Federal retirement expert, Chris Kowalik, shares tips and insights for federal employees to ensure their federal benefits have the correct beneficiaries assigned. In this segment, she helps federal employees to understand how beneficiaries work, and what happens if no one is assigned to receive the benefit upon the death of an employee or retiree. Stay tuned for a big surprise to the most common beneficiary named – and what happens in the aftermath.
- what federal benefits are available that warrant a beneficiary
- some various categories of potential beneficiaries (like current spouses, former spouses, minor children and same-sex couples)
- what happens if no one is named as the beneficiary
- the effect of having (or not having) a will, and
- the forms and process to get all of your federal benefits up-to-date
- a giant surprise for the most common beneficiary named – and what happens in the aftermath
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Scott: Hello and welcome to this episode of Fed Impact, candid insights on your federal retirement. I’m Scott Thompson with myfederalretirement.com and I’m here today with Chris Kowalik of Profeds, home of the Federal Retirement Impact Workshop.
Chris is here with us today with an important topic many federal employees overlook and that is making sure beneficiaries are up to date on several federal benefits.
Chris: Hi Scott, thanks for having me.
Scott: Well Chris, you always give us a lot to think about on these episodes and I’d just like to know what you have for our listeners today?
Chris: Yeah, like you mentioned the topic for today is “Updating Beneficiaries.” So, on the surface this may seem like just another kind of administrative topic, but I assure you that it’s a lot, lot more. So today we’re gonna talk about what benefits are available that warrant a beneficiary, like what can our family expect to have paid out if something should happen to us.
Chris: Some various categories of potential beneficiaries, whether we have current spouses or former spouses or minor children or same-sex couples. They’re all going to be treated a little bit different. So we’ll dig into that a little bit.
We’ll also discuss what happens if nobody’s named as a beneficiary. A question I get a lot of in our workshops is, “How does a will impact the beneficiary that I’ve previously elected?”
Chris: And then to get the show on the road, we’re going to talk about the forms and the processes to get all of the federal benefits up to date today.
Chris: So, as a bonus, be sure to stay tuned for a big surprise to the most common beneficiary named and what happens in the aftermath a little bit later in this episode.
Chris: Now I don’t want to forget this. We always want to hear from our listeners. So we’ll give an opportunity for everyone to provide some feedback to today’s episode and be able to give us some good ideas for future topics.
Scott: Great. Well most federal employees know there are some federal benefits which allow for beneficiary to be named. But for those who are not as familiar with this, can you give us an idea of what some of those benefits are?
Chris: Of course. So there are four main kinds of federal employee benefits available to be paid out upon the death of a federal employee or retiree. So here are the four. The first one are any lump sums available out of CSRS or FERS. So most employees know that when they look at their pay stubs right now, they are contributing to one of the two retirement systems, either the older version CSRS or the newer version, FERS.
Now the amount that they contribute is different so our CSRS employees contribute seven percent of their pay into CSRS and our FERS employees contribute .8%. Most of our FERS employees contribute .8% into FERS. Well that money is accumulating in a bucket at OPM and if there’s nobody set to receive a pension after you die, if we don’t have a spouse that is named as a survivor benefit and all of that, then someone’s going to get paid out that lump sum money.
Chris: Whether they’re CSRS or FERS. Under FERS as well there are other lump sum payments that happen when someone passes while they’re still working. There’s a lump sum payment of about 32 thousand dollars that comes out to a spouse. That number changes each year. And the other lump sum payment is about half of either their high three or their current salary, whichever is better for the person receiving the money. So whichever pay out is higher. So those are the lump sums available out of the CSRS or FERS programs. Simply because that person’s no longer around to receive a pension based on the money that they contributed to the retirement system. So that’s number one.
The next one is unpaid compensation. Now this is only in effect while an employee is still working and it includes any compensation that was earned but was not paid. So we’re talking about an employees last paycheck that would include their unpaid salary. We’ve got a lump sum payment of any annual leave that they had on the books at the time of their death, any unpaid travel vouchers, or any earned comp time. So, kind of a wide variety of different things that might be included in that track.
Chris: The third beneficiary or benefit that can be paid out, of course that most people know is the Thrift Savings Plan. A beneficiary can simply be named there as well as the Federal Employee’s Group Life Insurance Death Benefit. So the last two are pretty obvious ones. The first two not a lot of people know that there’s a beneficiary that can even be named.
