Non-Spouse IRA Inhertitance: Can Spouse Contest?

Submitted by Don Nascimento on Thu, 2012-04-12 06:48

We are in California.

Recently my wife’s father passed away at the age of 81. His wife left him 2 years ago. They never got a divorce.
While looking through his paperwork he has two Vanguard accounts. One with him and her listed, and another one with a lot more money ONLY listed in his name. Under beneficiaries, my wife is listed as 100%.

We called Vanguard and they confirmed it and froze the account until we send them the death certificate and everything else.

The question is, sooner or later the surviving wife is going to find out about this and she is not going to be happy. He had no will, so she gets the propoerty, their joint checking account, and the other lesser Vanguard account. But the account my wife inherited is huge! Can the spouse contest this in any way, shape or form? Vanguard said they would not even give her information if she calls because she is not listed as the beneficiary. Is this true? Are we free and clear?

Thanks!



Submitted by Bruce Steiner on Thu, 2012-04-12 13:40

You didn’t say in what state the decedent resided. In most states, a surviving spouse is entitled to an elective share, usually 1/3, though the amount or fraction varies from state to state, as does the determination of what’s in the pot, what might be offset against it, and whether it’s outright or just an income interest for life. In some states, the separation might eliminate the elective share. Some states have community property instead of an elective share.

In some states, the wife will have first priority to serve as adminstrator.

Your lawyer (or the lawyer handling the estate if your wife is the administrator) should be able to give you more specific information as to the wife’s rights or possible rights.



Submitted by Don Nascimento on Thu, 2012-04-12 15:56

My first sentence says we are in California.



Submitted by Don Nascimento on Thu, 2012-04-12 15:59

By California I mean everything is taking place in California. There are no lawyers for anyone at this point. All we have to go on is that my wife is the 100% beneficiary. Should my wife get a lawyer? Is there a chance in this community property state that the spouse can get all of it and leave us with nothing?



Submitted by Bruce Steiner on Thu, 2012-04-12 16:08

I wasn’t sure that “we” included your father-in-law.

California is a community property state, so your father-in-law’s wife might have a community property interest in some or all of the assets, depending whether they were acquired with community property.

Your wife should consult with competent tax/estates counsel in California who can give her more specific advice as to how best to proceed.



Submitted by Alan Spross on Thu, 2012-04-12 17:00

Vanguard is particularly focused on IRA beneficiary designations, and it is often difficult to get them to accept any beneficiary format that Vanguard assesses as prone to litigation or ambiguous. I doubt that they would accept a non spousal IRA beneficiary in a community property state without the spouse signing their acceptance of the non spouse beneficiary. That is probably your wife’s best chance of receiving these funds. If decedent’s spouse signed such a form, she may or may not recall doing it OR may indicate that she did not hoping Vanguard lost the form. With Vanguard’s focus on beneficiaries, it is very unlikely they would misplace such a form, but anything is possible.

On the other hand, if he was married before and put your wife on this account as beneficiary when he was single and did not tell Vanguard, then there would be no beneficiary waiver form.



Submitted by Don Nascimento on Thu, 2012-04-12 18:26

It looks like he did this online with a confirmation number and everything else. He did this a week after she left him.



Submitted by Alan Spross on Thu, 2012-04-12 21:32

So his wife was the beneficiary on the account when they split, Vanguard showed her as a spouse and they accepted the change? Beside the confirmation number is there a statement showing the change was accepted by Vanguard. All IRA contracts state that the beneficiary does not change until the firm clearly accepts the change.

That said, it is possible that their on line beneficiary changes allow some things to get through that would not otherwise get through with specific oversight. If it turned out that Vanguard breeched their own beneficiary requirements by accepting the change without a spousal waiver which would not have existed under these circumstances, it would not change any presumption of community property under CA law.

In that case, Vanguard will probably keep the account frozen until a legal settlement is worked out.



Submitted by Don Nascimento on Fri, 2012-04-13 06:53

Vanguard has confirmed over the phone that my wife is the beneficiary and is sending us paperwork. All we need to do is fill it out, and send it back with his death certificate and its all ours.

