Dividing a Variable Annuity in a Divorce Settlement

By Kelly Mroz


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When you buy an annuity, you enter into a contract with an insurance company for future payments. In a variable annuity, rather than having a set amount for future payments, the payments depend on the earnings made by annuity investments. Variable annuities are tax-deferred so that investment earnings are not taxed until the owner gets the money. Dividing a variable annuity in a divorce without unintended adverse tax consequences is tricky. A financial professional and divorce attorney can help ensure the asset is divided to reach the intended result.

Property Division

How property, including variable annuities, will be divided depends on the law of the state in which the divorce occurs. There are two main concepts for property division among the states: equitable distribution (where marital property is divided between the parties in a way that is fair and equitable) and community property (where marital property is divided equally).


A variable annuity is created by contract between the owner and insurance company. Upon divorce, ownership may be transferred according to the equitable distribution or community property laws of the state. The annuity may be owned jointly between spouses or by one spouse only. If the parties own the annuity jointly, it will likely be split into separate annuities owned by each party separately since there may be negative tax consequences to maintaining joint ownership when the spouses are no longer married. If the annuity is owned by one spouse, the divorce decree or settlement agreement may require that spouse to transfer all or part of the asset to the non-owner spouse.

Retirement Assets

Variable annuities can be held within qualified retirement plans. As a result, variable annuities must be transferred using a Qualified Domestic Relations Order. The QDRO is a court order that directs the insurance company to transfer all or part of the asset to the non-owner spouse. For non-qualified annuities, the insurance company will require a court order or written instructions from the owner spouse before it will transfer ownership.


Once ownership of all or part of the annuity is transferred, the recipient owns the newly created annuity outright. This means the new owner will receive any payments due under the contract directly; when payments begin depends on the contract. The new owner also has the right to reallocate the investments and establish a new death beneficiary. When payments begin, the new owner is responsible for paying taxes on those payments. If the new owner cashes the policy out early, he is responsible for any taxes, penalties or charges that occur.

Tax Consequences

Variable annuities are a particularly difficult asset to divide in a divorce because there are two factors that must be considered before distributing the asset: federal tax law and the annuity contract. The intention is typically to transfer the asset without negative tax consequences or contract fees. However, if the transfer is done incorrectly, the gains can be immediately taxed as ordinary income and a 10 percent tax penalty imposed. The transfer could also trigger an additional surrender charge under the contract.