Advantages and Disadvantages of filing out beneficiary designation forms with TSP and FEGLI

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Love your podcast! I am a Federal retiree and fine with Thrift Savings Plan (TSP) and Federal Employees Group Life Insurance (FEGLI) standard order of precedence beneficiary assignments being spouse, then children in equal shares. I understand this order of precedence is followed when no beneficiary forms are on file. I have not submitted any beneficiary forms. Are there any advantages/disadvantages of filling out beneficiary designation forms to restate this assignment? What are the advantages/disadvantages to naming my Revocable Living Trust (husband and wife) as beneficiary?” – Robin.

This is a GREAT question and one that has several layers, which we will unpack with you.

A lot of Federal Employees forget that as part of their federal service, they have several beneficiary designations on file. Even more, we visit with one on one during our federal employee consultations, think that the natural precedence in which their assets will be transferred is, “good enough.”

Until we start looking at all of the pros and cons.

Pros of Leaving Beneficiaries on File as a Federal Employee

We are big fans of making sure that your assets have beneficiaries AND contingent beneficiaries on record.

Here are a few of our top reasons we think you should leave beneficiaries are your federal employee benefits:

1. Ensure Assets are Distributed as Desired. It allows you to ensure your assets will be distributed to the person(s) you want to benefit from your estate. Remember, if you do not leave a beneficiary on file, the courts will find one for you. This can become complicated, time consuming and costly for your survivors to have to sort through.

2. Avoid Probate Process. Assets with named beneficiaries typically avoid the lengthy and costly probate process, allowing assets to be distributed more quickly to your beneficiaries. Probate is not always a “bad” thing but contingent on the State that you live in, it could be lengthy. We’ve seen probate take a few weeks and tragically, we have seen probate take a few years to be wrapped up.

3. Privacy is Paramount. As beneficiary designations aren’t public record, they provide a measure of privacy in the distribution of your assets that probate just does not. Probate is very public. Anyone can make a request with the court house to review open probate cases.

4. Flexibility and Control – we are big fans of both! When you complete the beneficiary forms, you can name multiple beneficiaries and specify the percentage of assets each should receive. You are also in the driver seat so you can have the flexibility to change beneficiaries as your circumstances or wishes change. This is a tremendous benefit for people who, as time passes, want to ensure that they’re being more philanthropic as their adult children become financially independent.

5. Tax Benefits – death and taxes! Certain accounts, like life insurance or retirement accounts, can have tax benefits when left directly to a beneficiary. If beneficiaries are not left on file and the assets go through probate, this could cause unneeded delays in determining tax liabilities. The year that a person passes away, their “last tax return” will still need to be filed. If assets are tied up in probate, this could cause delays in determining what is taxable, how much is taxable and who is paying that tax.

Cons of Leaving Beneficiaries on File as a Federal Employee

We really had to stop and think about what the “cons” of leaving a beneficiary because we are really, really big supporters of making sure that as a federal employee you have beneficiaries on file.

However, here are a few to consider.

Outdated Information. If you designate a primary or secondary beneficiary and forget who(m) you have left on file, this information could become outdated. This is one of the reasons that we review this information every couple of years with our clients. Sometimes we think we updated information that we just have not yet. We see this sometimes when a person is in their second marriage and their first spouse is still on record. Or, if they have left a mother or father who has since passed.
Financial Immaturity. If you leave someone as a beneficiary who is not financially responsible there are no safeguards to stop them from inhering the assets. Assets transfer by title which means, if you have left someone one file they will receive those assets irrespective of whatever life circumstances they are in the thralls of. The fear is that this individual could lack the wherewithal to be able to manage such an inheritance because they are struggling with substance abuse; cognitive challenges; disability or even divorce.
Loss of Medicaid or life-public benefits. If your beneficiary is receiving some type of State or Federal aid for disabilities, an inheritance could disallow them from being eligible to continue those benefits. This is particularly important if your loved one is handicapped or disabled and the reason why you need to speak with an attorney about a Special Needs Trust.

Now, in our opinion these are not good enough reasons so as to NOT have beneficiaries on file but they are reasons that you should speak with a professional about how best to structure your estate. Especially if you are concerned about any of the reasons above: outdated information, financial immaturity of heirs or loss of Medicaid or other public assistance.

Professional Help

When it comes to making sure that your beneficiaries and estate are in order we strongly recommend speaking with a professional to outline how you want your affairs handled.

You can make an unlimited amount of changes and decisions while you’re alive.

None posthumous.

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