Dividing a Variable Annuity in a Divorce in Alabama

Dividing a Variable Annuity in a Divorce Settlement

It is important that you and your spouse are aware of the nature of each asset while dividing marital property during a divorce. Variable annuities are part of most retirement portfolios. They play a key role in the diversification of the portfolio and are useful in anchoring income allocation for individuals nearing retirement.

You may want to divide the annuity proceeds equitably after the divorce. Unfortunately, variable annuities can prove to be difficult to divide for a number of reasons.

What is a Variable Annuity?

A variable annuity can be best explained as a contract with an insurance company through which individuals can invest in an annuity. A variable annuity allows the investor to receive payments from the insurance company at a future date. The company holding the annuity is responsible for investing the money within it till the first distribution becomes due.

In Alabama, a variable annuity can be split into two different policies following a divorce settlement. Alternatively, a portion of the annuity value can also be divided between the spouses. Variable annuities are different from fixed annuities since they depend on the performance of the investment. In fixed annuities, there is a fixed distribution of amounts. This is not the case with a variable annuity.

Variable annuities are tax-deferred, which means that account holders are not responsible for paying taxes on their earnings. This is until they can take distributions from the annuity. Contributions to a variable annuity and any investments earned thereon during the period of marriage, like other types of marital assets, will be subject to equitable division during a divorce. With that said, this may reduce the value of the annuity.

Determining Asset Ownership

A variable annuity is considered joint property, as a general rule, if it was obtained during the course of the marriage. In case the court decides to split the annuity, you would get ownership of one policy while your spouse gets another. Typically, you would be given ownership rights as soon as the new annuity is created. This will give you the opportunity to determine whether the asset continues to be a sound investment and name a beneficiary.

Dividing Variable Annuity Can be Tricky

It is vital that due consideration is paid to dividing the variable annuities correctly during a divorce. Otherwise, there may be penalties, contract fees, and taxes applied. There are certain variable annuities that are within qualified retirement plans. Dividing these assets will require qualified domestic relations orders.

Non-qualified plans require the account owners’ instructions or court orders to be divided correctly and for completing the divisions. You may face a 10% withdrawal penalty and taxes on the amount withdrawn as income if the transfer is not done correctly. You may be assessed a surrender fee as per the contract as well. This can take a major share of your savings from the variable annuity.

The transferred amount will be deposited in the recipient spouse’s name as a second annuity when the transfer is correctly completed. Your spouse will own their share of the annuity outrightly. Individuals with complex taxes may benefit from consulting with a proven family law attorney. Attorneys can help with the division of assets in a manner that minimizes penalties and taxes.

Transferring an Annuity During a Divorce

All marital assets, including retirement assets, are split as equitably as possible during a divorce. A variable annuity is divided on court orders. The judge will do this through a qualified domestic relations order (QDRO). The spouse that owned the original annuity doesn’t really need to do anything. The insurance company will take care of the process. The insurance company will essentially take the mandated percentage of the variable annuity and use it for creating two new ones.

You should know that the new annuity will have the same rights and responsibilities as the original annuity. For instance, the new owner will be required to pay taxes on it. There are serious consequences to a variable annuity not being divided properly. You may be able to achieve a smooth annuity transfer by finding a law firm that has experience in asset division.

Other Things to Know About Dividing Variable Annuities

Both parties should have a detailed discussion with their divorce attorneys and tax advisors about how the full or partial transfer and withdrawal of the annuity will affect the annuity contract before the divorce is finalized. Taxation is not the only thing you need to be aware of.

The transaction may adversely affect other features of the contract as well. Contracts receiving Series of Substantially Equal Periodic Payments (SSEPP) should be given special consideration. These contracts face additional penalties and taxes if they are modified before 5 years or before the age of turns 59 ½.

Get an Accomplished Divorce and Family Law Attorney on Your Side

It can be difficult to decide on how your marital assets need to be divided during a divorce. The capable family law attorneys at Alsobrook Law Group can explain all your legal options along with their pros and cons. Schedule your free case review with our skilled and compassionate divorce lawyers today. Call us at 334-737-3718 or contact us online.