Does a spouse have legal basis to challenge non-spouse beneficiary on IRA?

This is in NJ, so not a community property state. If a person names a non-spouse beneficiary on a rollover IRA, does the spouse have any legal basis to claim half or all of this account? No spousal consent form was signed. 

My dad left his traditional IRA (with Vanguard, a rollover from an employer sponsored 401k) to me when he passed away. My mother, who he was married to but estranged from, has hired a lawyer and is challenging this beneficiary designation. The bank has frozen the account and we now have to “work it out” or go to court. There is not very much money in the account (~50k)  so it’s definitely not something worth going to court over if at all possible.

I’m bewildered by this as everything I’ve read AND a lawyer I spoke to says she has no legal basis for the claim. I don’t know why the bank is freezing the account if this is so clear cut. Does anyone have any insight into possible nuances to the law around this that we could be missing? 

I agree it is clear-cut.  I'm not sure about the bank procedures and whether they can or must or...may not freeze an account under these circumstances.  They are, basically, not doing their job, but again, I'm not sure about whether their reaction is legal or not.  I guess I'd go back to them again and say that the next step is to sue them for withholding your legitimate benefits.  (Hey I'm not a lawyer and a lawyer would tell you whether that is the right approach or not but when dealing with aggression and nonsense sometimes firing back with aggression and nonsense works.)

This is a question of NJ law, and I don't know what NJ law would say.  I don't see how one could believe that it is clear cut without knowing how NJ would apply, or might apply, and also other facts which may be pertinent (e.g., did the decedent have a will; if no will are there other assets that would satisfy the spouse's statutory share under the intestacy laws of NJ; etc.).  

10 hours ago, Saddaughter said:

This is in NJ, so not a community property state. If a person names a non-spouse beneficiary on a rollover IRA, does the spouse have any legal basis to claim half or all of this account? No spousal consent form was signed. 

My dad left his traditional IRA (with Vanguard, a rollover from an employer sponsored 401k) to me when he passed away. My mother, who he was married to but estranged from, has hired a lawyer and is challenging this beneficiary designation. The bank has frozen the account and we now have to “work it out” or go to court. There is not very much money in the account (~50k)  so it’s definitely not something worth going to court over if at all possible.

I’m bewildered by this as everything I’ve read AND a lawyer I spoke to says she has no legal basis for the claim. I don’t know why the bank is freezing the account if this is so clear cut. Does anyone have any insight into possible nuances to the law around this that we could be missing? 

An IRA owner has the absolute right (barring some court order) to name any beneficiary he/she desires.  The bank is interfering with YOUR right as the named beneficiary and they have no right to "freeze" the account unless THEY have a court order that instructs them to do so.  You need to tell the bank that they are interfering with your federally protected rights, and that they will hear from your lawyer if they don't follow their legal responsibility under their IRA agreement to make the payment as directed.  If that doesn't work, you do need to have a lawyer do the same thing, but this time with a demand letter and a pledge that they will be personally sued for interfering in the IRA contract and wil claim damages for the inability to invest the funds as you desire.

Now, just to make sure, was there any prior court order that has any involvement with the IRA?

Let us know how it goes....

8 minutes ago, jpod said:

This is a question of NJ law, and I don't know what NJ law would say.  I don't see how one could believe that it is clear cut without knowing how NJ would apply, or might apply, and also other facts which may be pertinent (e.g., did the decedent have a will; if no will are there other assets that would satisfy the spouse's statutory share under the intestacy laws of NJ; etc.).  

Nope.  First, we don't know that he died intestate. Second, intestacy deals with property that has not otherwise been passed by other means, such as joint titling or specific beneficiary designation. Read this (particularly my highlighted last line):

If you die without making a will, a court will distribute your property according to the laws of your state. This process is called “intestate succession” or “intestacy.” Who gets what depends on who your closest relatives are. The most likely recipients are your spouse, your children, your parents, or your siblings.

Intestate succession probably won’t determine the fate of all your property.  Property that passes outside a will is not subject to intestacy rules. For example, property you put in a living trust passes directly to the beneficiaries you named. The same is true for other property -- like life insurance or a retirement account -- for which you directly named a beneficiary.

