No one goes into a marriage thinking that it is only a temporary arrangement, but it happens and when there are annuities involved, the divorce can get pretty ugly. Even a simple divorce where there aren’t any complicated finances to speak of is already messy and it is difficult to determine how the money should be split.
Several factors need to be taken into account and everything from the type of annuity to state law and insurer’s rules about divorce. Here we are going to look at what happens to your annuity if you end up in a divorce.
Timing is everything
The ruling by a court will differ from one state to another. Still, for the most part, if an annuity was purchased before the marriage, most courts will not consider the annuity as part of the marital property.
That said, if annuity payment premiums were paid after the marriage, things might look a bit different. If the annuity remained with the original owner, then it would generally not be split, but if both parties started to contribute to it, then it would only be fair to assume that it would be split. Then the discussion would revolve around who would get what cut.
What you need to know
When it comes to transferring annuities in a divorce, couples should seek financial advice early in the process. This will minimize or eliminate possible problems that could arise later on. The financial adviser will determine how best to go forward while keeping the type of annuity in mind.
The one thing that the two parties need to agree on is to minimize the loss. When an annuity is split in a divorce, there is bound to be a loss of some sort. The best course of action, regardless of who gets what is to minimize the loss.
Annuity dividing options
When dividing the annuity is inevitable, then you need to look at your options. You can either withdraw all or part of it or you could also have it transferred into an IRA, then you can also withdraw from the original contract and draw up a new one that is issued to you and your divorcing spouse.
Generally, insurance companies prefer the last options, as it is much easier to process. The money doesn’t leave the insurance, it only gets restructured. In this way, the tax penalties are reduced substantially and both parties tend to benefit. Alternatively, the parties could reach an agreement and exchange an asset of equal value and not split the annuity at all.
The tax implications
When an annuity is jointly owned, the couple may be required to split their investments along with all their other assets ad funds. When the joint annuity is maintained after the divorce, the annuity contract could bring about a negative tax implication on both parties.
When the cost is calculated, one party might surrender whole or part of the annuity and with it, also the tax implications. If the transfer is done correctly, there should be no tax penalties, seeing that the IRS sees divorce as a non-taxable event.
Surrendering or selling payments
If there are heavy disputes around an annuity, the best course of action might come down to a buyout. The one party can sell his or her share of the annuity for an agreed-upon amount.
However, a surrender penalty might be incurred by the insurance company, depending on how long the annuity has been running. Although there is a slight loss in value when you sell or surrender, the overall costs could be much less than having an actuary determine the split.