Generally speaking, your heirs become owners of your
retirement accounts and may also be eligible for a Social Security survivor benefit, depending on your relationship to the beneficiary.
That's why it's important to name a primary beneficiary, as well as a contingent beneficiary (in case the primary beneficiary dies), for your accounts, and to revisit those designations annually. Keeping them current could help you avoid unintended consequences.
How are Social Security benefits handled?
A surviving spouse is eligible for a survivor benefit of up to 100% of your benefit as determined by your earnings record. The amount of the benefit depends on your age at the time of your passing, whether you had started to claim retirement benefits and your spouse's age when they begin collecting survivor benefits.
Keep in mind that if your spouse is already drawing Social Security when you die, they will only receive a survivor benefit if it exceeds their own payment. In other words, they will receive the higher of the two benefit amounts, but not both. A divorced spouse may also be entitled to collect benefits as long as they were married to you for 10 years or more.
Additionally, a surviving spouse — or a minor child, if there is no surviving spouse — is normally eligible for a one-time Social Security death benefit of $255. To apply for the benefit, your survivor will need to call Social Security directly. Online applications aren't allowed.
Parents who are age 62 or older, and who depended for at least half of their income on a child who has died, may also collect benefits. If one parent is surviving, they are eligible for 82.5% of the benefit. In cases where both are surviving, each is eligible for 75% of the benefit.
A child is eligible to receive a survivor benefit of 75% of their late parent's benefit up to age 19 if they are attending elementary or secondary school. And if a child has a disability that dates from before they turned 22, they are also eligible to receive the 75% survivor benefit, no matter their current age. Keep in mind that in all cases, a child must be unmarried to be eligible to collect survivor benefits.
Benefits may also be available for a spouse who is caring for a child. These benefits end when the child turns 16 unless they have a childhood disability and certain conditions are met. There is a limit on the amount of survivor benefits a family may receive. This amount is listed on your Social Security statement.
What about IRAs and 401(k)s?
"If your spouse is already drawing Social Security when you die, they will only receive a survivor benefit if it exceeds their own payment."
— Ben Storey, director, Retirement Thought Leadership, Bank of America
Your IRA will go to the beneficiary, or beneficiaries, you named prior to your passing. As the account owner, you can change your decision at any point, but remember that whoever is on the beneficiary designation form at the time of your death will receive the account's assets. The rules for a 401(k), on the other hand, are a little bit different. In this case, your spouse is legally entitled to the account regardless if you'd like it to go to someone else. However, if your spouse agrees to sign a legal document giving up their rights as a beneficiary, you can then name any person you wish to inherit the account when you pass.