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Dividing an Annuity in a Virginia Divorce Settlement
When a couple gets divorced, one of the most complicated issues that will need to be resolved is the division of marital property. This is especially true if the spouses have accumulated significant assets during the time that they were married. One marital asset that is particularly difficult to divide is an annuity. This type of asset must be handled properly during the division of the marital estate in order to ensure that the spouses do not incur negative tax consequences and unnecessary penalties and fees.
What is an Annuity?
An annuity is an insurance contract that is issued and distributed by a financial institution to pay out the funds (that are invested in it) at a future time in accordance with the terms and conditions of the contract. Annuities are often purchased by individuals with a significant sum of money who prefer to receive the money in set payments (usually monthly) so they can have a predictable future income.
Annuities can be structured in a number of different ways. There are immediate payment annuities that, as the name implies, start paying the annuitant right after the lump sum is deposited. Then there are deferred income annuities that do not start paying until a later date. Individuals often set up a deferred income annuity to begin payments when they retire.
There are also fixed annuities and variable annuities. With a fixed annuity, the annuitant can receive set periodic payments (based on the amount deposited and other terms and conditions of the contract). With a variable annuity, the payments can fluctuate based on the performance of the investments made by the annuity fund. If the fund does well, payments are higher. But if the fund does poorly, payment amounts may drop.
Dividing Annuities During a Divorce
Because of the uniqueness of the asset, annuities must be divided very carefully when a couple gets divorced. As we touched on earlier, there are potential financial risks involved with altering an annuity contract, and there could be negative tax implications as well if the division of the annuity is not done properly pursuant to the divorce.
Before choosing the best way to divide the annuity, it must first be determined who the asset belongs to. In general, assets and property that a spouse brought into a marriage are likely to be considered separate, non-marital property. The same holds true for gifts and inheritances that a spouse received while the couple was married.
With annuities, it is not always clear whether the asset is marital or non-marital. For example, there are annuities that are part of qualified retirement plans through an employer. Maybe the spouse started the job and was given the annuity shortly before the couple was married, but most of its value was accumulated during the marriage. In a case like this, the court is likely to determine that the annuity is a marital asset.
Assuming that the annuity is determined to be part of the marital estate, there are some important issues for divorcing spouses to consider:
- Qualified annuities are annuities in which the funds that are deposited are tax deductible. In this way, they are similar to individual retirement accounts (IRAs), and dividing them in a divorce will require a qualified domestic relations order (QDRO).
- Non-qualified annuities are funded with after-tax dollars and do not require a QDRO. Since taxes were already paid on the money put in, only the appreciation of the account (i.e., earnings) will be taxed upon withdrawal.
- New annuity contracts (after the asset is divided) might not provide the same benefits as the original contract. For example, interest rate guarantees for annuitants could be lower, and as a result, their future guaranteed income could be lowered as well.
- Annuity contracts should be reviewed carefully to determine what fees and penalties an annuitant may be subject to if the asset is split.
- Divorcing spouses should discuss the terms and conditions of the annuity with a tax professional to determine how dividing this asset may impact their taxes.
At the end of the day, you may decide that it is better not to divide the annuity and to look for an alternative solution. There are a couple of different ways you can go about this. If possible, the easiest and cleanest way is to offset the annuity by giving the non-owning spouse assets of equivalent value. Another possibility is to keep the annuity as is but draft a written agreement to split the income stream from it.
Work with Experienced Virginia Divorce Attorneys
Dividing an annuity is one of many complicated issues that will need to be resolved during a divorce. And with unique assets like these, a creative “out-of-the-box” solution is often required. This is why it is very beneficial to work with attorneys who have extensive experience helping clients resolve difficult issues like these.
If you need help with a divorce or any other family legal matter in Virginia, contact Buck, Toscano & Terezkerz for assistance. Message us online or call our office today at (434) 977-7977 to set up a personalized consultation with one of our attorneys.
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