The most common disposition of an annuity in divorce proceedings is to split the annuity in half. This is typically executed by withdrawing half of the account value and giving it to one of the spouses. In most cases, the other spouse is then left with the option of taking the other half of the annuity in cash, or maintaining the annuity with half of the previous value. Either solution will almost certainly impact the guarantees of any living benefit that is attached to a variable or indexed annuity, thereby reducing the wealth of both spouses.
Can annuities be split in a divorce?
Annuities as Marital Property: Divorce Settlement Laws. However, if both parties paid premiums while married, the annuity is typically split. Some annuities are owned jointly between spouses, while others are individually owned. You can transfer in part or in whole an individually owned annuity.
Does my spouse get half my assets in a divorce?
To answer the question at hand of does your spouse get half your assets in a divorce isn’t cut and dried. The answer is yes and no, or maybe. Was that clear enough?
Can a spouse claim an annuity if it was acquired before marriage?
However, if the annuity was acquired during the marriage, each spouse may have a claim if it is part of the community marital property. Suppose, the annuity were acquired prior to the marriage, but the married couple paid premiums into the annuity.
How do I recommend an annuity in a divorce?
Strategy No. 1. Call the insurance company and ask how they handle an annuity in a divorce before you make any recommendation. This is not something the average phone rep is likely to know, so make sure you get their answer in writing.
How to divide an annuity?
There are four options for dividing an annuity. The first option is a withdrawal of all or part of the annuity with a direct distribution to you. The second choice is to transfer the amount awarded to you, whether a specific dollar amount or percentage of total contract value, via a direct transfer to your IRA. The third method, preferred by the vast majority of insurance companies, is to take a “withdrawal” from original contract and then issue two new contracts to you and your ex-spouse, that set forth pro rata benefits and new account values.
What is the role of annuities in divorce?
Annuities play a key role in portfolio diversification and can anchor fixed income allocation for those nearing retirement. However, in divorce, annuities can also be the black sheep of the marital pie.
Why are annuities important?
Annuities were designed to be a reliable means of securing a steady cash flow for an individual during retirement years and to reduce fears of outliving one’s assets. An annuity is a legal contract that binds an insurance company to provide guaranteed periodic payments to the annuitant for a specific time period or for lifetime.
What is an annuity?
In retirement, an annuity guarantees risk-free retirement income. Annuities come in all shapes and sizes. Each annuity contract varies among provider companies and each has its own set of rules. Each annuity contract specifies the structure (variable or fixed rate), any penalties for early withdrawal, surrender period, ...
Can you divide an annuity between spouses?
If the answer is no, you may not want this annuity as part of your share of the marital assets. Unfortunately, annuities are not like other marital assets which can be divided readily between both spouses. Divorce attorneys may not understand this.
Do you need a QDRO for an annuity?
This type of annuity requires a QDRO if it is to be divided. If you split an annuity, then any share of the annuity you receive will not be taxable at time of transfer in the context of divorce. However, if divided, you can receive at most the benefits of the existing contract, nothing more. You need to read the annuity contract to know ...
Can you split an annuity in divorce?
The last choice, that does not split the annuity but may be necessary in some divorce agreements, is to transfer ownership of the contract in whole to you, in which case, a new contract goes into effect. With any of these options, the annuitant must authorize the insurance company to split or transfer the annuity and a QDRO may be required.
What happens if you withdraw from an annuity?
A withdrawal exceeding that amount will be considered an excess withdrawal. A withdrawal of half of the annuity value will most certainly be considered an excess withdrawal. Any excess withdrawal will result in a reduction in the future guaranteed income.
Can a death benefit be reduced?
The death benefit will likely be reduced pro-rata by the amount of the “withdrawal.”. Surrender charges can apply. One of the spouses may have to accept a newer version of the contract. Many companies require the proceeds of the “withdrawal” to go into a contract that is currently available for sale.
Is a withdrawal taxable?
A withdrawal can create the following problems: It can be taxable. While most companies I’ve talked with will automatically process the transaction as an internal exchange, some will do this only if the divorce decree stipulates that it should not be taxable.
Is divorce a difficult process?
Divorce can be a very difficult process for all parties involved. Setting aside the emotional impact, it can also be very destructive to the financial well-being of both parties. And if your client counts an annuity or two among his or her investable assets, that client’s net worth may be reduced even more than expected.
Can an annuity contract be split?
The core of the problem is that very few insurance companies actually “split” the annuity contract. Instead, the vast majority of them process this request by making a “withdrawal” from the original contract and issuing a new one. Splitting a contract and issuing two identical pro-rata contracts in terms of account value, living benefit values and death benefits is an administrative burden for most insurance carriers.
Can financial advisors work with divorce attorneys?
This situation creates an opportunity for financial advisors to build relationships with divorce attorneys and assist them in taking the best course of action for their clients who own annuities.
Does an excess withdrawal reset the income base?
