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Dividing variable annuities in divorce cases

| Sep 1, 2020 | Divorce |

When a couple in Colorado decides to divorce, they’ll have to divide the assets that they’ve accumulated during their marriage. Spouses who have been married for a long time may have accumulated substantial assets, and this could lead to a complex asset division process. One particularly tricky type of asset is a variable annuity. Dividing variable annuities correctly is important for avoiding tax consequences and contract fees.

What is a variable annuity?

A variable annuity is a contract with an insurance company through which people invest money into the annuity. While fixed annuities offer fixed distribution amounts, the amounts that will be distributed from a variable annuity will depend on the performance of the investments. Variable annuities are also tax-deferred, meaning that the account holders will not pay taxes on their earnings until they begin taking distributions from the annuity. Like other types of marital assets, the contributions to a variable annuity and the investments earned during the marriage will be subject to division in a divorce.

Why dividing annuities in divorce is tricky

Variable annuities must be divided correctly in divorces. Otherwise, tax and contract fees and penalties may be applied. Some variable annuities are also contained within qualified retirement plans and will require qualified domestic relations orders to be prepared to effect the division. Non-qualified plans must still be divided correctly and will require court orders or the account owners’ instructions to complete the divisions. If a transfer is not completed correctly, the owner may face a 10% withdrawal penalty and be taxed on the amount withdrawn as income. The owner may also be assessed a surrender fee under the contract. When the transfer is completed correctly, the transferred amount will go into an annuity in the recipient spouse’s name, and this person will own that annuity outright.

An individual with complex assets that will need to be divided in a divorce may benefit from consulting with an experienced family law attorney. A lawyer could help you divide assets in a way that minimizes the taxes and penalties that might otherwise be assessed.