Annuity Clients Getting Divorced? Step Carefully
Boomers are famously the generation that wanted to try anything at least once – apparently that includes divorce.
Today’s post-50 couples are twice as likely to divorce as the over-50 crowd in 1990. In fact, that age group is responsible for one in four divorces, according to a study published by Ohio University’s Institute for Population Research.
That also happens to be the prime years for annuity owners, but who is thinking about annuities in a troubled marriage? It looks like advisors should be, but it is a tricky business, says Morris Armstrong, principal of Armstrong Financial Strategies, a registered investment advisory firm in Danbury, Conn.
For one thing, the advisor needs to determine what type of annuity is involved, he says. “Is it an income annuity? A deferred annuity? Is it qualified or non-qualified? The approach will be different depending on such things, as well as the ownership.”
If it’s an IRA annuity, then the IRA rules take precedence. “But the client will need to know that the asset can be divided if stipulated by the divorce decree, and that the tax-free consequence is important,” he says.
Advisors also need to keep in mind that the account custodians — brokerage firms, mutual funds or insurance companies — may have differing requirements, Armstrong says. For example, one firm may only want a letter from the divorcing husband and wife, while another firm may want to see the final papers from the divorce decree.
Some clients want the agent to provide guidance on how to split an annuity or to meet documentation requirements.
“In that case, if you are the agent of record, you would probably be able to speak to the insurance company on the client’s behalf,” Armstrong says. “But if you’re not the agent of record — say, the divorcing couple has come to you for assistance but they are unknown to you -- the insurance company won’t speak with you.”
An advisor might consider getting authorization to act on the customers’ behalf, he concedes, “but that can be cumbersome.” In that case, the agent will most likely want to advise the policyholder to contact the company directly.
Regardless, he stresses, “Someone must understand how to divide the contract, whether it’s qualified or non-qualified.”
Listen to the client
Steven J. Oshins of the Oshins & Associates law firm points out that “in a solid marriage, there is no reason to have a discussion about what happens to the annuity or any asset in event of divorce. But if the marriage appears to be rocky, or have the potential for becoming rocky, it might be good to have the discussion. It’s too late (after the fact).”
A Las Vegas attorney who works on trusts with high-net-worth clients, Oshins agrees that it’s not always easy for an insurance and financial advisor to know whether a marriage or relationship is strong or rocky. But advisors can sometimes get a hint about this by listening to what the client says about the spouse or prospective spouse.
For instance, if the advisor notices that one spouse is muttering unkind things about the other, that could be a sign that it might be time to bring up the subject of divorce.
Make sure to document all discussions with the home office and the client, suggests Anthony R. Bartlett, a financial advisor and registered representative with Baystate Financial, Worcester, Mass.
Also “make sure you document the discussion with the client about any changes that affect riders, surrender charges, fees etc.,” Bartlett says. “But remember that any discussion with a spouse about the other spouse’s assets should not occur, and that any information gathered during the divorce process with the advisor is not subject to client-attorney privilege and could be brought into discovery.”
Asset disparity could be another reason for having a divorce discussion. For instance, if one person is older and wealthier than a much younger spouse, how to handle the assets will be on the table. In those cases, he says, the wealthier spouse might call to ask what happens in event of divorce.
If divorce is imminent, and the advisor knows about it, the advisor should make a point to ask questions that might elicit details that could help with the planning.
But knowing in advance doesn’t always happen. Oshins tells of one businessman for a startup company who decided, with the wife, to do a do-it-yourself divorce, because it was cheaper.
“He was in my office signing some papers that would cut the wife out of some of his assets. When he started talking about splitting a qualified retirement plan, I asked him if he had a Qualified Domestic Relations Order.” (A QDRO is a divorce court document that details the splitting between divorcing spouses of tax-deferred employee benefit or pension plans that are subject to the Employee Retirement Income Security Act. The order helps the clients avoid a taxable event upon the split.)
It turned out that the businessman did not know about QDROs, so Oshins advised the man to go to a family practice attorney for help. “He did go to an attorney, and ended up saving $100,000,” says Oshins, who specializes in estate planning, not family practice.
Similar disclosures can and do occur in the offices of financial advisors, he points out. “For instance, a financial planner would have picked up the QDRO problem.” So a good strategy for advisors is to start asking questions if they get wind of a divorce.
Flies in the ointment
There are flies in the ointment that could make this advising juncture difficult, however.
For instance, Bartlett points out that benefits of the specific annuity may only be available to the owner or annuitant, and that riders on the contract are, many times, not transferable and thus lost when owners or annuitants are divorcing.
In addition, he says, changing the beneficiary of an account from the spouse while the divorce is in process could present issues. “If the client dies and you have changed the beneficiary, then that could lead to legal problems.”
Advisors should also keep in mind that annuity riders are based on either the owner of the contract or annuitant. In the case of a non-qualified annuity, “the divorce decree may award money to a spouse that is not the owner or annuitant,” Bartlett says. “That could potentially cancel the annuity’s rider benefit. If either of those change, the riders and guarantees could be changed.”
Another problem is that not all attorneys and judges are aware of how annuities and IRA annuities work. Oshins says he has seen them split up assets that legally can’t be split or make other changes to ownership that will cause problems later on.
Although input from an annuity advisor could make a lot of difference in some of these cases, insurance and financial advisors are not always consulted.
Many times, says Armstrong, the divorced spouses come to the insurance advisor after they are already divorced. “They may have $250,000 to $500,000 in their annuity, 401(k) or group annuity, but they have already made poor decisions that have financial ramifications about which they or their attorneys did not know.”
For instance, some don’t realize that, if there is a QDRO related to an employer-based retirement plan, a spouse can take money out of that plan with no premature distribution penalty. However, if that same spouse first rolls the money into an IRA, any withdrawals from that IRA will be subject to that penalty.
“So, if a younger client needs cash right away, make sure the client takes the money out of the retirement plan under the QDRO before putting it into an IRA or IRA annuity,” Armstrong says.
The various ins and outs of divorce and annuities do not mean there are no opportunities for advisors. For one thing, Armstrong says that “doing a good job for the client, say, when dividing an annuity, always helps cement the relationship with the clients.” The advisor may not make a new sale at that time, he allows, but the advisor is keeping the customer.
In addition, the divorce might bring forward assets that may be appropriate to recommend placing in an annuity. The population of people age 50 and up is increasingly having divorces, he points out. But due to the age, risk tolerance and income needs of this population, he says it might make sense to recommend for some of these individuals to take some of the assets from the divorce settlement and put them into an annuity.
“There is plenty of opportunity for an advisor, and there are plenty of tools from the carriers to help with this," he says.
Oshins believes another approach might also help, at least for wealthy clients. That is heading off some of the asset-related issues before a divorce ever occurs.
One vehicle for doing this is a domestic asset protection trust (DAPT), he said during a presentation of the recent annual meeting of National Association of Insurance and Financial Advisors in Las Vegas. The DAPT is an irrevocable trust into which a client (in this case, a spouse) deposits money that the trustee can later distribute back to the client (again, in this case, spouse). After a stipulated period of time, those assets are insulated from claims of creditors, including a spouse in a divorce action, Oshins says.
It’s not for everybody, but in certain cases, those trusts create a wall around the assets, he says.
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