Scott: Right, right. Well, what has been your experience with federal employees you meet at your retirement workshops? Do they have a pretty good handle on these beneficiaries? And where would an employee go to check to see who they have currently named?
Chris: Yeah, great question. You know for the most part, employees that I meet at our workshops filed their designations of beneficiary many, many years ago.
Chris: Probably when they were first hired. And for some, that’s 25, 30 years and more. So it’s definitely a system problem with federal employees because they don’t have, like annual reviews every year when they go into HR to make sure everything’s up to date. These things just kind of slip their mind.
Chris: So we have kind of a saying in the financial services side, “If you can’t remember who you named, it’s been too long.”
Chris: It’s been too long. If you can not physically remember filing the form, it has probably happened so long ago and so much of life has changed that you’ve gotta go in and adjust it. So here’s the good news, naming a beneficiary or even several beneficiaries is easy. There are four forms and we’ve got a link to all of these that we will share with you here in a few minutes.
Chris: But this will be very easy. So for our CSRS employees, for those lump sums available, they’ll complete the SF-2808. The FERS version of that same form is the SF-3102. We’ve got for the unpaid compensation, we’ve got the SF-1152. For TSP, we’ve got the TSP Form 3 and then for FEGLI, we’ve got the SF-2823.
So as far as checking who is already named, that gets a little bit tricky. For employees that have been granted online access to their electronic official personnel file or their EOPF, they can check there. That is where beneficiaries will be updated. But HR departments can offer some assistance there as well. Frankly, if it gets too time consuming and you have to fill in a request and they’re going to submit it somewhere to figure it out, I want you to kind of jump to the front of the line and simply fill out new forms.
Chris: Yeah these are so easy and they’re just gonna overwrite anything that you already have on file. So instead of waiting 60 days to hear back from HR, of who’s named, just file your new beneficiary and then it’s over.
Chris: Then you know who you want named is actually named. So like I said these forms are super easy. It’ll take an employee about ten minutes to fill out all four forms. So as long as they know who they want to name, the forms themselves are not terribly difficult. These forms can be completed at any time. So there’s no open season. There’s not a particular time of year –
Chris: – they must submit these, very easy and can be done at any time. So to make things simple for everyone that’s listening today, we have all of the beneficiary forms listed in one spot on our website. So if you need to find them, instead of going to dig down into all the different websites to find them on the federal side, you can go to our site, www.fedimpact.com/beneficiaries and we’ll have all the forms you need right there.
Scott: Okay great. Now you say that this is a pretty easy process but are there times when naming beneficiaries can get a bit confusing?
Chris: You know sometimes there are situations that do tend to complicate matters and it normally has to do with the type of person that an employee is naming as the beneficiary.
Chris: So here is some examples. The first is the basics for who you want to name. First you can name anybody that you want. It doesn’t even have to be a living person. It can be an entity like a company, a church, a charity, a cause, a trust, you know, any type of legal entity that’s out there, you could name as the beneficiary. An employee can also name primary beneficiaries as well as contingents. So someone might say, “Well, I am married and I’ve got some grown children. I want to name my spouse, but God forbid if something happens to my spouse before me, now I want that money to go to my kids.”
Chris: And so that is an example of a primary beneficiary and then a contingent beneficiary. Now anybody that has an outdated beneficiary on file, like say a former spouse or I tell people somebody else that you’ve fallen out of love with. And you’ve got a beneficiary listed that still has their name on it, I assure you they are going to be paid your money –
Scott: That’s right.
Chris: – when you die. And that’s gone all the way to the U.S. Supreme Court and upheld. So, very, very important. So, let’s jump into these types of people that we might find ourselves naming as a beneficiary.
The first one is not normally a voluntary designation, but it is a former spouse and presumably they have rights to that money by court order and so they’re first in line. So if there’s anything else to be paid out of a benefit, then you know, whoever else you name would come after that. So, let’s say in a divorce decree, your former spouse was supposed to get 1,000 shares of your TSP account upon your death. But by the time that you retire, you have 2,500 shares. Then your current spouse or whoever you name as the beneficiary would receive the additional 1,500 on top of what the court order has granted to a former spouse. Now they’re not always broken out quite that simple in divorce decrees, but that is the idea.
Chris: Another group that I get a lot of questions on is minor children and the real thing is not only “How do I make sure my kids get this money to benefit their life,” the underlying question or concern is, “How do I make sure my former spouse doesn’t get the money and be able to blow it?” That’s what people are worried about. So I’ve got some good news and I’ve got some bad news. The good news is you can name minor children to receive money from all of these different types of beneficiaries.
