Annuities & Divorce Laws

Equitable distribution can be a complicated and costly process in divorce proceedings. Though difficult, splitting annuity assets, properties and other investments is an inevitable part of the process.

Dividing Annuity Assets in Divorce

Dividing community property, or property jointly owned by a married couple, can often be a complicated process, with your financial options dictated by potential tax implications. You should seek to understand the long-term consequences of changing your annuity policy as you plan for your new life.

An estimated 40 to 50 percent of couples in the United States divorce, according to the American Psychological Association. As a result, a large number of couples have to legally and fairly divide assets, retirement funds, houses and sometimes even children. This starts the official process of division.

41 percent of first marriages end in divorce, 6o percent of second marriages in end in divorce, and 73 percent of third marriages end in divorce.

While some things may evenly divide in half, others do not. Some decisions involve more personal sentiment and attachment, while others – like annuities – involve financial calculation. Some divorce attorneys recognize the difficulty of this division process, specifically for the tax implications and the process of altering the initial annuity policy. However, there are four major ways divorcees can divide their annuities:

  • Withdrawal – Individuals can choose to withdraw a portion or all of an annuity and directly distribute it to both parties.
  • Transferral – Divorced couples can choose to have awarded amounts transferred directly to them through an IRA account.
  • Start a New Contract – One of the most common ways to divide an annuity is to withdraw from an existing contract and create two new contracts for both parties, with new benefits and account values.
  • Transfer Ownership – Transferring ownership does not split an annuity between two parties. Instead, it grants all rights and control of an existing annuity to one party in order for a new annuity contract to take effect.

Type of Divorce Settlement

There’s more than one legal way to get divorced, and often both sides have their say in how they want it to happen. Even so, state laws and the amount of investment assets involved dictate some of the options.

Options to Consider:

Summary DivorceA summary divorce involves shorter marriages, fewer assets (property), less debt, no children and does not require lawyer.
Uncontested DivorceAn uncontested divorce involves mutually agreed upon terms and cooperative behavior. There is not a formal trial or lawyer, and often no court appearance is required.
Default DivorceA default divorce can be granted by the court when one spouse is not participating.
Fault & No-Fault DivorceFault and no-fault divorces involve irreconcilable differences, whether one spouse is to blame or if neither spouse is found at fault.
Mediated DivorceWithin a mediated divorce, couples agree to engage a neutral third party to mediate disputes and assets.
Collaborative DivorceIn a collaborative divorce, lawyers on both sides work with clients and each other to reach settlement.
ArbitrationArbitration involves a private judge hired to help make decisions.
Contested DivorceA contested divorce requires a judge to decide terms, which often involve custody and child support, property division, debt allocation, alimony, temporary spousal support.

What is a Gray Divorce?

Getting divorced later in life presents a unique set of problems. Some people above the age of 40 report that a divorce is more devastating than losing a job, equal to going through a major illness, and only slightly less devastating than the death of a spouse. One out of 20 divorced Americans are 65 or older and are considered participants in what is termed a “gray divorce.”

The divorce rate for U.S. adults ages 50 and above has doubled since the 1990s.

In a gray divorce, dividing assets takes precedence over child custody, assuming that any children from marriage are no longer minors. Some things to consider when divorcing later in life include:

  • Carefully analyzing all your retirement accounts. Retirement funds, like annuities, are almost always split evenly – even if one spouse is considered at-fault for the divorce.
  • Asking your attorney about having your spouse provide health care coverage as part of the settlement, if necessary. Getting health insurance in your 60s can be particularly challenging, and Medicare doesn’t kick in until age 65.
  • Reviewing your rights under Social Security before the divorce is final. If you’ve been married for more than 10 years and you’re above the age of 62, you can collect Social Security on your former spouse without reducing his or her benefits.
  • Discussing tax concerns with your accountant. Filing as single means paying more in taxes.

Annuities as Marital Property

Annuities considered marital property must meet state law and insurers’ rules about divorce. Time changes how much payments are worth, and the value doesn’t necessarily transfer to a fixed dollar amount.

A court may not consider certain annuities as marital property if they were purchased prior to the marriage and if no one made premium payments after. Often times, annuities remain with their original owner. In that case, splitting them is unnecessary. 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. However, transferring a large sum of annuity assets can be considered an excess withdrawal and may ultimately reduce the amount of death benefits disbursed from the contract.

