The start of a new year is a good time to review your designations of beneficiaries on accounts such as your TSP account, IRAs, life insurance (FEGLI and others), annuities, and bank and brokerage accounts.
Why is this so important? Because a beneficiary you’ve named will collect the account’s proceeds after your death, no matter what it says in your will. You may not want your ex-spouse to inherit your IRA, for example, while you may want to name your spouse if you designated your brother, before you married.
Also, the person you’ve named as a beneficiary may be losing mental capabilities or may have shown a tendency to squander money. Leaving a substantial amount outright to such an individual probably is not a good idea. Instead, you can name a trust as your account beneficiary and name the recipient as the trust beneficiary. A trustee you name can see that the money is distributed prudently.
Name contingent beneficiaries, too. A contingent beneficiary will inherit your account if the primary beneficiary dies before you do and you don’t change the beneficiary designation form.
Pay particular attention to tax-advantaged accounts such as IRAs. If you don’t name any beneficiary, your account probably will pass to your estate. Then your IRA will pass under the terms of your will, if you have one, or under state law, if you don’t. Either way, your IRA may wind up with an unintended beneficiary. What’s more, passing your IRA through your estate will expose it to probate, expose it to your creditors, and cost your heirs valuable tax deferral opportunities.