Dividing a variable annuity in a divorce

On Behalf of | Sep 2, 2020 | Divorce |

In a Virginia divorce, one of the primary concerns for the couple is likely the division of assets. These assets are often referred to as the “marital estate.” Virginia is an equitable distribution state, which makes dividing a variable annuity tricky due to the tax implications post-divorce.

What is a variable annuity?

A variable annuity is an investment in an insurance company that doesn’t provide a guaranteed return. Instead, its value depends on an investment portfolio held by the company.

Who owns the annuity?

Variable annuities can be owned jointly or by only one spouse. If owned jointly during the marriage, the annuity may be split, and each spouse will receive a portion of the original annuity. It could also continue to be owned jointly, but that might cause negative tax consequences. A financial professional may be best equipped to advise you on how your settlement should be structured.

Tax implications

The division of variable annuities is complicated from a tax perspective. There are two primary factors to consider. The first is federal tax law, and the second is the annuity contract. Variable annuities are tax-deferred assets. This means that any gains that are achieved through the investment are not taxed until payments to the owner of the annuity are made.

The divorcing couple’s goal is usually to transfer the annuity without any negative tax consequences or interest fees. Doing the transfer of ownership of the annuity incorrectly could trigger the gains to be immediately taxable as ordinary income and a 15% tax penalty imposed. Transferring the ownership of the annuity could also trigger what is known as a “surrender charge” under the terms of the contract.

If you have more questions, you may want to speak with both a financial professional and a family law attorney for assistance with the division of the marital estate. Professionals may help you understand equitable distribution of variable annuities in a divorce.

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