Form 1041 is the estate or trust income tax return; the beneficiary’s share arrives on a Schedule K-1 from that return, which has a specific line for IRD-related items. Form 706, if filed, is where you find the estate tax figure needed to compute the section 691(c) deduction.
A workable order of operations for an executor. First, inventory which assets are IRD and which are not, before distributing anything. Second, ask the CPA whether income should be distributed out of the estate or trust to lower-bracket individual beneficiaries. Third, model the pacing of retirement account distributions across the available years rather than defaulting to a lump sum. Fourth, if a federal estate tax return was filed and tax was paid, ask by name whether the section 691(c) deduction is being claimed. Fifth, be careful about anything that spikes income in a single year, including the Medicare premium consequence two years out.
Pine Lake Legacy provides education and a free policy review only. We are not accountants, and nothing on this page is tax or legal advice — IRD calculations belong to your CPA and estate distribution questions to your attorney. If part of the estate is an in-force life insurance policy on a living insured and nobody can tell you whether to keep it, reduce it, surrender it or sell it, we will review it at no cost. Send the policy cover page or call (732) 978-9575.
Frequently Asked Questions
Is a life insurance death benefit income in respect of a decedent?
No. Amounts paid because of the insured’s death are generally excluded from the recipient’s gross income under Internal Revenue Code section 101(a), so there is no income to characterize as IRD and no need for a basis step-up. Interest the carrier pays between the date of death and payment is a separate, taxable item.
Why does an inherited IRA get taxed when inherited stock does not?
Because the IRA holds income that was never taxed, and section 1014 expressly denies a basis step-up to income in respect of a decedent. Inherited stock receives a new basis at date-of-death value, erasing the built-in gain. Two accounts of equal size can therefore be worth very different amounts after tax.
What is the section 691(c) deduction and who can claim it?
If federal estate tax was actually paid on an IRD asset, the person reporting that income may deduct the portion of estate tax attributable to it. It is an itemized deduction and not a miscellaneous itemized deduction, so it survived recent law changes. It requires a computation from the estate tax return, so raise it with your preparer directly.
How long do beneficiaries have to empty an inherited IRA?
For most non-spouse beneficiaries inheriting from an owner who died after 2019, the account must be fully distributed by the end of the tenth year after death. Final regulations issued in 2024 also require annual distributions in years one through nine where the owner had begun required minimum distributions. Confirm the current rule with your CPA.
What if someone dies while selling a life insurance policy?
It depends on whether the right to the sale proceeds was fixed before death and whether the transaction closed. In some circumstances the proceeds can be income in respect of a decedent to the estate rather than a tax-free death benefit. This is a genuine grey area, so involve the estate’s CPA before the transaction closes, not after.
Does spreading distributions over ten years really save money?
Usually, though not always. Ten years of modest withdrawals uses ten years of lower brackets, while a single lump sum stacks everything into one. A large one-year spike can also increase the taxable share of Social Security and raise Medicare premiums two years later. Run the projection with a CPA rather than defaulting either way.
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Related Reading
- Irmaa Medicare Premium Impact
- Retirement Income Gap
- Life Settlement Tax Basis Explained
- State Income Tax On Settlement
- Keeping The Policy Is The Right Answer
- What Is A Life Settlement
- How Much Is My Policy Worth
- What Is Estate Tax Portability
Pine Lake Legacy does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.