Annuities involve an insurance company paying the investor a lump sum or payments. A variable annuity is a type of investment that can rise or fall based on the investment. The investor does not pay taxes until they get paid or make a withdrawal. If a Texas couple with a variable annuity divorces, it can be tricky dividing it to avoid tax penalties.

Ownership and property division

Property gets divided in divorce according to state laws. Division of property involves two factors: community property and equitable distribution. Community property is shared equally while equitable property means dividing the marital property fairly.

The ownership of a variable annuity may be based on community or equitable property. It can pass to one or both spouses. However, a split annuity could have tax consequences, so it may get divided into two single annuities. A divorce settlement could require a spouse who fully owns the annuity to transfer part of it to the other spouse.

Payments and retirement assets

For retirement assets, annuities must transfer through qualified domestic relations order. This requires the insurance company to transfer some or all of the annuity to one spouse.

After the transfer, the new owner will be paid anything due to them under the agreement. The new owner may also invest it in any way they see fit and name a beneficiary. Upon getting payments, the new owner has to pay taxes.

Taxes

Federal tax law and the annuity contract must be considered when dividing a variable annuity. Taxes are figured according to the type of initial investment. For example, withdrawals from an annuity purchase made with a 401k will likely be taxed. Annuities usually get divided to avoid tax consequences. However, if an incorrect division occurs, the gains could be counted as ordinary taxable income.

It is important to know how dividing annuities work. A family law attorney may be able to ensure that things get divided fairly.