If an individual still has his or her former spouse as the beneficiary of an IRA, does the former spouse receive the assets upon the individual's death?
It depends. Generally, divorce does not effectively change a beneficiary designation unless the divorce decree makes a stipulation to change the beneficiary. It could be argued that the individual retirement account (IRA) owner wants the former spouse to remain the beneficiary of this IRA. Unless a court order states otherwise, the former spouse may be entitled to receive the assets if he or she is the named beneficiary on record at the time of the IRA owner's death.
This may not be the case if the IRA owner resided in a community or marital property state. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. If the IRA owner resided in one of these states and did not name his or her current spouse as the sole primary beneficiary, the designation may not be valid if the current spouse did not consent to such a designation. Note, however, that in a community or marital property state, the surviving spouse's entitlement to the IRA assets may be limited to what is defined (by state law) as community or marital property and even then may be limited to a percentage of the amount. For instance, some states define martial property as that which is earned during the marriage and limits the spouse's entitlement to 50% of the marital property.
It's a common occurrence for an IRA owner to die having failed to change a beneficiary designation after divorce. Some surviving spouses have taken the matter to court because they felt they should be the designated beneficiary (albeit, not so designated by the IRA owner). If such a dispute arises, the IRA custodian will place a hold/freeze on the IRA assets, and await a ruling by the court. The custodian will generally abide by the court's ruling.
In the absence of a notification of any dispute, the IRA custodian will pay the assets to the beneficiary on record at the time of the IRA owner's death.
To read more articles about divorce and finances, see Marriage, Divorce And The Dotted Line, Getting A Divorce? Understand the Rules Of Dividing Plan Assets and Build A Wall Around Your Assets.
This question was answered by Denise Appleby.