Division of Marital Property Annuities
It is quite common for educators and those in healthcare to have converted their 403(b) plans to annuities because the industry tends to target these occupations. When considering the annuities in divorce, any marital property annuity, or community property portion in community property states, must meet state law and insurers’ rules pursuant to divorce.
How do you determine which portion is marital? If the annuity was purchased or rolled into before the marriage and there have been no additional contributions or premium payments since the date of marriage, the annuity is fully separate property. However, if purchased/rolled into before the marriage, but there were premiums paid on the annuity during the marriage, the annuity is typically divided as a portion of it is considered to be marital property (after the marriage) and a portion separate (before the marriage).
Because marital assets need to be divided during divorce, the annuity would also need to be considered. There are several options for dividing an annuity:
1. You can withdraw all or part of the annuity
2. You can have it transferred to an IRA
3. You can withdraw from the original contract and have new contracts issued to you and your future ex.
The last option is often preferred by the issuer because it is easier for them to process and because the terms available for new annuity contracts are usually less favorable to the annuitant (current annuity owner) than the previous contract that may have been more generous.
However, there are several issues with transferring annuities.
Individually owned annuities
Transferring any portion of annuity assets can be considered as an “excess withdrawal” and may reduce the amount of death benefits paid to the original annuitant. The recipient spouse typically will need to roll the assets into a new annuity so the death benefit portion is re-established.
Another downside to transferring funds is the surrender charge that may be applied to the portion of the annuity which is not deemed to be “penalty free.” Annuities are required to be held for a specific period of time during which only approximately 10% of the assets are liquid, that is, available for withdrawal annually. Otherwise, the annuity incurs a surrender charge which could be quite hefty.
In addition, transferring or splitting an annuity may initiate a new surrender period, meaning the time table for higher interest on withdrawals is reset as defined by the issuer.
When retirement money is “withdrawn” and that includes a rollover to another account pursuant to divorce, there may be ordinary taxes due on the amount that is rolled over to any instrument other than an IRA rollover. There also may be other provisions that the issuer stipulates regarding rollovers and withdrawals pursuant to divorce.
Similarly, during a divorce a couple may be able to change some or all of the contract terms. Some contracts have more restrictive language about what may be changed or divided. Typically, individual annuity contracts put limits on what transfers in the case of a divorce. Most contracts do not allow transfers of living benefits or added riders. It is important to review the annuity contract closely, including additional riders typically paid for at the time of initial purchase, to determine what will carry over or not be affected adversely with a full or partial transfer. Annuity regulations can be found in the original investment contract.
It is important to have a Certified Divorce Financial Analyst® professional evaluate the annuity in advance to determine the best way to proceed with its division during divorce. Often, because of the inordinate fees, surrender charges, restrictions and taxes that may be due, it is better to offset the annuity with another “like” asset to equalize the division of marital assets. This can make things much less complicated, avoid penalties, surrender charges, and taxes as well as other contractual benefits such as the reduction of death benefits.
This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.
Jointly Owned Annuities
If you own a jointly held annuity you will be required to spit your investment. Maintaining a joint contract can result in negative tax consequences for both parties. Often one spouse transfers the annuity, in whole or in part, to the other spouse, granting full ownership of the contract. The transfer would include all tax implications.
Owner transfers related to divorce are usually non-taxable events by the IRS and the annuity maintains its tax-deferred status. Upon future distribution, income taxes will be assessed at ordinary tax rates. However, if transferred incorrectly, the assets may be immediately taxed as ordinary income and there may be additional penalties if withdrawn before age 59.5 and surrender charges assessed as well. The charges and fees beyond taxes are determined by the issuer.
Qualified Annuities
If the annuity is held in a qualified retirement plan such as mentioned above, a 401(k) or 403(b), a Qualified Domestic Relations Order (QDRO) may be needed to effectuate the transfer or division. Some issuers no longer require a QDRO but will require a final decree of divorce to validate the divorce.
The court requires issuers to comply with the orders for splitting the annuity; however the plan administrator may accept or reject the QDRO if it does not conform to the plan’s restrictions. Typically, before the QDRO is approved by the court, a draft is drawn, sent to the plan administrator (or issuer of annuity) and approved. This makes the court order at the time of filing for final decree, a rubber stamp.
There are many considerations for dividing annuities pursuant to divorce, and because of the restrictions, possibility of new contracts, taxes and surrender fee charges, it is important to review thoroughly what the annuity transfer will entail. It is often a better decision and less costly to offer another asset in place of the annuity to satisfy the division of marital assets.
This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.