Chris: The bad news is how minors are treated upon the payout of that money is different between different beneficiary designations.
Chris: So let me give an example. FEGLI: so any body that has that Federal Employees Group Life Insurance, they will not pay out a death benefit directly to a minor child. They’re going to award it to a custodian or a guardian that is designated by the court. That very well may be your former spouse. If they have a legal parent guardian that’s still living, chances are that parent is going to get the money to be able to serve the children in the future. Now for some people that works out okay. Other people that is like the worse, possible thing that could happen to that money.
Scott: Sure. Right.
Chris: It just depends. On the other hand, though, TSP will pay the money out directly to a minor. So it really depends, I would encourage anybody that has minor children that they want to be able to leave this type of money to, they need to consult an estate planning attorney to make sure that you get things set up, for instance in a trust that allows for minor children to be cared for without the money being turned over, perhaps, to a former spouse or someone else who may step in as the guardian against someone’s wishes.
Chris: Okay. Another group that tends to have some complexity are same-sex couples and the challenge of course is what’s automatic and what’s not. So with the strike down of the Defense of Marriage Act years ago, OPM came back and revamped a lot of their benefits and from OPM’s standpoint, a same-sex spouse is treated exactly the same as an opposite sex spouse.
Chris: But, a same-sex spouse is not on the list of what’s called the Order of Precedence for lump sum benefits to be paid out. So if there is not a beneficiary designation made a same-sex is not considered a spouse for this beneficiary purpose.
Chris: So in the list of the defaults of where the money goes, we would, we’re simply not going to be able to ensure that a same-sex spouse is going to receive all the things that we would expect them to as an opposite sex spouse would. So that’s one bit of complexity there. Now for anybody that wants a little bit more digging on the same-sex spouses and how all of it works, whether they’re domestic partners or whether they’re spouses and how each of them are treated differently we’ve got a fact sheet for everybody. Again, if you’re listening from the myfederalretirement.com website, you can scroll down to the bottom underneath where you push the “play” button to listen today and there are a number of links there. So, we’ve got a special fact sheet for you that outlines how all of the benefits apply to same-sex couples, whether it be spouses or domestic partners.
Chris: Okay. So that’ll be a pretty handy sheet for a lot of you. Now another question I get a lot of is, “Well, what happens if I have a trust or a will? I know I’ve got a former spouse listed as the beneficiary on my TSP, but just last year I made a will and in my will I made it clear that I want it to go to my current spouse.”
Well, guess what? The former spouse is getting it. It’s gonna override anything that that will or trust even says. So it is, these beneficiary designations are the most powerful, legal documents that us as laymen can fill out all by ourselves. We have to have a couple of witnesses, but we don’t need a notary. We don’t need an attorney. We don’t need a judge. We don’t need a court order. We don’t need any of those things. We can simply update them.
Chris: So we don’t want to let a will or a trust dictate where our money is going to go because if we have an outdated beneficiary, I assure everyone that’s listening today, that person who is named on that beneficiary document, will in fact receive your money.
Another group of people that we tend to have a little bit of complexity when it comes to naming a beneficiary are special needs kids. And the idea of having some sort of way to protect them and ensure that they get the money that their parents want to be able to leave to them without jeopardizing some other benefits that they may have.
Chris: So leaving cash, like a TSP payment or a FEGLI payout or any of these lump sums that we’re talking about that get paid out in cash, having cash left directly to a special needs child or adult may very well disqualify them from many other government benefits that they’re going to receive. So it is important for anyone that has a special needs child or adult to make sure that there is a very special trust. It’s called a Special Needs Trust that is helping to structure the assets properly as to not disqualify a special needs child or adult from being able to have these other services offered as well.
Chris: So, of course, Scott the lesson here is that we want employees to be proactive and take the steps necessary to ensure that the right people receive their money upon their death.
Scott: Yeah, that makes sense. Chris I’m sure there are instances where there are no beneficiaries named. What happens then?
Chris: This happens too often. Way too often. Most of the TSP statements that we receive, have no beneficiary listed at all, none. It’s not even that an outdated one is listed. It’s nobody is listed. And that’s scary for a lot of reasons. So let’s talk about from a legal standpoint what happens to the money upon someone’s death –
Chris: – if there’s no beneficiary listed.
