The Common And Costly Estate Planning Mistake Federal Employees Make

The Common And Costly Estate Planning Mistake Federal Employees Make

There are many financial mistakes that federal employees can make throughout their life but one of the most common that I see, and ironically one of the easiest to avoid, is naming and updating beneficiary designations. Yes, this sounds simple, but you may not realize how many beneficiary designations you have. And since it’s easy to lose track of the number of designations, it’s also easy to not assign one. Adding to the problem is that although these designations are not difficult to change, they’re often neglected once made. Because the truth is that inertia usually takes hold, and we never get around to updating them after we get married, the second child arrives, or a parent passes away. So, let’s look at why beneficiary designations are so important and what you can do to avoid making this critical mistake.


First, what is a beneficiary? In simple terms, a beneficiary is a recipient of assets. Generally, every financial account you own will have a beneficiary designation, from checking and savings accounts to your FERS Pension, Thrift Savings Plan (TSP), last paycheck, and of course, your Federal Employee Group Life Insurance (FEGLI). The importance of beneficiary designations cannot be overstated, as they will generally go into effect immediately following your death and override your will. Think of your beneficiary designations as a contractual arrangement, and if you don’t keep this contract up to date, you could set your loved ones up for disaster.

What Happens When No Beneficiary Is Named?

If there is no beneficiary on file for your federal employee benefits, each program will follow what’s called the order of precedence. This means your assets in each program (FERS refund, TSP, FEGLI, last paycheck) will be distributed in the following manner:

  1. Surviving spouse, if none then,
  2. Children (equal shares), if deceased their share distributed to their children if none living then,
  3. Parents, if none living then,
  4. Executor or administrator of the estate, if none then,
  5. Next of kin following the laws of the state of residency.

Source: OPM.gov

Now for your nonfederal employee accounts (IRAs, checking and saving, etc.), your assets will be distributed via the probate process for your state. Probate is the court-supervised process that determines the appropriate distribution of assets with no valid beneficiary designation. If you have a will, then the courts will generally distribute the assets according to the document. However, if you die intestate (with no will), the state has its order of precedence for distributing assets.

Why avoid probate? Well, the probate process can be costly, about 2-4 percent of the estate in California. So, for instance, if the value of your estate is $500,000, your probate fees could be $20,000! Yes, your heirs would have to pay a $20,000 fee that could have been easily reduced or eliminated by having a beneficiary designation on all of your accounts. Not to mention that probate can and often is a lengthy process, taking anywhere from 6 to 18 months to distribute assets.

However, remember that assets only go through probate if they do not have a valid beneficiary designation at the time of your death. Meaning, you can avoid probate by ensuring all your accounts have a beneficiary designation. It’s worth noting that a trust is also a common tool used to avoid probate but can come with a significant price tag.

Planning Opportunity: Contact your HR and ask for copies of all four of your beneficiary designations. If you don’t have a beneficiary designated, assign one.

Keeping Them Current

Since your beneficiary designations play such a significant role in your estate plan, it’s imperative that you review them regularly to ensure they are up to date. This is especially important after certain life events, such as marriage, divorce, births, or deaths. Contrary to popular belief, beneficiary forms are not automatically updated when you complete new enrollment paperwork. So, your original designation will remain in force until you submit another form to cancel or change your designations.

For instance, you might have filed your beneficiary designations many years ago, when you were first hired, and since then have remarried. However, since marrying your new spouse, you have not updated your beneficiaries. What happens to your FEGLI death benefit proceeds if you die? Your life insurance proceeds will go to your former spouse regardless of what is stated in your will.

Another reason why it’s essential to review your designations regularly, even if no change has occurred, is because forms get lost or misfiled. Therefore, by checking your designations regularly, you’ll eliminate any chance that they are not exactly as you wish.

Planning Opportunity: Create a beneficiary designation spreadsheet listing all four of your federal program and nonfederal accounts and include the primary and contingent beneficiaries designated. Review this document every 1 to 3 years or whenever there is a significant life event, such as marriage, divorce, birth, death, or a substantial change in your financial situation

Get It Done!

Because reviewing beneficiary designations is so essential, it’s one of the first areas that I review for my financial planning clients. And although designations don’t change frequently, I want to ensure that there are no mistakes.

So, if you have not designated a beneficiary or don’t remember who you designated, then it’s time to take care of it. The good news is that naming a beneficiary is easy. If you don’t remember who you named as a beneficiary, you can submit a new form that automatically cancels any designation on file. To designate a beneficiary for your pension refund, you’ll complete the SF-3102. For unpaid compensation, you’ll complete SF-1152. For your TSP beneficiary, you’ll use TSP Form 3 and for FEGLI, complete the SF-2823.

To learn more about the steps you should take to create your estate plan, read this article.

Final Thoughts

Designating beneficiaries and keeping them updated is critically important to your family’s financial wellbeing and is an area often neglected by federal employees. However, now that you know how vital the designations are and how easy they are to update, you can be proactive and review them as life happens. It’s also a great idea to keep a copy of the beneficiary documents in a safe place so that your family knows about the benefits if something should happen to you. If you found this information helpful, share it with others so that they don’t neglect their designations. Lastly, when creating your estate plan, you will need to consider the federal and state laws governing your situation. The process can be complicated, and the consequences of errors can be significant. Therefore, consulting a professional such as a qualified financial planner or estate planning attorney is highly recommended.

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2023 Legislative Change Notice

The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.

Published by Jose Armenta, MsBA, CFP®, ChFC®, EA

Jose Armenta is a CERTIFIED FINANCIAL PLANNER™ professional who specializes in helping federal employees get the most out of their federal benefits. Jose’s experience serving federal employees has provided him with valuable insight into federal employees' unique financial planning needs.

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