Who gets the annuities? Annuity protection…

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Dividing assets in a divorce is never easy. The tug-of-war of money, property and emotions can leave both sides frustrated and uncertain about their financial futures. When the time comes to untie the knot, annuities are one of the major assets that can be on the chopping block.

Couples must ask hard questions of each other (and of themselves) and make hard decisions that can have long-term implications. Does one side value the annuity more than the other? Is it worth cashing in the annuity now?

Couples also have to address non-personal but still relevant questions: Will the contract be divided or transferred into new annuities? Can they be exchanged for something of equal value? Do state laws or terms within the contract prohibit dividing the annuity?

Answering these questions takes work, but you can prepare yourself for meeting with your divorce attorney and financial advisor by knowing what factors will be considered to reach a settlement. You will want to dig into the details of your annuity: who issued it, when it matures, if there are any potential penalties for dividing it up and if you can cash it out.

State Laws
State regulations dictate what couples can do with their existing annuities or structured settlements. Although many states adopted the same code of laws that govern what can – and what can’t – be done to sell or separate an annuity, laws can vary in many other states. A financial advisor or planner should know these answers. (Sometimes an experienced divorce attorney will know them, too.)

When one party purchased an annuity before the marriage and premiums were not paid during the marriage, that annuity typically remains with the original owner. Ones purchased during a marriage — especially when both parties have contributed to premiums and the annuity is a joint annuity — usually get divided.

Who Issued Your Annuity Contract?
The company that issued your annuity is a key factor in determining how your assets will be divided. Annuities may be purchased through financial planners, life insurance brokers or securities brokers. Whoever issues your annuity determines the details of the contract, which include how it can be divided up in the case of a divorce.

Each annuity contract has its specific rules about whether it can be divided up. Some issuers don’t allow annuities to be split. Others do. And still others don’t permit them to be cashed out for a lump sum.

Leaving Your Spouse with the Annuity
Depending on what other assets two people shared during their marriage, you may hold the option of having one person keep the annuity while other person keeps something else of equal value.

This can be tricky. It requires both people to have a valuation expert determine the annuity’s worth and that of the other asset, if it is not cash. If you and your soon-to-be-ex can agree, you likely will preserve the value of the annuity by avoiding certain penalties and charges.

But any discrepancy in the annuity appraisal can be difficult to overcome, and you probably will move on to another option.

Penalties, Income Tax and Other Charges
One option can be deciding as a divorced couple to take immediate payments from the annuity. This generally comes with heavy financial consequences.

People under the age of 59 ½ owe a 10-percent penalty to the Internal Revenue Service (IRS) if they pull out retirement funds ahead of schedule. The IRS also taxes these payouts as income, which can put the newly divorced in a higher tax bracket.

Another result of taking a lump-sum payout from the annuity or structured settlement issuer is that part of the annuity value drops because of surrender charges. This is a fee annuity owners pay for accessing their money early.

 

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