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Annuities & Divorce Laws

Elaine Silvestrini • Jul 28, 2023

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.

Written By Elaine Silvestrini  ●  Edited By Emily Miller  ●  Financially Reviewed By Somer G. Anderson, Ph.D., CPA, CGMA®, CFE  ●  Updated: June 19, 20239 min read timeThis page features 7 Cited Research Articles

Written By Elaine Silvestrini  ●  Edited By Emily Miller  ●  Financially Reviewed By Somer G. Anderson, Ph.D., CPA, CGMA®, CFE  ●  Updated: June 19, 20239 min read timeThis page features 7 Cited Research Articles

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

Marital property laws, also called community property laws, are established at the state level.

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 belongings are sentimental, while others — such as 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.

A divorcing couple can divide their annuity in one of four ways:


Withdrawal

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.


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 contract 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.

Types 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 in the United States:


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

Arbitration is an alternative to a court trial whereby the couple hires an arbitrator, typically a lawyer or judge, to make decisions. Arbitration is a private proceeding, and the arbitrator’s decision is binding in most cases.


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 divorce involves shorter marriages, fewer assets, less debt and no children. They 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.


What to do when divorcing later in life:


  • Carefully analyze all your retirement accounts. Retirement savings, including the cash value of annuities, are almost always split evenly — even if one spouse is considered at fault for the divorce.


  • Ask 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.



  • Review 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.


  • Discuss tax concerns with your accountant. Filing as single means paying more in taxes.

Annuities as Marital Property: Divorce Settlement Laws

The division of an annuity that is 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 annuity 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 entirety an individually owned annuity. However, transferring a large portion of annuity assets can be considered an excess withdrawal and may reduce the amount of death benefits.


During a divorce, a couple may be able to change some or all of contract terms. 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 designated to receive remaining payments or death benefits

Transferring an Annuity: What You Need to Know

Couples should consult a financial advisor early in the process to avoid problems that commonly arise when transferring annuities in divorce. The 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

A divorcing couple with a jointly owned annuity 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 transfers the annuity, in whole or part, to the other spouse, granting full ownership of the contract. This transfer includes all tax implications.


The IRS allows certain exemptions for owner transfers related to divorce. Done correctly, the transfer should not be subject to tax consequences and contract fees. Couples transferring ownership of 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 may trigger 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 in addition to an early withdrawal penalty. If the policy owner moves the asset to a new annuity, a process 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 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.

Federal Employee Retirement Benefits

Federal employee retirement benefits, such as the civil service retirement annuity, are governed by the Civil Service Retirement System and Federal Employees Retirement System and are not subject to the Employee Retirement Income Security Act (ERISA). Because ERISA governs private-sector pensions, QDROs for dividing these assets in a divorce won’t necessarily be accepted for federal employees.


According to the U.S. Office of Personnel Management, the benefits available under ERISA plans are different from those under CSRS and FERS plans. In its handbook for attorneys, OPM states that, for example, “the most important difference between ERISA plans and CSRS and FERS is that under ERISA the former spouse’s share of the benefit can begin when the employee reaches the minimum retirement age, even if the employee is still working.”


This benefit does not exist under CSRS and FERS plans, and so, unless a QDRO states explicitly that the order complies with OPM’s regulations, it will not be accepted.


Full details regarding the division of a federal employee’s annuity or pension can be found in Title 5 of the United States Code and Title 5 of the Code of Federal Regulations.

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.

