By Mike Rahn, CISP | Ascensus
Our organization sends out IRA beneficiary designation reminders every few years. Some IRA owners respond and inform us that they have divorced, which leads us to ask whether divorce itself can impact IRA beneficiary elections?
It depends. A number of states—about half—have laws that automatically revoke an existing IRA spouse beneficiary designation upon divorce. This can prevent post-death IRA assets from being inherited by someone other than who the IRA owner would intentionally choose. Of course, if an IRA owner wishes his former spouse to remain a beneficiary, all that’s needed is a new, post-divorce beneficiary designation. (Unlike divorce, legal separation generally does not revoke an IRA beneficiary designation, though exceptions may apply.)
Conversely, can the terms of a divorce decree affect the application of a state’s spouse beneficiary revocation statute?
Yes. In the dissolution of a marriage and division of a couple’s assets, a court could determine that a former spouse will retain a beneficial interest in the IRA assets, as a future beneficiary, if not in an immediate transfer of ownership. Review of a divorce decree should be standard procedure, and your legal counsel should be involved in such complicated IRA death claim situations.
How would a state-law-dictated spouse beneficiary revocation affect subsequent entitlement to IRA assets if the IRA owner does not revise his beneficiary designations?
Governing IRA documents will generally determine who inherits. If there are other named primary or contingent beneficiaries, their “place in line” would elevate in accordance with their beneficiary status. If there are no other named beneficiaries, then the IRA document would generally dictate who, or what, inherits, by default. In such cases, it is common for IRA documents to name the deceased’s estate as the default beneficiary. Entitlement to the IRA assets would then be determined by a state’s probate laws, which generally favor family members. (This does not, however, make such individual(s) the actual IRA beneficiary, unless this status is granted by the IRS through a private letter ruling, or PLR.) Rather than default to the deceased’s estate as beneficiary, some IRA documents may prescribe an ownership succession, such as current spouse, living children, etc. (Note that state law can also override an IRA document’s default beneficiary provisions.)
Would a state law that revokes a spouse beneficiary election after divorce work the same way for our 401(k) clients?
Many non-IRA-based employer plans that cover more than just the employer are governed by the Employee Retirement Income Security Act (ERISA). ERISA generally preempts state law, and therefore a state law that revokes beneficiary status for a former spouse would not apply to such plans. However, an ERISA-governed retirement plan can have its own automatic revocation provision, and many do; some are “hard-wired” in plan documents. This is important, for there is ample case law history that reveals unintended consequences when a plan participant failed to revise a beneficiary designation after divorce. Just as is noted above for IRAs, if an ERISA plan participant wishes his former spouse to remain a beneficiary, all that’s needed is a new, post-divorce beneficiary designation.
KEY TAKEAWAY: State laws are not uniform. Your state’s laws should be reviewed before determining the effect of a divorce on a beneficiary designation. As is so often the case, “consult your legal counsel” is good advice.
Mike Rahn, CISP, is an ERISA consultant at Ascensus. Ascensus LLC is a U.S.-based company that provides financial recordkeeping, tax-advantaged savings and retirement plan services. Rahn has more than 30 years of experience in the retirement services industry. In his position with Ascensus, he serves as a researcher, technical writer, consultant and liaison with agencies having oversight over retirement savings arrangements.
