Splitting assets in a divorce is often complicated with many factors determining who gets what. When it comes to tax-deferred annuities, the complexity increases because there are so many named parties involved in an annuity contract. There is the owner, the annuitant, the beneficiary and the insurance company. Special court orders are often required to divide assets without creating a tax nightmare.
Understanding Annuity Parties
There are four parties to an annuity contract. The owner puts the money into the annuity contract and is responsible for all tax consequences. The annuitant is the person whose life the annuity is based on. This means that if the person is 59 1/2, normal distributions are allowed. If the person takes a lifetime income, his age is the primary factor. The beneficiaries receive cash value upon the annuitant's death. The insurance company sponsors the investment account maintaining IRS tax-deferred regulations.
Owner, Annuitant Variations
In regard to splitting assets, there are several configurations of owner and annuitant that need to be examined. Many times a husband is the owner with the wife the annuitant. There can be two owners with one annuitant. There are also joint survivor annuities, with the surviving spouse becoming the annuitant upon one spouse's death. These ownership, lifetime issues must be addressed to properly split the annuity.
Agreeing to the Values
A Qualified Domestic Relations Order is a divorce court document stating how much of a tax-deferred account is moving to a spouse's new plan. A QDRO or a similar order is required to conduct a tax-free exchange of the assets and acknowledge the new owner and annuitant designations. The order is written based on the percentage each spouse is determined to have in the annuity. Parties can negotiate the percentage or use family court calculators to determine the value.
Once the values are determined, the receiving annuity spouse must open a new annuity notifying the insurance company of an impending QDRO transfer. The new annuity information is written into the final QDRO document along with the existing annuity information. The amount that is moved, the changes to ownership and annuitant rights are adjusted. In the end, each spouse is the owner and annuitant in his or her own annuity. The QDRO is signed by the judge and copies given to each insurance company to perform the transfer. Once the transfer is done, each parties is responsible for naming beneficiaries, taking income and all tax liabilities.
With more than 15 years of professional writing experience, Kimberlee finds it fun to take technical mumbo-jumbo and make it fun! Her first career was in financial services and insurance.