In fact, with some living benefit designs, an excess withdrawal will actually reset the living benefit income base to the account value, thereby wiping out any additional benefits earned on the contract to date. And finally, many living benefit designs stop growing the income base at the guaranteed growth rate upon the first withdrawal.
How to divide an annuity in divorce?
The first step in assessing how to divide an annuity in a divorce is to determine whether the annuity is marital property or not. The specific criteria are dependent on state law. The general rule, however, is that if one partner owned an annuity prior to the marriage, and no further premiums were contributed to it during the marriage, the original owner retains rights to the annuity. However, if the annuity was acquired during the marriage, each spouse may have a claim. If the annuity were acquired prior to the marriage, but the married couple paid premiums into the annuity, then the second spouse may have a claim to part of the earnings attributable to contributions during the marriage.
How much is the penalty for an annuity distribution?
Normally, the law imposes a 10 percent penalty on distributions from an annuity prior to age 59 1/2, plus the immediate payment of any income taxes due on earnings over and above the annuity owner's tax basis in the annuity.
What is a QDRO in divorce?
A qualified domestic relations order, or QDRO, is a court order or decree dividing marital assets equitably among two divorcing parties . QDROs have their limitations, however: They cannot award either party in a divorce any income or annuity benefit that is not available under the terms of the original annuity contract. If the annuity cannot be cashed out in a lump sum, for example, neither can the courts award a cash payment to the annuitant's divorcing spouse. Instead, the courts can award a share of future income. However, if the annuity contract allows for lump sum payments, the divorcing spouse can receive a lump sum, rather than a stream of payments.
What is the tax basis of an annuity?
Tax Basis. When you take money out of an annuity, you must pay taxes net of the annuity's "exclusion ratio.". The exclusion ratio is equal to the tax basis in the annuity, divided by the future benefits expected from the annuity if the annuitant lives to life expectancy.
What happens if an ex spouse gets an annuity?
When an ex-spouse receives an annuity interest from a former spouse as part of a divorce, she also inherits her ex-spouse's tax basis in the annuity. In this way, she still receives credit for premiums paid into the annuity, and is not double taxed on income after having already paid taxes on premium.
Can a spouse claim an annuity?
However, if the annuity was acquired during the marriage, each spouse may have a claim. If the annuity were acquired prior to the marriage, but the married couple paid premiums into the annuity, then the second spouse may have a claim to part of the earnings attributable to contributions during the marriage.
Can annuities be divided?
Because of the unique structure of annuities, they can be a tricky asset to divide up in retirement. Annuity owners do not have a separate account at the insurance company, but instead simply hold a claim to the terms of a contract in which the annuity company will send them future income according to the contract's terms.
What to do if your spouse's retirement account is large?
Sometimes these are good enough, but if your share of your spouse's retirement account is large, you may want to work with a lawyer. A lawyer who specializes in QDROs can ensure that each aspect of your marital settlement agreement is part of the QDRO.
When do spouses receive pension payments?
If your spouse has a defined benefit plan, such as a pension plan, on the other hand, you are likely to receive monthly payments starting at your normal retirement age. 9
Is a retirement plan considered marital property?
Assets that are earned during the marriage are considered marital property . Anything added to a retirement plan after marriage will not be regarded as separate property and may be divided between both parties. In some states, this means they will be split 50/50, and in others, the courts will decide how to fairly divide the retirement plan based on factors like age, work history, health, etc. 11
Can you draft a QDRO during divorce?
Drafting a QDRO During Divorce. A DRO is not considered "qualified" unless it's been approved by the retirement plan's administrator and the court. 5 Retirement plans often have standard QDRO forms that your lawyer can use to draft the wording of the QDRO. Sometimes these are good enough, but if your share of your spouse's retirement account is ...
Is retirement a part of divorce?
Retirement Plans and Divorce. Retirement savings are among the most valuable assets many people own. That means they are often a big issue during a divorce. Knowing how to split retirement assets can be one of the hardest aspects of divorce, as they may be subject to tax implications. For that reason, they are often not handled properly.
Can my spouse take part of my employer's retirement?
It also works the other way around: Your spouse is entitled to part of your employer-sponsored retirement account value if you have one.
Do you need a QDRO to divide an IRA?
Keep in mind that QDROs only apply to plans that are IRS tax-qualified and covered by the Employee Retirement Income Security Act, or ERISA. 3 They do not apply to military or government pensions, which are governed by other laws. Note. You do not need a QDRO to divide IRA or SEP assets. 4 .
What happens when a couple can't agree on a property division?
However, when they can’t agree, the matter is often taken to court. The method of division of their property is then taken out of the couple’s hands. A judge will rule on the matter and make the decision on which asset goes to which party.
What is the most contentious aspect of divorce?
Aside from disagreements regarding child custody, perhaps the most contentious aspect of a divorce is dividing the assets. It is easy to understand what makes this issue such a combustible one. A couple spends years procuring assets together, and then they must divide said assets after a divorce. In some cases, couples are able to do this on their ...
