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What happens to a variable annuity in a divorce?

On Behalf of | Sep 2, 2020 | Divorce |

People in Elizabethtown who are getting a divorce might have a variable annuity as part of a retirement account. This may need to be divided in the divorce. However, if assets must be transferred from one spouse to another, it is important to do it in a way that minimizes penalties and taxes.

Annuity ownership

Ownership of the annuity may be held by both spouses or only by one. If only one spouse owns it, it might still be considered marital property. Since Kentucky is not a community property state, marital property is supposed to be divided equitably, which is not the same as equally. However, if a part of the annuity must be divided and it is part of a qualified retirement account, a document called a qualified domestic relations order is needed. If it is a non-qualified annuity, the owner may need to provide written instructions or a court order may be needed.

Transferring an annuity correctly

Both federal tax law and the rules surrounding the annuity are relevant in determining the steps for transferring the annuity. Annuities are tax-deferred investments, so if the transfer is done incorrectly, the person receiving it could be required to pay tax on it as part of income as well as an additional penalty and other charges.

Even if the annuity is owned by one spouse but it is considered marital property, it does not necessarily have to be transferred to the other spouse. Some people who are getting a divorce might be able to reach an agreement about property division through negotiation instead of going to court where a judge decides. This could mean that they agree to each take certain assets in whole instead of dividing them. However, they should allow for how taxes and other costs may affect the value of these assets.