Beneficiary Forms Serve an Important Role in Your Estate Planning

Beneficiary designations on a TSP account offer a lot of flexibility to federal employees in their estate planning.

Beneficiary forms for your Thrift Savings Plan (TSP) and other financial accounts serve an important role in your estate planning. For this reason, you should review all your beneficiary forms, especially after certain events such as divorce, death, marriage, births, adoptions, and other lifetime events. Beneficiary designations properly done will override what is written in a will or trust.

Beneficiary designations direct financial institutions to distribute your assets before probate. Therefore, those assets covered by the beneficiary forms will not be available to be considered as components of your estate. 

Beneficiary designations, however, can also offer additional ongoing flexibility in anticipating federal income taxes when a person has a sizeable amount in a qualified retirement plan such as the TSP or one that meets the requirements of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA) making it eligible for certain tax benefits.

Consider this situation. A person has a sizeable TSP account. She is now in her mid-eighties. Her spouse also has a TSP or 401(k) plan. At this time their home is paid for and they both have pensions with surviving spousal benefits and both delayed electing Social Security retirement benefits until age 70.

A strategy the couple may want to consider is shifting a percentage of their beneficiary designations to their children and grandchildren.

Years ago, when they were newly married and had no children, they designated each other on the beneficiary forms. Now, however, each has enough assets that access to the spousal benefits upon death is the federal tax impact of receiving the other spouse’s benefits will trigger significantly larger Required Minimum Distributions (RMDs) and higher Medicare Part B income-related monthly adjusted amount (IRMMA).

This can easily be accomplished through the use of beneficiary forms for the TSP and the 401(k) assets. The couple could designate their children and grandchildren on the proper beneficiary forms for the TSP and the 401(k) accounts. 

Changing beneficiary forms is not an irrevocable decision. No wills or trusts need to be updated and the beneficiary forms can be changed again and again to reflect the evolving dynamic of their family relationships. 

Careful financial planning should anticipate all possible scenarios to avoid the 11th-hour allocation of beneficiary forms. But for illustrative purposes what if a new financial expense such as nursing home care appeared on the landscape for the couple?

If the nursing care expense began to exhaust all the other available assets, the assets in the TSP and 401(k) would still be available for the new expense no matter the designated beneficiaries. The beneficiary forms could even be changed to reflect the assets contained in the qualified plans to be preserved for the couple’s needs by changing the designated beneficiaries back for the surviving spouse’s benefit.

Beneficiary forms are attractive in that multiple beneficiaries can coexist at the same time. 

In another scenario, suppose our couple upon reviewing their financial plan has nursing care elevated as a concern. Now they would like to have half their TSP and 401(k) accounts to a spouse and have the remaining half distributed to their three children and the nine grandchildren. This could be accomplished by having the designated amounts on a total of 13 beneficiary forms for each account. 

The TSP allows you to “designate up to twenty beneficiaries of your account including persons, a trust, a corporation, your estate, or another legal entity (including a foundation or charity). You cannot designate tertiary beneficiaries (i.e., “third-in-line” beneficiaries who would be entitled to a share of your account if the primary and contingent beneficiaries die before you do) for a TSP account,” according to The Death Benefits Information for Participants and Beneficiaries

About the Author

Francis Xavier (FX) Bergmeister retired from the USMC and the F.B.I. Consider following him on LinkedIn as he shares articles from others about retirement and other financial topics. He also provides retirement seminars thru Federal Career Experts.