Annuities & Divorce Laws

Written By : Elaine Silvestrini
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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.

Pro Tip
41% of first marriages end in divorce, 60 percent of second marriages in end in divorce, and 73 percent of third marriages end in divorce.

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 divide assets, including retirement funds and houses.

While some things may be easy to divide equally, others are not. Some belonging are sentimental, while others – like annuities – involve complicated financial calculations. 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 divorcing couples can address their annuities:
Individuals can choose to withdraw a portion or all of an annuity and directly distribute it to both parties. Keep in mind, however, that a large withdrawal from an annuity may reduce benefits, including death benefits, including death benefits paid from the contract.
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 way to get divorced, and both sides have their say. Even so, state laws and the amount of investment assets involved dictate some of the options.

Divorce Options:
Uncontested Divorce
An 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 Divorce
A default divorce can be granted by the court when one spouse is not participating.
Fault & No-Fault Divorce
Fault and no-fault divorces involve irreconcilable differences, whether one spouse is to blame or if neither spouse is found at fault.
Mediated Divorce
Within a mediated divorce, a couple agrees to engage a neutral third party to mediate disputes and division of assets.
Collaborative Divorce
In a collaborative divorce, lawyers on both sides work with clients and each other to reach settlement.
Arbitration involves a private judge hired to help make decisions.
Contested Divorce
A contested divorce requires a judge to decide terms, which often involve custody and child support, property division, debt allocation, alimony and temporary spousal support.
Summary Divorce
Summary divorces involves shorter marriages, fewer assets(property), less debt, no children and do not require lawyers.

What is a Gray Divorce?

Getting divorced later in life presents a unique set of problems. One out of 20 divorcing Americans is 65 or older and considered part of what is termed a “gray divorce.”

In a gray divorce, since children are usually grown, dividing assets is usually the focus.

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 in the name of your former spouse without reducing his or her benefits.
  • Discussing tax concerns with your accountant. Filing as single means paying more in taxes.
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Annuities as Marital Property: Divorce Settlement Laws

Annuities considered marital property must meet state law and insurers’ rules about divorce. The passage of time affects the value of payments.

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. When annuities remain with their original owner, 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.

During a divorce, a couple may be able to change some or all of these elements. The issuing company dictates what can be changed and usually requires notification from both spouses or papers from the divorce decree. 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:
  • The current annuity owner(s) — the person(s) who made premium payments
  • The person(s) receiving payments — the current annuity owner and/or spouse
  • The beneficiaries scheduled to receive remaining payments or death benefits

Transferring an Annuity: What You Need to Know

A financial advisor should be consulted early in the process to avoid problems that commonly arise when transferring annuities in divorce. An advisor will determine the best way to proceed, keeping in mind the type of annuity involved.

It’s important to get information from the annuity carrier about how it handles dividing contracts in divorces. You may have to talk to someone in the legal department to get the correct details. Ask the company to put the information in writing before you have a court order so you can use it to seek changes in the order, if necessary, before it is final.

There are several options for dividing an annuity: You can withdraw all or part of it; you can have it transferred into an IRA; you can withdraw from the original contract and have new contracts issued to you and your divorcing spouse. The last option is generally preferred by insurance companies because it’s easier for them to process

Consider having one spouse keep an entire annuity and allowing the other to have something else of value. This can make things less complicated and avoid possible disadvantages from dividing the contract.

Tax Consequences of Annuity Ownership Changes

Divorcing couples who jointly own annuities may be required to split their investments, 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 an annuity to the other spouse, granting 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.

Transferring and Splitting Details:
  • 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 limits on what transfers in the case of a divorce. Most contracts do not allow transfers of living benefits or added riders.

Qualified Annuities

A couple with an annuity held in a qualified retirement plan — including a 401(k) or an IRA account — needs a Qualified Domestic Relations Order (QDRO) to protect tax exemption. A court issues the order, and often divides retirement assets. However, if the annuity is non-qualified 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.

Although 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.

4 Cited Research Articles

  1. American Psychological Association. (n.d.). Marriage & divorce. Retrieved from
  2. Vasilef, L. (2016, August 2). Understanding the Trickiness of Dividing Annuities in Divorce. Retrieved from
  3. Cussen, M.M. (2016, May 23). Divorce and Annuities: What Clients Need to Know. Retrieved from
  4. Mercado, D. (2012, March 18). Breaking up is hard to do – especially with annuities. Retrieved from
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