Because Virginia is not a community property state, a variable annuity is supposed to be divided equitably in a divorce. This means that it does not have to be divided equally. The couple getting a divorce or a judge may determine what constitutes an “equitable” division, but whoever decides, dividing a variable annuity without triggering tax issues can be complicated.
What is a variable annuity?
A variable annuity is generally held in a retirement plan. It is essentially a contract with an insurance company to make future payments based on the earnings of investments. “Variable” refers to the fact that these payments will differ as opposed to what would be the case with a fixed annuity. An annuity may be jointly or separately owned, but in both situations, it may be subject to property division in a divorce.
A document called a qualified domestic relations order is necessary for transferring ownership if the annuity is held in a qualified retirement plan. If the plan is not qualified, written directions from a spouse or a court order might be needed. Both federal tax law and the rules for the annuity itself must be considered when transferring the annuity in order to avoid unnecessary taxes and penalties. Since an annuity is a tax-deferred investment, when payouts are made, taxes must be paid on them.
Couples who are getting a divorce might be able to reach an agreement regarding property division on their own or with the help of their respective family law attorneys. Negotiations may be less expensive, stressful and time-consuming than going to court and can allow the couple access to creative solutions. However, when it comes to division of variable annuities and other complex assets, they should ensure that they understand any costs associated with division or distribution that might make the value of the asset less than its face value.