So there is a statute called The Statutory Order of Precedence and it is, by law, the order which your money is to be paid out if you did not indicate on a beneficiary designation who’s supposed to get it.
Chris: So in lieu of you naming a beneficiary, one’s going to be named for you here. So the list seems pretty innocuous at the beginning and then it gets a little hairy the longer down the list you go. So the first natural person that they’re going to send your money to is to your spouse. If there is no spouse, either you’re not married or they predeceased you then it will go to your children. If there are no children or your children have predeceased you, it goes to your parents. If your parents have predeceased you, it goes to the executor of your estate. And if there is no executor named, it’s gonna go to your next of kin. So I suspect the further down this list that we go, the less likely it is the person that you want to get your money is actually getting your money.
Chris: Right. Because we’ve all heard the stories of the next of kin kind of coming out of the woodwork when there’s money to be had, right?
Chris: We even see some local news about that with some celebrities that have passed that we’ll talk about here in just a second. So this process that I named, The Order of Precedence is the process that the probate court goes through to determine where assets should go, where they should be paid in lieu of a beneficiary designation, if none is on file. Now here is the real key with probate. The money doesn’t get paid out right away. It typically sits in probate for anywhere between six and eighteen months.
Chris: And during that time, your family doesn’t have any access to it. And so if you left that money for your family to be able to continue to pay a mortgage or to make sure your kid still got to go to college, you know, or whatever your value is, whatever the thing is that you wanted to make sure happen upon your death with all that money you’ve left them. They don’t have the ability to use that right away.
Another challenge of probate is that there are a lot of other people in line for your money before all the people we just listed, before your spouse and your kids and your parents and on down the line. And mostly who we’re afraid of is creditors.
Chris: Let’s say at the end of your life you racked up 300,000 dollars of medical bills and you didn’t have a way to pay them. Well guess what? All the proceeds that come out of these life insurance premiums, TSP, all these lump sums that we’re talking about, all of that money is going to be taken from that pot before the Order of Precedence is followed. So your creditors get first jab at you know, all the money that’s sitting in that account in probate. So it’s just not an ideal situation and I’ll tell you if anybody listening today has ever been through the probate process with their family, they know it can destroy relationships, relationships between siblings, between parents and siblings, between aunts and uncles and cousins and you know all the next of kin that start coming out of the woodwork.
And I’ll give a very timely example of this, which is Prince. When Prince died, he didn’t have a will, so there’s no instructions on what’s supposed to happen to his estate. He didn’t name the proper beneficiaries, and so his 300 million dollar estate is in the probate court. There’s an attorney drawing a fee off of the 300,000 dollar estate. So the attorney’s going to get paid. And anybody that want’s to lay claim to that money, gets to go to front of the line, before the family.
Yeah, really scary.
Chris: And keep in mind, for anybody that was kind of following that news coverage when it came out, before Prince was buried he was required to give a, well they simply took a blood sample from him so that any next of kin laying claim to his estate could be tested to make certain. So that’s just not the situation that anybody wants to leave their family in at the time that they go. So, if nothing else, name a beneficiary. It takes the guess work out of the courts deciding where the money goes. And better yet, by naming a beneficiary, the money not only bypasses the probate process, but it’s also paid out immediately and not subject to any creditors. So they can’t come and take life insurance proceeds paid to a beneficiary. They simply they don’t have claim to those anymore. So –
Chris: Lot of protections that simply naming a beneficiary can really put in place. So we suggest employees be proactive in naming that beneficiary and keeping them up to date as life changes along the way. And gosh, I know everyone probably knows this but it’s worth reminding everyone to keep a copy of the beneficiary documents so that your family knows that there is something waiting for them if something should happen to you.
So many employees keep a binder that has like a listing of bank accounts and safety deposit boxes and life insurance policies; if they have a burial policy or a burial plot already purchased, various account numbers, powers of attorney, a will, trust documents, all of these types of things just right in one binder. It’s an easy place for someone to be able to look upon your death. So this really becomes an invaluable resource for your family who’s searching and, perhaps, never finding any of those documents. So they may not ever know that there’s something waiting for them out there if you weren’t really open about your finances to begin with.
So after all you’ve spent a whole lifetime earning these benefits. So we want to make sure that your loved ones get everything that’s due to them once you pass.
Scott: Absolutely. Well at the start of this episode, you mentioned Chris that you had something to share with us about the most common beneficiary that is made and this sounds like it might come as a pretty big shock to federal employees.