07 Nov, 2023
The O’Mara Law Group is available to assist stay-at-home mothers facing a divorce. Our team of family law professionals can offer support in various areas, such as financial planning, custody arrangements, and mothers’ rights. Our guide will help you develop strategies for rebuilding your life, managing your finances, and caring for yourself. By following these tips, you can confidently create a bright future for yourself and your children. 
28 Jul, 2023
When thinking of age-related health issues, physical infirmity probably springs to most people’s minds; however, seniors are also prone to mental health disorders. Another exciting transition is retirement, which many people anticipate with enthusiasm but might trigger or exacerbate mental health issues. Although there are insufficient studies into seniors’ mental health, those that do exist expose cause for concern. For example, almost one-fourth of seniors in the United States are believed to be socially isolated and approximately two-thirds don’t get the mental health treatment they need. Assisted living facilities provide safe, secure, and sociable homes with staff trained to care for residents with mental health issues. This guide provides an overview of the mental health conditions that seniors typically face and how assisted living can help.  Common Mental Health Conditions That Impact Seniors Some mental health conditions are common among seniors. Given their general prevalence, however, there are often a variety of ways to treat them. Anxiety Disorders An anxiety disorder may make a senior become so anxious that dealing with everyday life becomes a challenge. Common symptoms you may notice include uncontrollable fear, obsessive thinking, insomnia, increased heartbeat and headaches. It is estimated that anywhere from 3% to 14% of America’s older adults have a diagnosable anxiety disorder. This could be due to one or more risk factors most relevant to the senior population, such as bereavement, reduced mobility and financial insecurity. Fortunately, anxiety can be effectively treated by medications and psychotherapy. Bipolar Disorder Most people with bipolar disorder experience severe mood swings that include manic highs and depressive lows. The precise cause for these swings isn’t known, but genetics, a chemical imbalance in the brain, childhood trauma and stressful life events are believed to be factors. Around 25% of people with bipolar disorder are aged 60+, and this figure is projected to exceed 50% by 2030 . Seniors should visit their doctor if they think they’re experiencing symptoms of bipolar disorder. Depression Depression is a medical condition that can cause someone to continuously experience feelings such as sadness, hopelessness and apathy for lengthy periods — typically weeks or longer. Significant events, such as losing a loved one, can lead to depression in the elderly. Depression affects 1% to 5% of seniors, rising to 11.5% of those hospitalized and 13.5% in those receiving home care. It can be treated with psychotherapy and/or antidepressant drugs. Eating Disorders Eating disorders typically appear in early adulthood (age 18 for bulimia and anorexia and 21 for binge eating disorder ) and may continue into the retirement years. As we age and our metabolism slows down and hormone levels decrease, it can become a challenge to lose weight, and seniors who aren’t used to carrying a few extra pounds may develop unhealthy habits with food. Health risks associated with eating disorders include heart disease, hypertension and diabetes. Seniors should speak to a doctor if they’re concerned about their relationship to food, as common treatments include psychotherapy, nutritional counseling and medications. Medication Misuse Many people take prescription drugs to treat physical ailments, pain, mental disorders and chronic conditions, and some medications may contain addictive and potentially dangerous controlled substances. Patients may, for example, take more than the recommended dose or use drugs prescribed for someone else. Misusing drugs may reduce their effectiveness, increase interactions with other drugs and cause serious side effects, including death. Post-Traumatic Stress Disorder (PTSD) PTSD is caused by a traumatic event, such as a near-death experience or an attack. It’s believed current data under-represents the problem, but some studies reveal 1.5% to 4% of adults aged 60+ have PTSD, with 7% to 15% exhibiting subclinical level symptoms, which is not enough for a confident diagnosis. Symptoms include experiencing intrusive thoughts and nightmares, sleeping poorly and having angry outbursts. Cognitive and exposure therapies are effective treatments, as is joining a support group. Seniors should contact their doctor if they show signs of PTSD. Risks Factors for Mental Health Conditions in Seniors The World Health Organization (WHO) states 15% of adults aged 60 and older have a mental disorder. Many factors can trigger these disorders: Alzheimer’s: Alzheimer’s is a type of dementia affecting more than 6 million Americans as of 2022. Changes in the brain resulting from age, as well as environmental, lifestyle and genetic factors, are believed to play a part. Chronic Pain: Chronic pain is pain that lasts longer than expected as part of the healing process (usually pain lasting over 3 months). Persistent pain can cause mental health conditions such as depression and anxiety. Chronic Stress: Chronic stress is persistently feeling overwhelmed or pressured. Factors such as worrying about developing dementia, personal finances and losing independence are known contributors. Elder Abuse: Around 1 in 10 adults aged 60 and older have suffered elder abuse in their community. Based on self-reports from residents, the most common type in residential care is psychological abuse (33.4%) and the least common is sexual abuse (1.9%). Physical Health: Deteriorating physical health is known to affect seniors’ psychological health. Arthritis is a common condition that may impact mental health, with 49.6% of adults aged 65+ reporting a diagnosis. Warning Signs of Mental Health Disorders