I have no idea who the previous beneficiary was. I dont think anyone was listed. I do know that this Vanguard account has ALWAYS been in his name ONLY (therefore the spouse name has NEVER been associated with this particular account), with no beneficiaries listed. Remember he also has ANOTHER account with both him and her listed.

The person who has power of attorney for his spouse says we have nothing to worry about because everyone knows he wanted us to have this money. I am pretty sure we are in the clear but I wanted to see what her options are.

I assume that if she, in her old age, wants to put forth the time and effort (which is highly unlikely) that the most she could ever get is half the money. This is what an attorney I called today told me.



Submitted by fairira on Tue, 2012-04-17 17:33

Alan and Mary Kay Foss,

While I have found Vanguard to be consistently very cautious and legalistic in observing and interpreting laws, rules and regulations, Vanguard has told me several times in the past that the owner of a Vanguard IRA, unlike with a qualified plan, can name a nonspousal beneficiary without any written consent of his/her spouse. I called Vanguard just now to see if this had changed and was told that it is still true and that Vanguard has no spousal consent form for their IRA’s nor do their beneficiary designation forms have any proviso re spousal consent.

Re such a nonspousal beneficiary designation, I do not know whether California has any spousal consent requirement or whether they would simply accept Vanguard’s position.



Submitted by Alan Spross on Tue, 2012-04-17 18:47

Did you specify to VG that the question applies to a community property state?
Since most IRA custodians require spousal consent in CP states, it would be very surprising if VG did not, given their focus on avoiding litigation over beneficiary designations. See attached:

http://www.sirkinlaw.com/article%208.htm

I don’t know if CA has a specific requirement, but under their CP provisions, it really does not matter who is named as beneficiary because the spouse can still claim that the IRA is a community property asset. While the surviving spouse’s rights to 50% of all community property is often settled by acquiring assets other than the IRA, the IRA custodian does not know what other assets exist. If they paid the non spouse beneficiary and the IRA was the principal asset, the litigation could get rather expensive and involve the IRA custodian.



Submitted by Don Nascimento on Tue, 2012-04-17 22:24

[quote=”[email protected]“]
I don’t know if CA has a specific requirement, but under their CP provisions, it really does not matter who is named as beneficiary because the spouse can still claim that the IRA is a community property asset. While the surviving spouse’s rights to 50% of all community property is often settled by acquiring assets other than the IRA, the IRA custodian does not know what other assets exist. If they paid the non spouse beneficiary and the IRA was the principal asset, the litigation could get rather expensive and involve the IRA custodian.[/quote]

The IRA my wife inherited was $500,000.

The other IRA for his spouse is $80,000. plus they have a $100,000 checking account and their property which is valued at $500,000.

Given that she gets the property plus the other $180,000 which makes things a total of $680,000 for her, can she STILL go after the $500,000 we have?



Submitted by Alan Spross on Tue, 2012-04-17 23:08

At most, probably not more than 50% of the IRA, her community property share.

That might be rebutted if it can be shown that the IRA was funded with separate property, for example from his earnings prior to their marriage. Are there any other agreements between them such as a pre Nup agreement or provisions in that will that relate to the IRA, eg whether this IRA is NOT community property etc?

Did you read the link in my prior post?



Submitted by fairira on Wed, 2012-04-18 00:45

Alan,

As always, your sage and knowledgeable comments hit the bull’s-eye!

I had NOT specified community property when I called VG earlier today and was told that VG did not require spousal consent when a VG IRA owner designates a nonspousal beneficiary. After your post I called them again and asked about an IRA owner living in California or other community property state. The VG rep sent me a copy of their June 2008 IRA Beneficiary Designation Kit that’s in current use. On the second introductory page headed “Your beneficiary options,” is the following:

“Community property. If you have ever lived
in a community property state while you were
married, your spouse at that time may have
certain rights to your retirement account. You
may want to consult with your estate attorney
for guidance on community property rights.

“Vanguard will not assume responsibility for
determining whether your IRA is subject to
community property. Until we receive a properly
documented community property claim at the
time of distribution, we will not be liable to
anyone for acting in accordance with the
designation we have on file.”

