“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.
Filling out and reviewing beneficiary forms is an important step in retirement and financial planning for federal employees. These forms ensure that your benefits, such as life insurance and retirement savings, are distributed according to your wishes after your death. This article explains why these forms are essential and the potential consequences of not completing them correctly.
What is a Beneficiary Form?
A beneficiary form is a document that specifies who will receive your federal benefits, such as Thrift Savings Plan (TSP) funds or Federal Employees’ Group Life Insurance (FEGLI), after your death. If you don’t complete this form, your benefits will be distributed according to the default Order of Precedence established by law. The order is as follows:
- Spouse
- Children
- Parents
- Siblings
- Other relatives or estate
While this order aims to distribute benefits fairly, it may not align with your personal wishes. Completing a beneficiary form ensures clarity and control over how your benefits are distributed.
Why Should You Fill Out a Beneficiary Form?
Clarity and Control
By completing a beneficiary form, you ensure that the right people receive your benefits, avoiding any confusion or legal disputes. Without this documentation, your loved ones may face unnecessary complications during an already difficult time.
Primary and Contingent Beneficiaries
It’s important to designate both primary beneficiaries (those who receive benefits first) and contingent beneficiaries (those who inherit if the primary beneficiaries are unavailable). Failing to name contingent beneficiaries could result in your assets being distributed to unintended parties or even reverting to the government.
Protection from Mistakes
If you don’t file a beneficiary form or if errors exist on the form, it can lead to delays or legal challenges for your family. Keeping an updated and accurate form can prevent these issues.
Trusts as Beneficiaries
Another option is naming a revocable living trust as a beneficiary. A trust is a legal arrangement where one person (the trustee) manages assets for the benefit of another (the beneficiary). Not all trusts can properly hold retirement assets, so it’s essential to review this with a legal professional to determine if you can. Trusts offer several advantages:
- Control After Death: Trusts allow you to specify how and when assets are distributed, which can be helpful if you don’t want young children inheriting large sums all at once.
- Avoiding Probate: A trust helps bypass probate court, saving time and money for your family.
- Simplifying Updates: Instead of updating multiple beneficiary forms across accounts, you only need to update the trust document.
Beneficiary Forms for Federal Benefits
Thrift Savings Plan (TSP)
Federal employees can designate beneficiaries for their TSP accounts. Spouses often receive favorable tax treatment when inheriting TSP funds. For example:
- A surviving spouse can transfer inherited TSP funds into their own account, allowing continued tax-deferred growth.
- Non-spouse beneficiaries may face stricter tax rules and quicker withdrawal requirements.
Federal Employees’ Group Life Insurance (FEGLI)
FEGLI benefits are paid based on the most recent valid designation on file. If no valid designation exists, benefits follow the Order of Precedence. It’s important to keep this form updated, as it overrides any instructions in a will.
Key Takeaways
- Fill Out Your Beneficiary Forms: Ensure your forms are complete and up-to-date to avoid legal complications.
- Consider Naming a Trust: Trusts provide flexibility and control over how assets are distributed.
- Stay Organized: Keep copies of all beneficiary forms in a safe place and review them periodically.
Conclusion
Completing beneficiary forms for federal benefits like TSP and FEGLI is a small but vital step in financial planning. These forms ensure that your wishes are honored and prevent unnecessary challenges for your loved ones. Additionally, setting up a trust can provide even greater control over how your estate is managed. Take the time to review and update these documents regularly to protect your financial legacy.
ABOUT THE AUTHOR
Micah Shilanski, CFP®, is a distinguished financial planner known for his deep commitment to providing exceptional advisory services to his clients. As the founder of Plan Your Federal Retirement, Micah has dedicated his career to helping federal employees understand and optimize their benefits to ensure a secure and prosperous retirement. His expertise is widely recognized in the industry, making him a sought-after speaker and educator on financial planning and retirement strategies.
Micah’s approach is client-centered, focusing on creating personalized strategies that address each individual’s unique needs. His work emphasizes the importance of comprehensive planning, incorporating aspects of tax strategy, investment management, and risk assessment to guide clients toward achieving their financial goals.