Annuities & Divorce: Assets Between Ex-Spouses

Splitting annuities during divorce is a common step, but it's important to understand the implications. Whether you surrender, transfer or sell the annuity for cash, there may be tax consequences and fees. The financial institution holding the annuity plays a crucial role in ensuring a smooth process under the contract’s terms.

Ebony J. Howard, CPA
  • Written by
    Ebony J. Howard, CPA

    Ebony J. Howard, CPA

    Credentialed Tax Expert at Intuit

    Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation.  She specializes in analyzing financial information in the health care, banking and real estate sectors.

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  • Edited By
    Savannah Pittle
    Savannah Pittle, senior financial editor for RetireGuide

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is a professional writer and content editor with over 16 years of professional experience across multiple industries. She has ghostwritten for entrepreneurs and industry leaders and been published in mediums such as The Huffington Post, Southern Living and Interior Appeal Magazine.

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  • Reviewed By
    Brandon Renfro, Ph.D., CFP®, RICP®, EA
    Brandon Renfro, RetireGuide Reviewer

    Brandon Renfro, Ph.D., CFP®, RICP®, EA

    Retirement and Social Security Expert

    Brandon Renfro is a Retirement and Social Security Expert and financial planner. He focuses on helping clients create a secure financial future in retirement and co-owns Belonging Wealth Management. He is also a former finance professor and writes for several publications.

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  • Published: June 9, 2023
  • Updated: October 25, 2023
  • 5 min read time
  • This page features 8 Cited Research Articles
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How to Cite RetireGuide.com's Article

APA Howard, E. J. (2023, October 25). Annuities & Divorce: Assets Between Ex-Spouses. RetireGuide.com. Retrieved April 15, 2024, from https://www.retireguide.com/annuities/divorce/

MLA Howard, Ebony J. "Annuities & Divorce: Assets Between Ex-Spouses." RetireGuide.com, 25 Oct 2023, https://www.retireguide.com/annuities/divorce/.

Chicago Howard, Ebony J. "Annuities & Divorce: Assets Between Ex-Spouses." RetireGuide.com. Last modified October 25, 2023. https://www.retireguide.com/annuities/divorce/.

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Key Takeaways
  • Annuities can be divided between divorcing ex-spouses through direct division or by offsetting the account value with other assets.
  • A qualified domestic relations order (QDRO) may be necessary to divide the annuity and other qualified retirement accounts.
  • Tax exemption applies to annuity transfers related to divorce or within one year after the legal end of a marriage.
  • Surrendering the annuity before maturity incurs surrender charges in the form of penalties.

Are Annuities Protected in a Divorce?

Whether annuities are protected from division in a divorce depends on the timing of when the annuity was purchased. If your annuity was purchased prior to your marriage, then it may be protected from the rules of splitting marital assets in divorce proceedings. However, if the annuity was purchased during your marriage, it is likely subject to the division of property.

The involvement of the issuing insurance company makes annuities complex in divorce proceedings, especially when both spouses paid premiums.

Financial implications to be considered when holding an annuity during a divorce are the contract’s cost basis, surrender charges, living and death benefits and interest rate guarantees.

It is important to understand how annuities are treated in divorce settlements. To make informed decisions about asset division, a financial advisor should also be involved.

Understanding how annuities might be treated during a divorce and knowing what options you might have allows you to make better decisions around asset splitting.

Can an Annuity Be Divided in a Divorce?

Annuities can be divided between ex-spouses by directly withdrawing half the account value or offsetting it with other assets. A qualified domestic relations order (QDRO) may be required to divide the annuity contract and other assets, such as 401ks, pension plans and other qualified retirement accounts.

There are factors that determine how annuities can be divided. Specific to the terms of the annuity contract, some insurance companies may not allow lump-sum payments or for a single annuity to be split. A QDRO isn’t required to split a non-qualified annuity. However, if the insurance company doesn’t allow splits, it may trigger a taxable event pursuant to a divorce decree.

Without a divorce decree, splitting the annuity could incur tax consequences in the form of a 10% penalty if the owner is not at least age 59 ½. Dividing the annuity assets up and distributing them as a lump sum can be complicated, especially if the annuity income has already started paying out. To avoid the hassle of splitting up the annuity, the overall division of other marital assets may be necessary.