How are assets divided?
In general, assets are divided by the court or the two spouses by assigning a monetary value to each item that is considered community property. Having an appraisal done of the asset is often the easiest way for the correct value to be determined. Some assets are more difficult to divide, such as retirement assets or a business and require an attorney’s expertise.
Can a divorced couple agree to divide their assets?
Of course, there are always those cases where individuals simply cannot come to an agreement when in regards to how their assets are to be divided. When a divorced couple works out the details on their own, it makes the whole process much easier. However, when they can’t agree, the matter is often taken to court.
Does my spouse get half my assets?
To answer the question at hand of does your spouse get half your assets in a divorce isn’t cut and dried. The answer is yes and no, or maybe.
How Are Pensions Usually Divided or Split in a Divorce?
Generally speaking, a pension that is earned during the marriage is considered to be joint marital property and is subject to division during divorce, just like any other marital property. Any part of the pension that was earned prior to the marriage can be considered non-martial, separate property. Separate property is not divided during divorce.
How are pensions calculated in divorce?
How Are Pensions Usually Calculated During a Divorce? There are two basic ways to treat a pension in a divorce: either both spouses can agree to share the monthly annuity payments (or lump-sum payment) during retirement, or they can divide the present value of the pension at the time of the divorce.
Why are pension plans unique?
Pension plans are unique because they promise to give employees a set amount of retirement benefits for life. This is referred to as a defined-benefit plan. Unlike defined-contribution plans such as 401 (k)s, employees do not have a role in contributing to the funds.
What happens if you sell your house and get $300000?
The spouse who got the home may be hit with capital gains tax if they decide to sell the home, making the settlement unequal.
What is the biggest asset in a divorce?
Retirement accounts are often one of the biggest assets in a divorce, and many people going through divorce worry about losing their retirement savings, especially if they are nearing retirement age.
Can you lose half your pension in divorce?
Before you automatically assume that you will lose half of your pension in your divorce, keep in mind that a pension is usually only one piece of the pie when it comes to property settlement. It is possible to divide your marital assets in a way that would allow you to keep your entire pension in exchange for your spouse getting other property ...
What does it mean to have a single life property settlement?
Your plan might also have a single-life payout, which means the monthly payments would stop at your death , or a joint-life payout, which means the payments would continue until your spouse's death. You need to know both of these details before negotiating a property settlement.
What to do if you have a pension and are in the midst of a divorce?
The Power of Bargaining. If you have a pension and are in the midst of a divorce, don’t just fork over half – at least not at first. You may have a few bargaining chips on your side. First, find out if your soon-to-be ex has a retirement of their own.
What to do if your spouse doesn't have a retirement account?
Second, if your spouse doesn’t have a retirement account of their own that’s equal to your pension, consider other joint marital assets that you may be able to offer them instead. Real estate would be your best choice here. In lieu of splitting your pension, try offering up your former home or another piece of real estate if it’s of comparable value.
When did the retirement equity act come into effect?
However 1984 brought the Retirement Equity Act, which protects spousal benefits as they relate to pensions. In order to gain access to a percentage of your pension, your spouse would have to specifically ask for their share at the time of the divorce – not at the time of your retirement.
Is a pension joint or individual?
A pension earned by one spouse is usually considered a joint asset, as are other retirement accounts, such as 401(k)s, 403(b)s and IRAs, though state laws govern the latter. Usually, whatever is earned prior to the marriage remains individual property, while what is earned during the marriage is considered a joint asset.
Can you divide your pension in divorce?
However, the divisions of pensions in a divorce isn’t always a cut-and-dry situation. For one, unless you are actively receiving a pension (and thus know the exact details of the payment amount and frequency), it can be difficult to pin down its exact value.
Can you split military pension in divorce?
If you have a military or government pension, these are governed by their own specific set of rules and may not be subjected to the same rules when splitting your assets in a divorce.
Do military pensions have separate rules?
Know that military and government pensions have their own separate set of rules.
non-divisible
Four Options in Dividing Annuities
- There are four options for dividing an annuity. The first option is a withdrawal of all or part of the annuity with a direct distribution to you. The second choice is to transfer the amount awarded to you, whether a specific dollar amount or percentage of total contract value, via a direct transfer to your IRA. The third method, preferred by the vast majority of insurance companies, is to take a “…
Are You Getting What You Think You’Re getting?
- What happens in the process of issuing new contracts? You have risk – and, you may not be getting what you think you are as a new annuitant. Why? New contracts may not provide the same benefits as the original. Here are some of the adjustments that can be made by insurance companies. Interest rate guarantees may be less than the original (in favor of the insurance com…
Concepts to Consider
- Do your homework and understand the nature of your annuity (call the company and get detailed policy information in writing) Try to offset the annuity with other assets of equivalent value in the property division (you will need proper actuarial valuation) Try not to split the annuity. Explore sharing the income stream from the annuity in the future (if used for income). Know when a QDR…