HOW FEDERAL BENEFITS IMPACT ESTATE PLANNING

pre-retirement planning seminar

Question: How do my federal benefits impact my estate?

Answer:

To frame the answer to this question I will add another question – Why is that important?  By understanding the impact your benefits have on your estate you should be able to get the:

  1. Quickest distribution of your assets
  2. Correct distribution of your assets
  3. Maximum distribution of your assets (ie. minimize taxation and fees)

To get the above results I will provide some Estate Planning basics.  But before I do that, I want to clear out of the way the Federal Benefits that are NOT part of your estate.

 

Which Federal Benefits are NOT part of your estate?

Some Federal Benefits are part of your estate and other benefits are NOT.  Your estate includes assets that you own (or control) and are transferable to another person or entity.  Any Federal benefit that you do not own or is not transferred to another is not part of your estate.

The following benefits are NOT part of your estate:

  • CSRS or FERS retirement pension – Not part of your estate. Even though you can elect to leave a survivor benefit to a spouse or an insurable interest, this benefit is not something you own and thus not part of your estate. (This benefit is NOT to be confused with your CSRS or FERS contributions which are your asset and are included in your estate.)
  • FEHB – Not a part of your estate. Yes, your surviving spouse or children may remain insured in FEHB (assuming they meet certain criteria), but this benefit is really just membership (which your survivors continue to pay for) and is not an asset that involves ownership, therefore it’s not part of your estate.
  • FSAFEDS – If an FSAFEDS enrollee dies before the end of the Benefit Period, the account holder’s survivors and/or estate may submit claims or receive payment for eligible expenses incurred through the account holder’s date of death. Expenses incurred after the date of death are not eligible for reimbursement. All reimbursements will be made to the Estate of the deceased.
  • LTCFEDS, FEDVIP – These are similar to FEHB. They are membership benefits and they do not provide a benefit that is transferable to a survivor, therefore they are not a part of your estate.

Even benefits that are NOT part of your estate can influence the way you maximize your estate plan.  For example, by providing some of your CSRS or FERS pension to a survivor, or by providing yourself or spouse with LTCFEDS, that may remove the need to access some of your other assets.  This, in turn, may allow you to place those other assets into a trust (to either minimize estate taxes, or avoid a spendthrift spouse, or protect those assets from ending up in the wrong hands or being mismanaged, etc).

 

Handling Federal Benefits that ARE a part of your estate:

Okay, back to the basics.  As mentioned above, any asset that you own (or control) and is transferable to another person is part of your estate.  These assets will need to be distributed upon death.  How will anyone know the correct way you wanted to distribute these assets?  The most basic method is via your will.  If you do not have a will, or if your will doesn’t address certain assets, those assets will be handled by the laws of intestacy (each state has their own intestacy laws).

Probate:

Any asset passed thru the will (or thru the laws of intestacy) will go thru probate.  Probate is the court process that verifies the will and oversees the distribution of your assets in accordance with your will (or the laws of intestacy).  The probate process has its pros and cons.  The cons include probate fees and lengthy distributions processes (usually 1 year), as well as possible contesting of the will which just adds to the above cons.

Avoiding Probate:

By avoiding probate you can skip the fees and delays it imposes on your estate.  There are 4 ways to avoid probate:

  • Beneficiary Designations – These are legally binding documents that usually are completed when establishing a financial contract (ie. on an investment account or an insurance product). The beneficiary becomes the owner of an asset upon the principle’s death.
  • Titling of assets – These are the declarations of ownership that are placed upon an asset, usually at the time of establishing ownership of the asset. Some titling is designed specifically to ensure a transfer of ownership occurs instantly upon death.
  • Gifts – Giving an asset away to the point where you no longer wield any control over it. Gifting usually occurs while still alive.  Since the asset is no longer yours, it is not a part of your estate.
  • Trusts – Placing an asset into a binding legal agreement, where it is overseen by a trustee. The trust will have a named beneficiary who becomes the owner upon the principle’s death.

Any asset governed by the above 4 methods will not be subject to the will or to the laws of intestacy, thus that asset will avoid probate.  Also, noteworthy, if any of the above 4 methods contradict the will, the asset will NOT follow the will.

Federal Benefits governed by Beneficiary forms:

The following Federal Benefits are governed by beneficiary forms and thus automatically avoid probate:

  • Thrift Savings Plan (TSP)
  • Lump Sum benefits – Including a return of your retirement system contributions, as well as any lump sum death benefit. Also includes a return of your contributions into the Voluntary Contributions Program (CSRS).
  • Unpaid Compensation – Includes unused annual leave as well as unpaid salary.
  • Federal Employee Group Life Insurance (FEGLI)

It should go without saying that since your will is powerless against a beneficiary form, you should verify that your named beneficiary is still accurate, and still alive!

Order of Precedence

If you do not have a beneficiary on file (or if your beneficiary has already passed away), the above benefits are paid – subject to probate – to the following people according to OPM’s “order of precedence.”

  1. To your widow or widower.
  2. If #1 is not applicable, to your child or children in equal shares, with the share of any deceased child distributed among that child’s descendants.
  3. If #2 is not applicable, to your parents in equal shares or the entire amount to your surviving parent.
  4. If #3 is not applicable, to the executor or administrator of your estate.
  5. If #4 is not applicable, to your next of kin under the laws of the state where you lived at the time of your death.

 

Do you need a trust?

For a fuller understanding of the value of a trust in your estate plan, I refer you to another one of my articles “Revocable Trusts – What they do and what they don’t do.”

There I explain that a prime motivator for revocable trusts is probate avoidance.  Since the above benefits are typically governed by beneficiary forms, they will not need a revocable trust to avoid probate.  But even more than that; The above Federal Benefits cannot be placed into a trust while you are alive, with 1 exception – FEGLI.

 

Assignment of FEGLI

For FEGLI, you have the option of assigning your life insurance to someone else, giving them ownership and control of your coverage. In such cases, the insurance still covers your life, but someone else controls the coverage and controls who is named beneficiary. You can assign FEGLI to an individual, a corporation or an irrevocable trust, but your decision to make such an assignment cannot be changed.

 

Irrevocable trusts:

Although beneficiary designations help avoid probate, they do not help avoid estate tax.  Even revocable trusts do not help avoid estate tax.  In order to avoid estate tax, an asset must be removed from your estate completely.  There are a few ways to do so, amongst them being the irrevocable trust.  There are pros and cons to irrevocable trusts.  Again, I refer you to “Revocable Trusts – What they do and what they don’t do.”

There are more twists and turns in estate planning that the above points.  As always, you should discuss your plan with a qualified advisor.

Much success!

Stephen

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