in Seniors Loved ones and caregivers are often the first people to notice that a senior may be struggling with a psychological condition. Signs to look out for include: Loss of temper and argumentative behavior Appears unusually angry, scared or upset Feelings of desperation or helplessness Loss of sleep or sleep pattern changes Loss of appetite Experiences pains that can’t be explained A lack of emotion Extended depression Substance misuse Thoughts of self-harm, suicide or hurting others Housing Options for Seniors Living With Mental Health Conditions Seniors living with mental health conditions don’t need to suffer alone. There are several types of care available, and the best option depends on the individual. Here are three of the most common housing options for seniors in need of mental health treatment. Assisted Living for People With Mental Health Conditions Assisted living is nonmedical care delivered in a homelike community. Residents live in private or shared rooms, typically with kitchenettes and bathrooms. Trained caregivers assist with activities of daily living (ADLs), which may include bathing, dressing, toileting and eating. Structured social and wellness programs help residents stay mentally and physically active and encourage them to develop friendships with other residents. Most people live reasonably close to an assisted living facility. Pros: Memory care units are often on-site, many with trained staff Sharing a home with residents lessens feelings of isolation Increased safety/security with CCTV, emergency response systems, and staff on-site 24/7 Staff will call medical professionals in a medical emergency Cons: Staff may not be trained to handle specific conditions, such as psychosis Not all states have regulations for assisted living facilities caring for seniors with mental health problems There may be less medical support on-site than needed for some seniors Nursing Homes for People With Mental Health Conditions Nursing homes deliver 24/7 medical care to seniors requiring short-term help to recover from illness or surgery and those with enduring conditions needing long-term support. The environment is more homelike than a hospital. Residents live in private or shared rooms with fresh meals served daily. An estimated 65% to 91% of nursing home residents have a significant mental health disorder. Residents may be able to receive therapy and medication management to treat mental health conditions in nursing homes. Pros: Mental health professionals may be on-site or visit regularly Staff is trained in medication management 24/7 access to medical care Cons: Being away from home may cause a mental health issue, such as depression Facility may not have staff on-site 24/7 with experience in a specific condition Seniors may experience less social interaction In-Home Care for People With Mental Health Conditions In-home care can be nonmedical or medical. Nonmedical care can range from simple companionship to helping with activities of daily living (ADLs), such as bathing. Medical care is typically delivered by registered nurses and therapists, including injections and physical therapies. Caregivers aren’t typically on-site 24/7 but can become available for an additional cost. In-home care can provide supportive companionship for seniors with mental health conditions. Pros: Seniors live in familiar surroundings Agency may have staff to help with common conditions, such as dementia Seniors can still access mental health support out of their home Cons: Caregivers may not be immediately available in an emergency Agency may not have staff trained in some conditions, such as PTSD Senior may struggle to bond with a caregiver if staff changes are frequent The Benefits of Senior Living for Seniors With Mental Health Disorders Studies have shown that quality housing can support recovery from and management of mental health conditions. Assisted living facilities must maintain high standards or they risk losing their licenses. With appropriate support, seniors can benefit from care at an assisted living community in the following ways: Feeling accepted : Assisted living creates opportunities to socialize with other residents who also have various mental health conditions. Getting a new lease on life : Assisted living offers opportunities to build new friendships and learn new skills. Feeling safe : A problem such as a fall isn’t as frightening because an assisted living caregiver is always near and ready to help. On-site mental health support : Assisted living facilities may have staff trained to recognize warning signs and deal with them. When Should Someone With a Mental Health Condition Consider Senior Living? Determining when to consider senior living can be difficult for loved ones, particularly if the senior is resistant. Families should look for warning signs their loved one can no longer handle their condition without regular support. The following covers some things you should watch for: Deteriorating personal care standards, such as not bathing Weight loss Expressing thoughts of self-harm, suicide, or violence Refusal to take prescribed medications Social isolation, which can be triggered by losing a spouse Who May Not Be a Good Fit for Senior Living? Seniors with mental health conditions that a facility can’t manage aren’t a good fit for senior living. Some facilities may not have proper staffing, while others may not have safe housing options, depending on the senior’s behavior. If the senior is already in senior living but has refused care, it may be a sign the facility can no longer meet their individual needs. Downloadable Files: What To Look for in an Assisted Living Community for Seniors With Mental Health Disorders State Resources for Mental Health Assistance
by Rachel Christian 28 Jul, 2023
An income annuity is an annuity contract that converts all or part of a consumer’s savings into a guaranteed stream of income rather than providing a lump sum amount. These payments, beginning right away or at a later time, can last the consumer’s lifetime or a specified number of years.
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