Chris: It does. This is huge, probably an understatement to say that it’s huge. So let’s take a look at a program that the vast majority of federal employees have.
Chris: The Thrift Savings Plan. So we’ll assume, for the purpose of this example that we have a married participant, so someone contributing to TSP, who wishes to leave the money to their spouse upon the death of the employee. So it seems pretty simple. That’s a very, very common, most common designation that there is.
Chris: So it seems simple that you just name the spouse as the beneficiary and that’s all good. And on the surface yes, that’s fine. But, the question is what happens next? So upon the death of the TSP participant the spouse who’s the named beneficiary in this scenario, they’re going to receive the money in a separate TSP account. So it’s called a beneficiary account as opposed to a participant account where you can actually contribute to it.
Chris: But they can’t take withdrawals and all of that. So that’s the default that TSP goes to. When a spouse is named as the beneficiary, a simple beneficiary account is opened. The spouse now gets to name their own beneficiaries. So if something happens to the spouse, who’s going to receive the money?
So let’s say that the spouse names their three children. Again, the next common designation of beneficiary is children.
Chris: So upon the death of the spouse, so now the participant has died and left the money to the spouse. And now the spouse dies and wants to leave it to the three kids. All of the money has to be paid out immediately in cash.
Chris: It’s all going to go out to the children. And check this out, this is something that blew my mind when I learned it. The money is taxed at the highest tax bracket of the named beneficiaries.
Chris: So if you have one child that is really knocking it out of the park and they’re in the you know, 30, 35 percent tax bracket. And you’ve got another child that’s been struggling, doesn’t really, you know could really use the money. We’re going to tax that lower earning child at the higher child’s tax bracket.
Chris: And it all has to come out at one time. So imagine having a half a million dollars in TSP upon someone’s death. Well let’s make it 600 thousand. Since we got three kids let’s make us some easy math here. Each child’s going to get 200 thousand before taxes. But it’s going to be taxed at the highest child’s tax bracket. And so all of that is going to be considered earnings for that particular year in which they receive it. They can’t spread it out over several years or anything like that. So this is an insane amount of tax to have to pay.
Chris: Right. So how do we avoid this? Well upon the death of the federal employee, so again the TSP participant, the spouse would have to move the money out of TSP to a special, private IRA. It could be in a lot of different types of products, but it has to be structured in a way that allows the spouse to then stretch out the payments to her children as the beneficiaries. So that the next set of beneficiaries that the spouse is naming, this would keep the kids from being smacked with that huge and immediate tax hit. So they get to keep more of the money that he intended for them to have.
Chris: Isn’t that shocking?
Scott: Yeah, it is.
Chris: Wow, unbelievable.
Scott: Well, updating those beneficiaries is so important but something that a lot of us don’t think about very often, unfortunately. I’d like to thank you for these insights and I bet a lot of our listeners know they need to update these documents ASAP.
Would you remind everyone where we could get access to these forms?
Chris: Of course. So employees don’t have to go hunting for all the documents. We’ve put them all in one place on our site. Our site is fedimpact.com/beneficiaries. And again, for anyone listening on the myfederalretirement.com website, you’ll be able to link right to that website at the bottom of the page underneath where you push the “play” button to listen to today’s episode.
Scott: Well, great. That should make it a lot easier. I know you have much more to share with everyone about these complex federal benefits. Can you give us an idea of what we can look forward in future episodes?
Chris: Yeah, you know we’ve covered so many topics so far. But like I’ve mentioned before, we’re never going to run out of these topics. So we’re going to cover the wide swath, the federal benefits everything from CSRS and FERS and TSP and FEGLI and health benefits and open seasons and –
Scott: All right.
Chris: – social security, I mean all over the map. So we’ve got so much to share. I hope they’ll all stay tuned for more insights.
Scott: Okay. Good. Now Chris you mentioned that you love getting feedback from employees and you want to encourage our listeners to interact with you. So what kind of feedback are you looking for and where can employees visit to give that feedback to you?
Chris: Yes, I love getting feedback from employees, whether it’s in our workshops or online here listening to these podcasts. So feds that have a little bit to share with us, they can visit our site at fedimpact.com/feedback and share their thoughts. So for all of our listeners here today I can’t wait to hear what you have to say.
Scott: Great well it’s been a pleasure to have Chris Kowalik again with us today and we’d like for you to stay tuned for another upcoming episode of the Fed Impact podcast to get straight answers insights on your federal retirement.