“Your federal benefit payments are not made following a trust or will. You need to ensure you have a properly completed beneficiary form.”- Joe Runza
If you are well-planned, you have a will or trust to ensure you leave a legacy to your loved ones. These documents, your funeral instructions, durable power of attorney, healthcare directives, and a list of accounts and passwords form the core of a basic estate plan. However, federal employees often forget to fill out or update their beneficiary forms. Failure to have these forms means that beneficiary payments will not be made according to your trust documents or your will. Instead, the government will issue payments according to a standard order of precedence.
In addition to FEGLI, beneficiary forms government payouts from FEGLI, CSRS, and FERS contributions and unpaid compensation.
If you don’t have a beneficiary form, or if your beneficiaries pass away before you do, the standard order of precedence applies. Benefits will first go to the surviving spouse, then your children or stepchildren (if formally adopted). After that, your parents would get payments, your estate executor or administrator (if you have named one), and the next of kin. Next of kin is based on intestacy laws in your legal state of residence at death.
Of course, as with any legal procedure, there are exceptions to this standard order. For example, with FEGLI, a valid court order such as a divorce decree will supersede the standard order of precedence. It also replaces a named beneficiary.
If you want to ensure that your TSP goes to individuals or groups you have named in a trust, you can make the trust a beneficiary of your Thrift Savings Plan. If you want to leave your Thrift Savings Plan account to individuals, you should probably name those individuals on your TSP-3. If you decide to do any of these things, you will want to consult an attorney who has expertise with trusts and retirement plans.
As of 2022, if your named beneficiary is a federally-employed spouse who is either retired or still employed, they can roll your TSP account into theirs. If your designated beneficiary is a non-federal spouse, they will get a “beneficiary participant account.” If the beneficiary chooses, they can keep their money in the Thrift Savings Plan.
If you’re your beneficiary is not your spouse, they are not allowed to leave the money in your TSP. However, they can elect an “inherited IRA,” which may offer them some tax advantages.
Provisions of the recent SECURE Act mean that most non-spouse beneficiaries are not allowed to elect inherited IRAs and stretch payments for their life expectancy, subject to certain exceptions. Unless such exceptions apply, the beneficiary will have to empty the account in ten years.
Summing it up: Federal benefits do not follow wills and trusts but rely on accurate beneficiary forms. Ensuring that all your benefits have the correct beneficiary forms attached allows your funds to be distributed according to your wishes. If you have questions about beneficiary forms, estate planning, or tax consequences, you should consult an attorney or advisor familiar with federal benefits. Be sure your advisor has the knowledge, tools, and skills required to navigate the often-challenging requirements of federal benefits