Some important parts of your estate planning don’t involve estate plan documents like wills, trusts and advance directives. You can designate beneficiaries directly on some types of accounts.
Retirement accounts are an example. If you’re a federal employee with a Thrift Saving Plan (TSP), you should designate one or more beneficiaries. If you don’t, the assets will automatically be distributed to your spouse, children or parents, depending on who survives you. If you have none of these, a distant relative could end up receiving them.
Note that the beneficiary doesn’t have to be a person. For example, some people make their living trust the beneficiary of their and other retirement accounts. By doing this, the funds move directly to your trust for disbursement to beneficiaries as you designate.
The TSP abides by your beneficiary designation rather than your will
One other important thing to remember: The entity that holds an account must abide by the beneficiary designation on the account – even if something different is listed in a person’s estate plan. That’s why it’s crucial if you make changes to do so directly on your account.
The TSP specifies that “your beneficiary designation must be on file with us at the time of your death. We cannot honor a will or any other document.” Don’t forget to make necessary changes as life events warrant – for example, if you marry or divorce.
What happens if you don’t designate any beneficiaries?
If you don’t have any beneficiaries listed on your TSP when you pass away, the assets are handled in a way that can be compared to when someone dies without a will (intestate). They’re distributed to family members in the order of how closely they’re related to you. Of course, this may or may not reflect how close your relationship actually was or whether or not you wanted them to have any portion of your TSP.
Can beneficiaries keep a TSP?
If a surviving spouse inherits the assets in a TSP, the plan administrator will establish a beneficiary participant account. Other beneficiaries are only allowed to have this type of account on a temporary basis. The funds will need to be transferred to an IRA.
As a federal employee, you have some unique benefits, like your TSP and your Federal Employee Group Life Insurance (FEGLI). Make sure that your loved ones are able to benefit from these after you’re gone. Having legal guidance will help you ensure that.