In divorce procedures, the most typical annuity disposition is to split the income in half. This is usually accomplished by taking half of the account’s value and distributing it to one of the spouses.
Is an annuity protected in a divorce?
An annuity that is considered marital property must be divided according to state law and insurers’ divorce procedures. The value of payments is affected with the passage of time.
Certain annuities may not be considered marital property if they were purchased before the marriage and no one paid premium payments afterward. Splitting annuities is unnecessary when they remain with their original owner. The annuity is usually split if both couples paid annuity premiums while married. Some annuities are jointly owned by spouses, while others are owned by individuals. Individually owned annuities can be transferred in whole or in part. Transferring a considerable chunk of annuity assets, on the other hand, may be regarded an excessive withdrawal, resulting in a reduction in death payments.
A couple may be able to amend some or all contract conditions during a divorce. What can be modified is determined by the issuing firm, which normally requires notification from both spouses or documents from the divorce decree. Some contracts have more limited wording concerning what can be altered or divided than others. The original investment contract contains the rules for annuities.
Does an annuity require a QDRO?
If you or your spouse bought an annuity outright or as part of your retirement plan, it would not be unusual.
Annuities are a vital component of portfolio diversification and can serve as a solid foundation for a fixed income allocation for those approaching retirement. Annuities, on the other hand, can be the black sheep of the marital pie during a divorce.
Let’s start by defining an annuity. Annuities were created to provide a consistent cash flow for people in their retirement years and to alleviate concerns about outliving their assets. An annuity is a legal contract in which an insurance company agrees to pay the annuitant guaranteed periodic payments for a set amount of time or for the rest of their lives. An annuity ensures risk-free retirement income in retirement.
Annuities come in a variety of sizes and styles. Each provider company’s annuity contract is unique, with its own set of restrictions. The structure (variable or fixed rate), any penalties for early withdrawal, surrender term, spousal features such as a surviving clause, death payout, and so on are all specified in each annuity contract. Some are enrolled in retirement programs, while others are not; some have life insurance, while others do not. Some are postponed, while others are immediate; some are unqualified, while others are qualified.
Non-Divisible
Because of the complexities of annuities, dividing or valuing them for equal distribution is extremely challenging.
Annuities, unfortunately, are not like other marital assets that may be easily shared between both spouses. Divorce lawyers may be unaware of the implications of distributing annuities. Changing an original annuity contract has considerable risks, and if the annuity is not shared appropriately during a divorce, the tax repercussions can be severe. You must fully understand the annuity and, with the assistance of a financial expert, determine whether and how the annuity can be split. You could suffer long-term consequences if you don’t.
A non-qualified annuity is funded with after-tax monies, which implies that contributions into the contract are not tax deductible. On the money you put in, you’ve already paid taxes. When you withdraw money, some of it will come from your initial deposit (the principal), and the rest will come from your earnings (appreciation). On withdrawal, only the earnings will be taxed. A Qualified Domestic Relations Order is not required to split a nonqualified annuity (QDRO).
An IRA is similar to a qualifying annuity. The money you put into the contract is tax deductible, but withdrawals are fully taxable. Qualified annuities are utilized in conjunction with tax-advantaged retirement plans such as 401(k) plans and 403(b) plans (eg. tax sheltered annuities for teachers).
If you split an annuity, any portion you get will not be taxable at the time of transfer in the event of a divorce. However, if the contract is divided, you can only obtain the advantages of the existing contract. You must study the annuity contract to determine whether you are eligible for a lump amount, cash-out, or rollover to an IRA via QDRO. If you answered no, you might not want this annuity to be included in your portion of the marital assets.
Annuities, unfortunately, are not like other marital assets that may be easily shared between both spouses. This may be lost on divorce lawyers.
Four options in dividing annuities
When it comes to distributing an annuity, you have four alternatives. The first option is to withdraw all or part of the annuity and receive a direct payment. The second option is to make a direct transfer to your IRA of the money you were awarded, whether it was a precise dollar number or a percentage of the entire contract value. The third option, which is favoured by the vast majority of insurance firms, is to “withdraw” from the old contract and then issue two new contracts to you and your ex-spouse, both with pro rata benefits and new account values.
For insurance firms, processing new contracts is significantly easier and less of an administrative burden. The final option, which does not split the annuity but may be required in some divorce settlements, is to transfer whole ownership of the contract to you, in which case a new contract is created.
