Some IRA Administrators Still Require QDROs/DROs:  As with ERISA-qualified pension and 401(k) plans, IRA benefits are also considered marital assets subject to equitable distribution upon divorce. Many attorneys attempt to use a traditional QDRO to divide IRA benefits, not realizing that IRAs are exempt from the federal QDRO provisions. However, for unknown reasons, some IRA administrators still require a QDRO before they will divide a participant’s IRA balance. Rather than “fighting city hall” on this issue, it is advisable to simply prepare a QDRO as you would for any traditional 401(k) plan, and submit it to the IRA administrator for processing. 

Letters of Instruction:  Before drafting a QDRO, attorneys should contact the IRA administrator to determine whether a simple Letter of Instruction will suffice in lieu of a QDRO. If you do draft a QDRO, if so requested, you should refer to the Order as a Domestic Relations Order (“DRO”) and not a QDRO per se. The IRA administrator should be fine with that.

If you are not sure about the IRA Administrator’s Procedures for Transferring Benefits in Divorce: If you are not sure what the IRA administrator requires in order to effectuate a transfer of benefits in your case, give us a call. We can determine what’s needed and draft the necessary documents for you. 

Remember Beneficiary Change Forms if you represent the IRA Participant:  All IRA Administrators have “Change of Beneficiary” forms that allow the IRA participant to change his beneficiary designation for his remaining share of the benefits once the transfer of benefits is made to the former spouse. Don’t forget about this if you represent the IRA participant. Many IRA participants forget to change their beneficiary designation that was in place before the divorce.

Medallion Signature Guarantee on Letter of Instruction: Many IRA administrators also require the Letter of Instruction to have a Medallion Signature Guarantee, which is similar to a Notary stamp.  Most banks offer Medallion Signature guarantees. A bank officer will witness the parties’ signatures and then stamp the letter accordingly.  You should ask the IRA administrator whether a Medallion Signature Guarantee is required or whether an old-fashioned Notary will suffice. In fact, some IRA administrators only require the signature of the IRA participant (without a Notary or Signature Guarantee).

Do Both Parties Sign the Letter of Instruction?:  It’s also important to ask the IRA administrator whether both parties need to sign the letter of instruction or just the IRA participant himself.  Some IRA administrators understand that the parties are often not on speaking terms at the time the letter of instruction is drafted, so they do not require both parties to sign off on it and have to appear at the same time at the bank to obtain a signature guarantee.

Submission of Judgment Entry of Divorce:  In all cases in which you utilize a Letter of Instruction, you should also submit a copy of the parties’ judgment entry of divorce.  This is required by virtually all IRA administrators. They will not transfer the benefits until they receive and review a copy of the parties’ judgment entry of divorce that sets forth the provisions of the intended transfer of IRA benefits.

Not All IRA Administrators Will Calculate Investment Earnings Nor Allow for Retroactive Dates of Assignment:  Some IRA administrators have restrictions on the transfer of benefits to a former spouse.  Many of them have to be told exactly how much should be transferred to the former spouse (either as a percentage or dollar transfer).  They may also only permit such transfer amount to be accomplished as of the date they actually make the required transfer rather than as of the date of divorce.  In other words, if the parties’ divorce was on July 1, 2019, and you are now drafting the letter of instruction (or completing their transfer form), they will NOT let you state that the former spouse is to receive 50% of the IRA balance as of July 1, 2019 (date of divorce), plus investment gains/losses from July 1, 2019 to the date of transfer.  You must tell them how much to transfer as of the date they actually make the transfer. This moving train scenario often causes inequities for one of the parties (depending on whether there have been investment gains or losses since the date of divorce). There really is no way around this. Therefore, we suggest that you complete the necessary transfer forms and/or letter of instruction as soon as possible following the parties’ divorce.

Establishment of New IRA in the Former Spouse’s Name (ie: the Recipient Spouse): If your client is to receive a portion of her soon-to-be-ex’s IRA benefits, the IRA administrator will likely require that she establish a new IRA account with the same IRA administrator that holds the benefits for the participant.  This will be necessary to effectuate the transfer of benefits. Even if the former spouse may already have an IRA at another institution, they will likely not make an immediate transfer of benefits to that other institution. However, once the transfer of benefits is made to the former spouse’s newly established IRA account, she may elect to transfer those benefits to her other IRA account. Therefore, it’s important to request an IRA application form as part of the transfer process so that the recipient spouse can establish one there also.

As author of the leading textbooks in the field of QDROs, including the acclaimed Qualified Domestic Relations Order Handbook, 4th Edition, and The Complete QDRO Training Manual for Corporations and Plan Administrators (both Wolters, Kluwer Publications), Gary Shulman brings unparalleled expertise to QDRO drafting for attorneys and individuals.