Take care with your IRA beneficiaries

October 22, 2022

Q: My husband passed away last year. In the process of settling his estate, I contacted the custodian of his IRA to rollover his IRA into my account. I was completely surprised when they informed me that his IRA lists my mother-in-law as the primary beneficiary and me as the contingent beneficiary. Unfortunately, his mother passed away earlier this year. With that background, I have two questions: 1) Can my deceased husband name a primary beneficiary other than me (his wife) without me knowing about it? 2) Now that my mother-in-law is also gone, do I become the beneficiary on the IRA anyway?

A: One of the most common and perplexing estate planning mistakes is not keeping beneficiary designations for IRAs and retirement plans up to date. It’s easy to see how it happens. People get busy, life throws them a few curve balls and before you know it, their heirs are tied up in emotional knots as they wrestle with all sorts of awkward and unpleasant questions. What was my deceased spouse or parent thinking? Did I do something wrong? Didn’t they love me like I thought they did? Wasn’t I a good spouse or son or daughter? These questions might sound absurd now, but after we die, our actions—even unintended actions—can have amplified emotional impact in the lives of those left behind.

You can spare your loved ones a lot of unnecessary anguish with a little attention to a few details. It isn’t hard and it won’t take a lot of time, but it may provide a huge benefit to those you love. Simply call the financial institution that holds your IRA and have them tell you who your designated beneficiaries are. If you have a financial advisor, he can check your IRA beneficiary designations for you. You should also send an email to your company’s HR department and have them tell you who is listed as the beneficiary on your company’s retirement plan. If you discover that the beneficiary designations are out of date, they will be able to help you correct it. Correcting a mistake in your beneficiary designation now will save your loved ones a lot a confusion, heartache and legal fees later. Now let’s get to your questions.

In a community property state like California, each legal spouse has claim on the property the two spouses own together. Community property includes income earned by the spouses during their marriage and any income earned and saved in a retirement vehicle. Consequently, when a non-spouse is designated as the primary beneficiary for an IRA or a retirement plan, the IRA custodian or plan administrator usually requires the non-beneficiary spouse to sign a waiver.

I am not an attorney and this is not legal advice, but if you didn’t sign such a waiver, you may have a claim on the assets in the IRA. If your discussions with the IRA custodian don’t go anywhere, you may need the help of a good attorney. Look for someone with expertise in probate law or estate litigation.

One thing that could work against your claim is if the IRA was somehow deemed to be separate property. For example, it could be separate property if the IRA was established and funded before you were married. Again, this could get legally complex, so you may want to discuss it with an attorney.

The fact that your mother-in-law is deceased likely has no bearing on your standing as contingent beneficiary. Since she died after your husband, if her status as primary beneficiary is upheld, her estate still inherits your husband’s IRA.

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to smerrell@montereypw.com.