Nanaki had been suspicious that Zack was searching for answers about him and the question was further evidence towards it. Really, he should just ask straight out, Nanaki wasn't going to deny what he was, but he was happy to dodge careful questions.

"I don't mind direct questions. It was captivity mostly," he grumbled. There'd been some prodding and poking, but he was mostly being saved for Aerith. "I would ask you the same.... but I suppose I know." So did Zack know he was dead? It wasn't that long after the Mansion that he was killed. Or perhaps he was unhappy long before that ordeal?