During a divorce, a couple could change some or all of these elements. The issuing company dictates what can be changed and usually requires notification from both spouses or demands papers from the divorce decree prior to making any changes. Some contracts have more restrictive language than others about what can be changed or divided. Annuity regulations can be found in the original investment contract.

Three elements come into play when dividing annuities:

  1. The current annuity owner(s) — the person(s) who made premium payments
  2. The person(s) receiving payments — the current annuity owner and/or spouse
  3. The beneficiaries scheduled to receive remaining payments or death benefits

Taxes & Fees

Couples who jointly own an annuity may be required to split their investment as a term of the divorce decree, along with all remaining assets, property tax basis and funds. Maintaining a joint annuity contract can bring on negative tax consequences for both parties. Often, one spouse may transfer a portion or all of their annuity to the other spouse, granting them annuity ownership. This transfer includes all tax implications.

The IRS allows certain exemptions for owner transfers related to divorce. Done correctly, the transfer should prevent tax consequences and contract fees. Couples moving the annuity from one spouse to another don’t face added tax liability for the transfer. In other words, the IRS treats divorce as a non-taxable event. The annuity maintains its tax-deferred status, though the new annuity owner will still owe income taxes on distributions. If transferred incorrectly, any transferred assets can immediately be taxed as ordinary income and can also accrue additional tax penalties and surrender charges.

If one spouse accepts an early distribution from an annuity as part of a divorce settlement, the IRS will charge income taxes on earnings and will also charge an early withdrawal penalty. If the policy owner moves the asset to a new annuity, known as a 1035 exchange, they will not owe added taxes. For the 1035 exemption to apply, the transfer must meet certain stipulations.

Notes on Transfer or Split Scenarios:

  • 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 insurance company.
  • Individual annuity contracts put limitations on what transfers in the case of a divorce. Most contracts do not allow transfers of living benefits or added riders.

Qualified Annuities

Couples with annuities held in qualified retirement plans — including a 401(k) or an IRA account — need a Qualified Domestic Relations Order (QDRO) to protect tax exemption. A court issues the QDRO, and it often divides 50 percent of retirement assets. However, if the annuity is nonqualified and taxes have already been paid on the money invested in the account, a QDRO is not required to split the annuity. Only the earnings are taxed upon withdrawal.

Taking the original contract terms into consideration, the court may allow a couple to divide future periodic payments or distribute the annuity in a lump sum. The QDRO needs to be in place prior to the finalized divorce in order to protect both parties.

The court requires insurers to comply with orders for splitting the annuity. A state court judgment, decree or approval of the property settlement agreement can define rules for dividing the asset.

Surrendering or Selling Payments

To resolve annuity disputes caused by divorce, couples can surrender or sell annuity payments for cash. Annuity owners can surrender their policy through the issuing company. However, they may owe surrender fees depending on how long the policy has been in place, whether distributions have started and the amount of disbursed payments.

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While you lose a portion of the asset’s value when selling or surrendering, dividing a simple cash total can be easier than having an actuary determine value, trying to split the policy or changing your contract.

Divorce Attorneys and Financial Advisors

Insurance companies create complex contracts with rules dictating how the policy may or may not change. Even the savviest of divorce attorneys must pay thorough attention when evaluating the consequences of dividing this asset. Speak with a divorce attorney and financial advisor to help minimize losses, discuss your options, and to determine any financial repercussions of changing annuity contracts.

Page Sources

  1. Cussen, CFP, CMFC, AFC, M. P. (2016, May 23). Divorce and Annuities: What Clients Need to Know. Retrieved from
  2. McKinley Irvin Family Law. (2012, October 30). 32 Shocking Divorce Statistics. Retrieved from
  3. Mroz, K. (n.d.). Dividing a Variable Annuity in a Divorce Settlement. Retrieved from
  4. Stepler, R. (2017, March 9). Led by Baby Boomers, divorce rates climb for America’s 50+ population. Retrieved from
  5. Vasileff, L. (2016, August 2). Understanding the Trickiness of Dividing Annuities in Divorce. Retrieved from
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