The annuitant must permit the insurance company to split or transfer the annuity with any of these alternatives, and a QDRO may be required. Always check with the annuity provider to see if an annuity can be divided, transferred to a new owner, or if lump sum cash-outs are possible. Early in the divorce process, call the insurance company to find out what options are available and what fines, charges, or taxes would be payable. Make sure you have everything from the company in writing.
Are you getting what you think you’re getting?
What occurs when a new contract is being issued? You’re taking a chance, and you might not be getting what you think you’re getting as a new annuitant. Why? It’s possible that new contracts won’t offer the same benefits as the old ones. Here are some of the adjustments that insurance companies can make.
Guaranteed interest rates may be lower than the original (in favor of the insurance companies).
In the absence of precise and unambiguous instructions in the divorce decision, some corporations may treat a withdrawal as a taxable event.
If the policy includes a living benefit, a withdrawal will most likely lower both ex-spouses’ future assured income. While the annuitant is still alive, living benefits normally guarantee some form of predetermined payout, such as the annuitant’s principal or a specific amount of income every year, usually 4-6 percent of the income base.
A withdrawal that exceeds that limit is referred to as an excess withdrawal. A withdrawal of half the annuity amount will be regarded an excess withdrawal, and future guaranteed payments would be reduced.
Some contracts additionally require an excess withdrawal to reset the living benefit base to the new account value, wiping out any previously earned benefits.
Upon the first withdrawal, many living benefit designs stop growing the income base at the guaranteed growth rate.
The death benefit will almost certainly be decreased by the amount of the “withdrawal” on a pro rata basis.
A new contract can initiate a new surrender period (you may have to wait up to 10 years before withdrawing).
Concepts to Consider
Do your homework and learn everything you can about your annuity (call the company and get detailed policy information in writing)
In the property split, try to offset the annuity with other assets of comparable value (you will need proper actuarial valuation)
In the future, consider splitting the annuity income stream (if used for income).
To summarize, an annuity is a sophisticated financial asset that can be irreversibly ruined by misinformed parties attempting to divide, transfer, or pay out an annuity after a divorce. If your instructions are vague or contradictory to their own policies, insurance and financial companies will make it difficult for you to carry out the provisions of your divorce agreement. To better understand your annuity, act early and do your homework.
Is my wife entitled to my annuity?
When it comes to determining how much each spouse is entitled to, the normal practice is to divide pension benefits earned throughout the marriage evenly. Though this means your spouse will be able to claim half of your pension, they will only be allowed to claim what they earned during the marriage. Any contributions you or your employer made on your behalf during that time, for example, would not go against the amount a spouse could seek in a divorce if you were enrolled in a defined-benefit plan for ten years previous to getting married.
What does a split annuity involves?
A split-funded annuity is a type of annuity in which a portion of your purchase price is used to fund an immediate payout and the rest is used to fund a delayed annuity. Years after the purchase date, a deferred annuity pays out. This allows the cash to accrue over time, resulting in greater payouts.
Can ex wife claim my pension years after divorce?
Is it possible for my ex-wife (or ex-husband) to receive my pension after we divorce? In a divorce judgment, a court could require that you pay your spouse a share of your pension payments when you retire. Even after several years, the court’s decision would remain enforceable.
Can I transfer my annuity to my wife?
Because annuities grow tax-deferred, the untaxed growth counts toward the recipient’s taxable income when they pay out. By electing to forego the proceeds, which is solely available to the surviving spouse, the full annuity is transferred to the surviving spouse without incurring any tax burden. Transferring an annuity throughout the life of the annuitant may have tax implications. If the annuity is donated to someone over the age of 13, such as an adult child, the original owner may face gift taxes at the time of the transfer.
Are annuities part of an estate?
All assets titled in your name become part of your estate when you die. There is a maximum estate valuation exemption for federal tax purposes and for states that impose estate taxes before taxes are applied. Your annuity death benefits are normally not included in your taxable estate if they go to your spouse. The death benefit is included in your estate valuation if it goes to any other beneficiaries.
Is an annuity personal property?
You transfer property to your children or others in exchange for their unsecured promise to make annual payments to you for the remainder of your life in a typical private annuity arrangement. Because the annuity is delivered by a private party rather than an insurance company or other commercial body, it is considered “private.”
How do I change ownership of an annuity?
If you want to change the owner of your annuity contract, contact your annuity firm and inform your account manager. A change of ownership form will be sent to you by the annuity firm. Fill out your annuity’s change of ownership form.
What is a Quadro in divorce?
A “qualified domestic relation order” (QDRO) is a domestic relations order that establishes or recognizes the right of a “alternative payee” to receive, or assigns the right to receive, all or a portion of the benefits payable to a member under a retirement plan, and that
