Advanced Underwriting Consultants

Ask the Experts – February 21

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: If an IRA owner dies after she divorces her ex-husband, and she failed to remove him as the designated beneficiary, would he still be entitled to the IRA proceeds?

Answer: It depends on the facts and the state’s laws, so it’s best to contact a local attorney.

Some states automatically invalidate an ex-spouse’s designation as beneficiary following a divorce, but this is not always the case. For example, consider the recent case in New Hampshire, UBS Financial Services v. Brescia, 2014 WL 580142 (2/12/14).

In UBS Financial, an IRA owner and her husband divorced. They signed a divorce decree which released all claims of one party to the property of the other; however, the ex-wife left her husband as the named beneficiary to her IRAs.

The ex-wife died six years later without amending the designated beneficiary. At her death, both her estate and her ex-husband asserted a right to the IRA proceeds. The district court of New Hampshire held that the ex-spouse, as designated beneficiary, was entitled to the IRA.

The court reasoned that the divorce decree must unambiguously show an intent to remove a beneficiary in order to change the original designation. The ex-wife’s estate argued that by signing the property release agreement upon their divorce, the ex-husband was removed as beneficiary. The court disagreed, reasoning that the property release agreement did not affect the beneficiary status because the beneficiary status was not a vested property right.

The estate also argued that the property release showed an intent to remove her ex-husband as beneficiary to the IRA. The court was not convinced, holding that under state law, the owner must make an effort to change the beneficiary designation.

The ruling may seem unfair, but the court noted that the purpose of this rule is to avoid speculating about what the parties may have intended. Furthermore, the ex-wife could have avoided this result by simply changing the designated beneficiary.

In some states, ex-spouses are automatically removed as beneficiaries. But regardless of the state in which an individual resides, she should always make sure her designated beneficiary lines up with her intentions. This is much safer and easier than relying on state-specific rules.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.