So this appears to be how VG disclaims any liability should there be a dispute between the IRA owner’s spouse and any nonspousal beneficiaries. The VG rep said that if notified of such a dispute, it would abide by a court decision as to any IRA distributions.

Thank you for your comments that it really does not matter who is named as beneficiary because the surviving spouse can still claim that the IRA is a part of the community property assets to which he/she has a 50% claim. Thanks also for providing the link to the Sirkin article about California laws regarding community property.

You are awesome!



Submitted by Don Nascimento on Wed, 2012-04-18 15:24

Doesn’t the spouse have to move fast though?

[i]Until we receive a properly documented community property claim at the time of [b]distribution[/b][/i]

Also, back on the link it says this:

[i]7. Your spouse cannot designate as a beneficiary on and IRA account, or a qualified pension plan, any person other than you without your WRITTEN consent. If your spouse has withdrawn community property contributions from his 401k, IRA, etc, without your knowledge, you have recourse against his estate and the designated beneficiary if you act [b]FAST[/b][/i]

FAST being the key word above. Because my wife called in the account is now frozen. Vanguard is sending us the paperwork. We are making sure to act fast ourselves. In the paperwork we will even have an option to change the name on the IRA. Why does it say FAST? I wonder if there is a certain point when its too late for the spouse?



Submitted by Don Nascimento on Wed, 2012-04-18 15:44

Another thing is, I cannot find a documented case anywhere online of a spouse doing this. Especially one who is very old, sick, with no immediate family, and who already has plenty of money and property. Why would she even try to contest this? The process would destroy her..

Am I being paranoid? Should I worry or calm down?



Submitted by Jose Morales on Wed, 2012-04-18 15:46

[quote=”[email protected]“]Doesn’t the spouse have to move fast though?
[/quote]

The reason the spouse would have to act fast is because once the funds have been withdrawn by the non-spouse beneficiary named nothing can really be done by the custodian to take the fund back if the spouse makes a community property claim. It would then turn into a civil matter between the contesting spouse and the named non-spouse beneficiary.

Can the spouse in this case bring you difficulties if they wanted to? Yes, it very much seems so. But as you have stated, their own POA says that you have little to worry about as they aren’t particulary motivated to come after half of the IRA assets your wife inherited.



Submitted by Jose Morales on Wed, 2012-04-18 15:53

[quote=”[email protected]“]Another thing is, I cannot find a documented case anywhere online of a spouse doing this. Especially one who is very old, sick, with no immediate family, and who already has plenty of money and property. Why would she even try to contest this? The process would destroy her..

Am I being paranoid? Should I worry or calm down?[/quote]

Beneficiary disputes are very real. The facts of this case are a little different, but it will give you a picture of how ugly things can get: http://insurancenewsnet.com/article.aspx?id=271363



Submitted by Don Nascimento on Wed, 2012-04-18 19:45

i appreciate all the responses discussing all the possibilities but what i really need now is someone to tell me not to get all worked up or worried until there is something to be worried about.
Do I need to chill out a bit?



Submitted by Patrick Viglotti on Thu, 2012-04-19 18:31

[quote=”[email protected]“]i appreciate all the responses discussing all the possibilities but what i really need now is someone to tell me not to get all worked up or worried until there is something to be worried about.
Do I need to chill out a bit?[/quote]
Yes, you do need to chill out a bit. There is nothing you can do to control what the other party may or may not do, so worrying about it isn’t going to resolve anything.



Submitted by Don Nascimento on Tue, 2012-04-24 17:44

The probate attorney called me and said that the IRA is not community property. How is this possible in a community property state? Her name was not on the IRA. Maybe because he created it before they got married but that does not make sense. He created this in the early 90’s when they we already married.

Anyways the attorney said its all ours. I am just curious if she is wrong about it not being community property, or, there is another fact I don’t have..



Submitted by mk foss on Wed, 2012-04-25 00:39

Community property is created from earnings during the marriage. Assets acquired before the marriage or received by gift or inheritence during the marriage are not community property. In addition, couples can enter into an agreement (in writing) to treat income as belonging to one spouse or the other.
There aer som variations from community property state to state but those are the basic rules.



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