It could be argued that the owner of an IRA wants the ex-spouse to remain the beneficiary of this IRA unless a court order states otherwise. Barring a court order, a former spouse is likely to be entitled to receive the assets in the IRA. That is particularly true when the ex-spouse is a named beneficiary on record at the time of the IRA owner's death.
- Divorce does not usually change a beneficiary designation unless the divorce decree makes a stipulation to change it.
- In a community property state, the designation naming the ex-spouse as beneficiary may not be valid if the current spouse did not consent to such a designation.
- Often, IRA owners die without changing the beneficiary designation after a divorce decree.
- By addressing the issue of IRAs as part of a divorce, it is possible to avoid surprise transfers to an ex-spouse after a death.
Community Property Exceptions
The situation may change if the deceased resided in a community or marital property state. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Suppose the IRA owner resided in one of these states and did not name his or her current spouse as the sole primary beneficiary. Then, the designation naming the ex-spouse may not be valid if the current spouse did not consent to such a designation.
In a community property state, the surviving spouse's entitlement to the IRA assets may be limited to what is defined by the state's law as marital property. Even that may be limited to a percentage of the total amount. For instance, some states define marital property as the assets earned during the marriage and limit the spouse's entitlement to 50% of that property.
IRAs and Divorce Settlements
Increasingly, retirement accounts are figuring in divorce settlements and the partitioning of assets. On the other hand, it is a common occurrence for an IRA owner to die without changing the beneficiary designation after a divorce. Often, the cause is simply forgetfulness.
Some surviving spouses have taken these matters to court. They felt the IRA owners intended to designate them as beneficiaries. If such a dispute arises, the IRA custodian will place a hold on the assets and await a ruling by the court. The custodian will generally abide by the court's decision. 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.
Splitting IRA Assets in a Divorce
In many ways, the best approach is to divide IRAs during a divorce. By addressing the issue of IRAs as part of a divorce, it is possible to avoid surprise transfers to an ex-spouse after a death.
A little bit of planning on IRAs during a divorce can save a lot of time and legal fees later on.
There are also potential tax advantages to dividing an IRA as part of a divorce. The movement of funds between IRAs as part of the divorce can count as a tax-free transfer. However, it may be difficult for individuals to make the transfer properly and complete the appropriate paperwork. Failing to get it right can result in an early-withdrawal penalty. Hiring a financial professional is often the best solution.
When a divorce occurs, it is also time to change the primary beneficiary. If there are any children, they might become the new heirs for the IRA. Siblings are another popular choice. Finally, a new spouse can be designated as the beneficiary after remarriage occurs.