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Transferring an Annuity During a Divorce

When transferring ownership of an annuity contract to an ex-spouse, there are options. The annuity can be transferred into an ex-spouse’s IRA, or the original annuity contract can be canceled and that money used to purchase a new annuity by the ex-spouse. A new surrender period will begin with the new annuity. Typically, this requires the cooperation of the insurance company or financial institution that holds the annuity.

Documentation and other legal requirements when transferring annuities can include:
  • A formal agreement or qualified domestic relations court order (QDRO) outlining the division.
  • An application to complete the annuity contract transfer.
  • The annuity’s policy information.
  • Personal information of the current owner and the former spouse.
  • Completed W-9 information.
  • Fiduciary documentation from attorneys or plan administrators, if applicable.
  • Required signatures from spouses and notaries.

It is essential to follow proper procedures — such as working with a qualified attorney or mediator — to ensure compliance with applicable laws and regulations.

Annuity Transfer Rules

In certain circumstances, annuities may be transferred to a spouse in a divorce decree. Fixed or variable deferred annuities can be transferred if payments have not begun yet or if they haven’t been annuitized. Immediate annuities cannot be transferred.

Canceling the contract before maturity may result in surrender charges. Surrender charges are determined in which year the contract is canceled and can range from 1% to 10%. Depending on the provisions of the contract, both ex-spouses may owe surrender charges.

Tax Implications of Annuity Ownership Changes

When an annuity contract transfers between former spouses and the transfer is related to the cessation of marriage or occurs within one year of the date that the marriage legally ended, it is exempt from tax. The tax-deferred status of the annuity continues with the transfer to the spouse.

However, withdrawing funds early without transferring them to another annuity does result in taxation.

This annuity income could put the spouse in a higher tax bracket, further increasing their tax liability.

Pro Tip
Annuity withdrawals will be taxed at ordinary income tax rates, not capital gains tax rates.

Surrender or Sell Annuity for Cash

A viable alternative for ex-spouses seeking immediate liquidity is surrendering or selling the annuity payments for a lump sum. Be mindful that if you choose to surrender the annuity before it matures, a penalty in the form of a surrender charge may be applied.

Another option that avoids surrender charges is selling the annuity contract to a third-party company. The buying company applies a discount rate to the annuity that could shave off 9% to 18% of the contract’s value, and then the difference is paid to you upfront. If you choose to sell your annuity contract, any lump-sum payment exceeding the annuity contract will be taxed as ordinary income.

Consider consulting a tax professional or financial advisor to ensure you understand all tax implications and make an informed decision.

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Last Modified: October 25, 2023

8 Cited Research Articles

  1. Canvas Annuity. (2023). What Happens to an Annuity During a Divorce? Retrieved from https://canvasannuity.com/blog/divorce-annuity
  2. Principal.com. (2023). Divorce and Annuity Ownership Changes. Retrieved from https://advisors.principal.com/wps/portal/advisor/resource-center/education-training/advanced-markets-info/annuities/annuities-divorce-annuity-ownership-landing-page
  3. Adams, R. (2022, October 17). What Is an Annuity Surrender Period? Retrieved from https://www.centerforasecureretirement.com/en/posts/what-is-an-annuity-surrender-period
  4. Internal Revenue Service. (2022, August 30). Retirement Topics – Divorce. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-divorce
  5. Corner Stone Financial Planning. (2013, November 1). Splitting Annuities in a Divorce. Retrieved from https://www.cornerstoneplanning.com/newsletter/item/splitting-annuities-in-a-divorce
  6. Haithcock, S. (2013, August 13). 5 Things To Consider Before Switching Annuities. Retrieved from https://www.marketwatch.com/story/5-things-to-consider-before-switching-annuities-2013-08-13
  7. John Hancock Annuities. (n.d.). Annuities Divorce Distributions Instructions Form. Retrieved from https://www.johnhancock.com/content/dam/onejohnhancock/pdfs/annuities-forms/1307192.pdf
  8. Raymond James. (n.d.). Getting Divorced While You Own an Annuity? Be Very, Very Careful. Retrieved from https://www.raymondjames.com/-/media/rj/advisor-sites/sites/j/o/joshsankes/files/getting-divorced-while-you-own-an-annuity.pdf