Generally speaking, your heirs become owners of your retirement accounts and also may 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 retirement accounts, and to revisit those designations annually, or when a major life event occurs, such as the birth of a child. 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 benefits when you die, your spouse will only receive a survivor benefit if it exceeds your spouse's own payment. In other words, your spouse will receive the higher of the two benefit amounts, but not both. A divorced spouse also may be entitled to collect benefits, as long as he or she was married to you for 10 years or more and had not remarried before age 60 (subject to exceptions).
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, also may collect benefits. If one parent is surviving, he or she is 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 his or her late parent's benefit up to age 19 if he or she is attending elementary or secondary school. And, if a child has a disability that dates from before he or she turned age 22, he or she is also eligible to receive the 75% survivor benefit, no matter his or her current age. Keep in mind that, in all cases, a child must be unmarried to be eligible to collect survivor benefits.
Benefits also may be available for a spouse who is caring for a child. These benefits end when the child turns age 16 unless the child has 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 benefits when you die, your spouse will receive a survivor benefit only if it exceeds your spouse's 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. If you fail to name a beneficiary, then the custodial agreement will provide for a default beneficiary, which may be your estate. The rules for a 401(k) plan, on the other hand, are a little bit different. In this case, generally 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 his or her rights as a beneficiary, you then can name any person you wish to inherit the account when you pass.