Who Is a Spouse Beneficiary for Financial Accounts?

Designating beneficiaries for financial accounts ensures assets are distributed according to your wishes after your passing, bypassing probate. Properly named beneficiaries receive assets directly from the financial institution or plan administrator. This direct transfer capability means beneficiary designations often override instructions in a will, making their accuracy paramount.

Defining a Spouse Beneficiary

A spouse beneficiary is an individual legally married to the account holder at the time of their death. Divorced individuals are generally not considered spouse beneficiaries. Legal separation does not automatically revoke beneficiary designations, but designations should be updated to reflect an account holder’s wishes. If a financial account still lists a legally separated spouse as a beneficiary, that individual may retain the right to inherit. Some retirement plans may require spousal consent to name a non-spouse beneficiary, even during separation.

How to Designate a Spouse as Beneficiary

Designating a spouse as a beneficiary involves completing forms from the financial institution or plan administrator. These forms require your spouse’s full legal name, Social Security Number, and date of birth for accurate identification. Designating both primary and contingent beneficiaries is important; a primary beneficiary is the first in line to receive assets, while contingent beneficiaries inherit if the primary beneficiary cannot. Regularly reviewing and updating these designations is important, especially after life events such as marriage, divorce, or remarriage. Outdated designations can lead to assets being distributed contrary to your intentions.

Special Rules for Spousal Beneficiaries of Retirement Accounts

Surviving spouses who inherit qualified retirement accounts, such as IRAs and 401(k)s, have advantageous options. One option is the spousal rollover, which allows the surviving spouse to roll inherited assets into their own IRA or employer plan, which permits funds to continue growing on a tax-deferred basis. Alternatively, a surviving spouse can elect to treat the inherited IRA as their own. This allows the spouse to manage the account under their own required minimum distribution (RMD) rules and name new beneficiaries. If the surviving spouse is younger than the deceased, this option may enable them to delay RMDs until they reach their own RMD age.

Required Minimum Distributions (RMDs)

The SECURE Act and SECURE Act 2.0 have adjusted RMD rules, with the age for beginning RMDs increasing to 73 in 2023 and further to 75 in 2033. For spouse beneficiaries, this means they can generally delay RMDs until the later of December 31 of the year after the original owner’s death or December 31 of the year the deceased would have reached age 73. If the spouse treats the inherited IRA as their own, their own RMD age applies. Additionally, if the deceased account holder had already begun taking RMDs, the surviving spouse can continue distributions based on their own life expectancy or delay until the deceased would have reached age 73. Unlike non-spouse beneficiaries, who are generally subject to a 10-year distribution rule for inherited accounts, spouses have more adaptable options to stretch out distributions.

Spouse Beneficiaries for Other Account Types

Beyond retirement accounts, spouse beneficiaries have specific considerations for other financial instruments like life insurance policies, annuities, and non-retirement brokerage accounts.

Life Insurance

For life insurance, naming a spouse as beneficiary ensures the death benefit is paid directly to them, typically tax-free. This direct payout bypasses probate, providing immediate financial support. In some community property states, spousal consent might be required to name someone other than a spouse as a primary beneficiary.

Annuities

For annuities, a surviving spouse often has the option of “spousal continuation,” allowing them to take over the contract and maintain its tax-deferred status. This means the spouse can continue receiving payments, or delay them, under the original annuity terms, rather than being forced to take a lump sum and incur immediate taxes. This continuation preserves the long-term income stream or growth potential.

Non-Retirement Brokerage Accounts

For non-retirement brokerage accounts, such as those with Transfer on Death (TOD) or Payable on Death (POD) designations, naming a spouse as beneficiary allows for direct asset transfer upon death, avoiding probate. While these accounts do not offer the same tax-deferred growth advantages as retirement accounts, inherited assets generally receive a “step-up in basis.” This means the cost basis is adjusted to their fair market value on the date of the original owner’s death, which can significantly reduce capital gains taxes if the spouse later sells the assets.