A California resident who is terminally ill receives an accelerated death benefit under a living benefit rider. For California personal income tax purposes, the accelerated death benefit is generally:
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Answer & full 3-part explanation (select an option above, or peek)
Why C is correct
Under IRC Section 101(g), amounts received as accelerated death benefits by a terminally ill or chronically ill individual are excluded from gross income. California personal income tax law conforms to the federal exclusion, so a California resident who receives an accelerated death benefit while terminally ill is not taxed on it at the state level either. Because the accelerated benefit is treated like a death benefit paid early, the tax-free treatment of life insurance proceeds extends to it, allowing the insured to access funds while living without creating a taxable event. The same exclusion generally applies to viatical settlement proceeds paid on behalf of a terminally ill person.
Why the other options are wrong
- A) An accelerated death benefit is not ordinary income; §101(g) excludes it from gross income for terminally or chronically ill insureds. The benefit is an early death payout. So it is not income.
- B) The benefit is not a capital gain; it is an early payment of death proceeds and enjoys the same exclusion as a death benefit. Capital gain never applies to it.
- D) There is no $250,000 cap for the exclusion; §101(g) applies to the entire accelerated death benefit without an amount limit. The full amount is protected. No ceiling applies at all.
Memory hook
Terminal riders pay ahead of death and stay tax-free at the state level too - California conforms to Section 101(g).