Is an annuity always worth the value on the statement?

By Cary B. Stamp
August 31, 2010
FL FAQs/Tax Issues

Attorneys are trained to know and understand the law and many have advanced degrees in finance and tax. In my experience, most family lawyers are very savvy about the implications of choosing various assets in a settlement or the tax consequences of making a particular choice. However, attorneys do not deal with financial products such as annuities, life insurance, private equity and limited partnerships on a daily basis and they understandably lack knowledge about the details of how these products work..

Annuities, for example, can be very complex vehicles. Many of these products have surrender charges that exceed ten years. Other annuity products may have guaranteed income or death benefits that are difficult to understand or not even disclosed on the client monthly statement. If a annuity purchase was made at the height of the market in 2000 or 2007 and has declined substantially in cash or liquidation value, the actual value of that product could be substantially higher because of income or living benefits tied to the product. If you value this contract at cash value and allow your client’s spouse to take it at that value in a settlement, your client may be losing out as a result.

An illustration of this concept might look like this:

Hypothetical Annuity Purchase Date: March 2000
Initial Investment:
$500,000
Cash Surrender Value, March 2010:
$400,000
Guaranteed Income base:
$1,000,000
Annual amount available for withdrawal:
$50,000

 

The statement will most likely show the cash value, $400,000, on the first page and not disclose the guaranteed income benefit until a page or two later. If you miss it on this one, you have missed an asset that is worth substantially more than the stated value. To determine the true value, you would need to discount the future stream of guaranteed payments and use a discount rate. In this case, a 20 year stream of guaranteed $50,000 payments at a 5% discount rate would be worth in excess of $600,000—much greater than the cash value on the statement.

Equity index annuities are also very complex investments and have many restrictions that limit the investors’ ability to withdraw funds. These contracts can have surrender periods greater than ten years and penalties in excess of 15%. If your client needs access to liquid funds, these are not good options for them to take in a divorce settlement. Additionally, if the client is under age 59 ½, then there is a 10% early distribution penalty imposed by the tax code.

While forensic CPA’s are very valuable experts in complex and highly contested divorce cases, a financial advisor can often offer more insight into many of the issues concerning the features and benefits of these products. As a Certified Financial Planner™ professional and Certified Divorce Financial Analyst ™, I deal with these products on a daily basis and have access to contacts at the various insurance companies that can explain the bells and whistles in great detail. In a divorce settlement, this knowledge can be very powerful in negotiating or selecting assets for your client.

*Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Guarantees are based on claims paying ability of the issuer. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Optional features available may involve additional fees.


Cary B. Stamp is a CERTIFIED FINANCIAL PLANNER® and Certified Divorce Financial Analyst™.  He specializes in helping independent women make informed decisions and take charge of their financial lives. Mr. Stamp is a twenty year veteran of the financial industry and practices in Palm Beach Gardens, FL.  His website can be found at: www.MyPalmBeachDivorce.com

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August 31, 2010
Categories:  FAQs

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