Divorce can be complicated, both emotionally and financially. When you add annuities to the mix, the process can feel even more complex.
Dividing an annuity, or giving one up, during a divorce can affect your long-term finances. This is especially true if the annuity was meant to support your retirement income. If you are going through a divorce, your joint assets may include an annuity and that annuity could be subject to property division. Here are important points to review as you work through the terms.
1. Evaluating Annuity Contract Values
Divorce attorneys focus on family law. They may not have deep experience in tax law or insurance contracts. You may want to work with a tax attorney who understands insurance products or a Certified Divorce Financial Analyst.
A professional review can examine:
- Cost basis
- Living benefits
- Present value
- Future value
- Potential tax liability
- Death benefits
This type of review can help you understand whether dividing the annuity would be fair to both spouses.
2. Types of Joint Annuities
There are many different types of annuities. Each has its own unique benefits:
- Single Premium Immediate Annuity: Pays an immediate income stream for a set period of time.
- Variable or Fixed Annuities: May grow over time, can include riders or bonus credits, and may still be subject to surrender charges.
Valuing fixed or variable annuities can be complex. Features such as surrender charges, bonuses, and riders can affect how the annuity is handled during divorce.
3. Was the Annuity Purchased During Marriage?
An annuity purchased prior to marriage may not be subject to a division of property. If purchased:
- Before marriage: May not be subject to division
- During marriage: Likely to be considered marital property
If it is marital property, the contract may be split, or one spouse may give up ownership depending on the overall settlement.
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4. Were the Premiums Paid With Inherited Money?
The source of the money used for the annuity's original premium payment may also influence how the annuity is handled in a property division.
If the annuity was funded with inherited money and:
- The inheritance was not placed into a joint account, and
- No joint funds were added later
The annuity may be treated as separate property. In that case, it is usually not included in the division of marital assets.
5. Was the Annuity Paid With a Rollover?
If the annuity was purchased during the marriage using qualified funds rolled over from either a pension, 401(k) or 403(b), into an individual retirement account (IRA), the IRA rollover may be subject to division. If so, the annuity will likely need a review of present and future values before determining a fair division.
6. Obtaining a QDRO
If the annuity is part of a qualified employer-sponsored retirement plan, such as a pension, 401(k), or 403(b), a Qualified Domestic Relations Order (QDRO) may be required.
A domestic relations order outlines payment of:
- Alimony
- Child support
- Marital property
A QDRO allows a spouse to receive all or part of the retirement plan benefits, according to the U.S. Department of Labor.1 This order also gives both parties access to necessary account details.
7. IRA Annuities
If you purchased an annuity directly from an insurance carrier as an IRA rollover during your marriage, the insurance carrier will determine how the contract can be split. This is done according to a filed domestic relations order.
Rules vary by carrier. A professional review can help clarify:
- How the contract may be divided
- Possible tax consequences
Important: If you are not the contract owner, the insurance company will not release information without a valid domestic relations order or written legal authorization from the owner.
8. Non-Qualified Annuities
Non-qualified annuities are funded with after-tax savings. The issuing insurance carrier typically requires a QDRO to divide the contract. It is important to review current and future values and any tax implications before making a decision.
9. Alternatives to Splitting
After reviewing the annuity’s current value, future value, and tax impact, one spouse may keep the contract while the other receives assets of equal value. This depends on the total marital property available and each spouse’s financial needs. Consider consulting a lawyer or qualified financial representative before moving forward.
10. Will There Be a New Contract?
If the annuity is split, a new contract may be issued.
Before agreeing, review the new contract carefully. Make sure you understand:
- Benefits
- Fees
- Withdrawal options
- Tax implications
Read the contract in full and ask questions if anything is unclear.
Moving Forward After Divorce
Once your divorce is finalized and the annuity issues are resolved, you may want guidance as you rebuild your long-term strategy.
A financial representative can help you review your goals, income sources, and retirement needs. Divorce marks a major life change. With the right information and support, you can take steady steps toward your next chapter.
Annuities can play a key role in supporting long-term retirement income goals. Start Your Free Plan
Sources
- QDROs Chapter 1 - Qualified Domestic Relations Orders: An Overview. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/qdros-chapter-1.
