Function

• IRAs and other types of retirement investment accounts, including 401ks, are unique in that they do not pass through probate, the court charged with adjudicating a decedent's will. Instead, IRA owners designate one or more beneficiaries directly with their trustee by filling out a form that lists their names and contact information. These beneficiaries inherit the account immediately following the original owner's death; the form overrides any bequests listed in the will. If the IRA owner does not name a beneficiary, his account passes to his estate after his death where it will be subject to probate.
  
  

Significance

• It is very common for an IRA owner to list his spouse as his sole IRA beneficiary. Doing so provides the inheriting spouse with special privileges related to managing the account. However, there have been many cases where an IRA owner forgot to update his beneficiary forms following a divorce. In some states, a divorce automatically eliminates an ex-spouse as an IRA beneficiary. In states that have no such law, an ex-spouse has an excellent chance of inheriting an IRA if she is the designated beneficiary.
  
  

Waivers of Survivor Benefits

• Upon divorce, many ex-spouses sign a waiver of survivor benefits as part of the settlement. The waiver is meant to release a person from any benefits he would receive in the event of an ex-spouse's death -- including retirement benefits. In cases where an ex-spouse was named as an IRA beneficiary and a waiver was in place, the courts have ruled both ways. In some cases, the waiver was enough to override the beneficiary designation; in others, the ex-spouse inherited the IRA anyway.
  
  

U.S. Supreme Court Ruling

• In 2009, the U.S. Supreme Court unanimously ruled on a decision that would seem to uphold the rights of designated beneficiaries. In "Kennedy Vs. the Plan Administrator for the DuPont Savings and Investment Plan," a woman sued DuPont, claiming that her deceased father wanted her to inherit a 401k valued at over $400,000, even though his ex-wife was the beneficiary. Kennedy asked DuPont to release the money to her father's estate, but the company refused. The court determined that her father had the opportunity to remove his ex-wife, but failed to do so, and awarded the money to her. However, it is important to note that, in this case, the money was to go to the decedent's estate, the claimant was not the man's last spouse. In some cases, there may be laws that give the last spouse a claim to the IRA.
  
  

Considerations

• In the event that an ex-spouse is named an IRA beneficiary, but does not inherit the IRA, the account may pass to the decedent's estate. This is a serious disadvantage, because IRS rules require that IRAs that pass to estates be emptied within five years following the original owner's death. If the account in question is a Traditional, SIMPLE or SEP IRA, whomever inherits the money will owe income taxes on the amount. Furthermore, the assets are subject to probate, where they will be held up until a judge rules on who is to inherit. The money may also end up in the hands of the decedent's creditors during the process.