Does a divorce decree override a named beneficiary? The quick answer is no. Divorce does not usually change a beneficiary designation unless the divorce decree includes a stipulation to change it. Individual retirement accounts (IRAs) work the same way. Unfortunately, it is common for an IRA owner to die without having changed the beneficiary designation after a divorce. The cause is often simply forgetfulness.

One could argue that the owner of an IRA wanted the ex-spouse to remain the beneficiary unless a court order known as a qualified domestic relations order (QDRO) states otherwise. Without a QDRO, a former spouse is likely to be entitled to receive the assets in the IRA. That is particularly true when the ex-spouse is named the beneficiary on record at the time of the IRA owner's death.

Some surviving spouses have taken these matters to court because they felt that 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. Of course, in the absence of notification of any dispute, the IRA custodian will simply pay the assets to the beneficiary on record at the time of the IRA owner’s death.

Key Takeaways

  • Divorce does not usually change a beneficiary designation unless the divorce decree includes 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 give consent.
  • IRA owners often die without having changed 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 property or marital property state. These states are 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 their 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.

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 IRA planning 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 if it is done as a trustee-to-trustee transfer. However, it may be difficult for individuals to make such a transfer properly and complete the appropriate paperwork. Failing to get it right can result in an early withdrawal penalty. Hiring a financial professional to ensure you succeed is often the best solution.

Reasons to Keep Your Ex as a Beneficiary

Generally, when a divorce occurs, it is also time to change the primary beneficiary of an IRA. Sometimes, however, it may be stipulated as part of the divorce agreement that the ex-spouse remains the beneficiary. Barring that, a new heir should be found. If there are any children, they might fill the bill. Siblings are another popular choice. If remarriage occurs, the new spouse can be designated as the beneficiary.