I once wrote training material for the estate planning curriculum of a major life insurance company when I was in the home office marketing department, training division. You can review some issues on specific state intestacy rules here: https://www.nolo.com/legal-encyclopedia/intestate-succession

Larry Starr:  I suspect in NJ Spouses cannot be completely disinherited by a will, and if he died intestate clearly the spouse is entitled to some portion of the estate.  You're right we don't know the facts other than that the OP says they were estranged, which if it's relevant in applying NJ law that is a factual question for a trier of fact.  My point being i am not sure that you can use a non-probate asset like an IRA to avoid the spouse's entitlement under the law, whether there is a will or not.  For example, let's assume the decedent had $0 except for his IRA.  I am not convinced that the surviving spouse can be completely disinherited.  I admit that i could be wrong, but i am not convinced yet.    

I have dealt with similar issues in Texas and California (admittedly both community property states) and am inclined to agree with jpod. My impression is that every state's law is unique and has subtleties when it comes to marital and family property issues. If it's that clear cut, then presumably Saddaughter won't be exposing herself to excessive legal fees by finding a very experience NJ marital property lawyer and paying for an hour of his or her time.

First let me say I have no real knowledge of New Jersey laws, but they tend to have some peculiar laws and or court precedence

There is universally a intestate (no will) "spouse's share" and under will a "spousal elective share" of the net estate. Usually, these only apply to probate assets, not IRAs, life insurance, etc...*, but this is NJ so who knows. *ERISA provides federal spousal protection. 

Intestate (no will): In most states, if there are children, there is a fixed amount that goes to the spouse, then 1/2 goes to the spouse and 1/2 to the children. This depends on the state and whether the children are only from one, the other or both parents.

Testate (will): In most states, the spouse may claim an elective spousal share if the will does not meet the minimum legal requirement (1/3 in most states). In most states, there is also a provision that can deny a spouse an elective share if they have been living apart for a significant period time under circumstances that could have been used for divorce.

The bottom line. Anyone can sue for any reason. Whether she has a case or not is up to the lawyers and the courts. Good Luck!

Good points about laws against disinheriting a spouse...but I think in this case they don't apply; see below...however it's just something I found online and not the final word.

• New Jersey law provides that surviving spouses have the right to a minimum “elective share” equal to one-third of the “augmented estate.”  The augmented estate is essentially the decedent spouse’s probate estate, which includes all assets passing under the decedent’s Will, plus certain assets transferred by the decedent during lifetime in which he or she retained some type of control, or which were made within two years of death.  The augmented estate also includes joint accounts with someone other than the surviving spouse, but does not include life insurance, joint annuities or pensions (although there are federal rules which grant a surviving spouse survivor benefits in pensions and certain retirement plans which would override New Jersey law).

My emphasis in italics - an IRA passing by beneficiary designation is not described therein, and note the additional commentary about federal law which of course is referring to plans with annuity options and not relevant.

It is quite common for financial institutions to freeze an IRA account, file an interpleader action, and allow the court to determine the claimants' rights so that there is no double payment; indeed, interpleader actions are common even where a claim seems frivolous. New Jersey law as to the right of a spouse to claim under an augmented estate theory suggests that interpleader may be appropriate as an action by the IRA custodian.

I don't know what all the discussion is about. The asset in question is NOT part of the probate estate since it passes by beneficiary designation.  Bird found the info on the specifics of NJ rights (and see  my links as well), and it also does not include any rights against the IRA passing outside of probate.  My original comments stand, but certainly if the other side is bringing a claim (valid or not) the daughter is probably going to need representation to get this thing resolved.  But the resolution, ultimately, will give the daughter all the funds as an IRA beneficiary; I'm willing to bet! ?

Thank you all for the feedback! The discussion has been super useful and makes me hopeful we would win if this continues to escalate.

I wasn’t familiar with the term “augmented estate” but did some googling. Even if the IRA counted towards the augmented estate (which it seems unlikely it does here) she couldn’t claim it this way as they weren’t living together for a decade before he died, and she has significant assets of her own (a second house besides the one they owned jointly, two cars, and at least a few hundred thousand dollars she inherited from her mother).

She doesn’t need the money at all, just hates me and wants to harass me. Lovely, right? You can see why my dad wasn’t inclined to list her as a beneficiary.. now I just have to hope that dealing with her doesn’t cost so much that the account is drained. I will let you know how this shakes out.