Divorce & Nonqualified Annuity

by Lauren Browne
If you bought the annuity during your marriage, you are typically entitled to a portion of its value.

If you bought the annuity during your marriage, you are typically entitled to a portion of its value.

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A nonqualified annuity is an insurance contract purchased with after-tax dollars, and like any other asset, it may be subject to division when you divorce. You and your spouse may decide how to divide your assets in a prenuptial or divorce agreement -- subject to the court's approval -- otherwise, the court will divide them for you.

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Distribution Laws

Assets, including annuities, are divided during divorce a little differently depending on whether you live in a community property or equitable distribution state. In a community property state, courts typically divide all property acquired during the marriage equally between the spouses. In an equitable distribution state, the courts have more leeway to divide marital property in a way they consider to be fair. In practice, this often means a fairly equal division of the assets, but it may not necessarily be 50-50.

Separate, Marital and Mixed Assets

To divide your assets, you must determine what's separate property and what's marital property. For example, an inheritance you received before your marriage is typically considered your separate property, and you usually don't have to share it in a divorce. By contrast, a car you bought during your marriage with money from your joint checking account is typically considered marital property, and you would divide it evenly. Other assets are "mixed assets," meaning that you acquired them before the marriage, but both partners made contributions to them during the marriage. For example, a nonqualified annuity would be "mixed" if you made contributions to it before and during your marriage. In this case, to determine how much value each spouse is entitled to, you must figure out the annuity's value at the time you married, and the amount each spouse contributed during the marriage.

Who Gets the Annuity

You and your spouse can generally agree to divide your assets in any way you wish. If your nonqualified annuity is one spouse's separate property, that's easy: she keeps the whole thing. If both of you are entitled to a portion of an asset's value, however, that doesn't mean you necessarily have to take the exact portion of that asset. For example, suppose your car is worth $20,000 -- you can't chop the car in two parts and take half, and you might not want to sell it and share the cash if one of you needs it to commute. One of you might keep the car, and the other might take a different asset worth $20,000. You can choose to do the same thing with your nonqualified annuity. Just because you're entitled to 30 percent of it doesn't mean you must take 30 percent of the annuity. You can take other assets worth that amount instead, especially if the annuity is in the other spouse's name and he prefers to keep it intact.

Dividing the Annuity

If you decide to divide the nonqualified annuity, the court will enter a domestic relations order, which allows each spouse to take the appropriate share of the account -- either now, as a lump sum, or in the future, during retirement, in the form of payments to each of you. Because a DRO can be expensive and time-consuming, many couples would rather divide their assets in another way. It may not even be possible to divide an annuity: as the Kegel McBurney website notes, "One of the most difficult post-divorce situations to deal with is when the parties discover, after the final judgment ... that one of the retirement assets they have agreed to divide is simply not divisible or assignable." Annuities are especially tricky in this regard -- a change in ownership may not be allowed or may cause a loss in value. The AnnuityFYI website notes that many lawyers and judges are not familiar with the rules of annuities, and it urges caution if you think you want to divide one.