We have always said that there are numerous ways to arrive at a 50/50 division of assets. In the case of retirement plans, and more specifically, annuities, attorneys are often unaware of the potential to reduce their clients’ net worth by dividing the contract in half as this portion of an article in Investment News Magazine describes. At Divorce Analysis, we are experts in advising clients about best ways to think about tax when dividing annuities and other retirement plans.
Breaking up is hard to do – especially with annuities
Attorneys often split contracts in divorce settlements, unaware of the potentially costly impact
By Darla Mercado
March 18, 2012
When a client came to his office bearing her new divorce decree, adviser Dale Russell became the bearer of bad news.
During the divorce proceedings, the couple’s lawyers decided that their chief financial asset, a $500,000 variable annuity inside one of their individual retirement accounts, was to be split among the two. But that Solomon-like decision was made without the attorneys’ awareness of its dire financial consequences.
Splitting the variable annuity meant that Mr. Russell’s client had to pay an 8% surrender charge and a 10% penalty for an early withdrawal from the IRA.
For Mr. Russell, vice president of Gallo & Russell Inc., the experience is hardly uncommon.
With nearly one in two marriages ending in divorce, financial advisers who deal with divorcing couples often face complex problems connected with untangling annuities that are in the pool of shared assets.
With divorce attorneys typically unaware of the nuances of annuity contracts and the various ways insurers treat contracts in the context of divorce, and with advisers typically out of the loop when settlements are hammered out, the problem lands in the lap of advisers.
“In the case of my client, there wasn’t much I could do in the way of alternatives,” said Mr. Russell, who hadn’t been consulted before the couple began preparing for the split.
“This was essentially the only asset they had, and instead of my client’s getting the $250,000 she expected, she’s getting almost $50,000 less,” he said.