Does TSP Go Through Probate? Guide to Protecting Your Federal Retirement Savings
Most TSP (Thrift Savings Plan) accounts avoid probate if beneficiaries are properly named. However, probate may be required if:
- No beneficiary is listed.
- The named beneficiary is deceased.
- The estate is designated as the beneficiary.
- Legal disputes arise over the beneficiary designation.
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Why TSP Accounts Typically Avoid Probate
The Thrift Savings Plan (TSP), the federal government’s 401(k)-style retirement program, is designed to bypass probate when beneficiaries are correctly designated. Here’s how it works:
1. Beneficiary Designations Override Wills
- TSP accounts transfer directly to the named beneficiary on file, bypassing probate and the deceased’s will.
- Example: A federal employee names their spouse as their TSP beneficiary. Upon death, the spouse submits a death certificate and TSP-3 form to claim funds—no court involvement required.
2. The TSP-3 Form Is Critical
- The TSP-3 (Designation of Beneficiary) form is the only way to name beneficiaries. Verbal wishes or instructions in a will are ignored.
- How to Submit: File online via the TSP portal or mail a physical form to the TSP record keeper.
3. Military-Specific Rules
- Active-duty military members: If no beneficiary is named, the TSP defaults to the standard order of precedence:
- Spouse
- Children (equally)
- Estate
When TSP Accounts Do Go Through Probate
Probate becomes unavoidable in these scenarios:
1. No Beneficiary Listed
- If a TSP participant fails to name a beneficiary, the account becomes part of their estate and must go through probate.
- Example: A retired federal worker never updated their TSP-3 form after divorce. The ex-spouse is no longer eligible, so the TSP enters probate.
2. The Beneficiary Is Deceased or Ineligible
- If the primary and contingent beneficiaries predecease the participant, the TSP defaults to the estate.
- Example: A TSP participant names their sibling as primary beneficiary and their parent as contingent. Both die before the participant, triggering probate.
3. The Estate Is Named as Beneficiary
- Intentionally or accidentally naming your estate as beneficiary forces probate, exposing the TSP to:
- Delays: Probate can take 6–18 months.
- Creditors: Debts and legal fees are paid before heirs receive funds.
- Higher Taxes: Estates face a 37% federal tax rate on income over $14,450 (2024).
4. Disputes Over Beneficiaries
- Heirs may contest the beneficiary designation in court, claiming:
- Undue influence (e.g., a caregiver manipulated the participant).
- Outdated forms (e.g., an ex-spouse was never removed).
Related article for you:
Do IRA Beneficiaries Go Through Probate?
How to Ensure Your TSP Skips Probate?
1. Name Specific Beneficiaries
- Use the TSP-3 form to list individuals by full name, Social Security number, and relationship.
- Avoid vague terms like “my children” or “my estate.”
2. Update Beneficiaries Regularly
- Life events that require updates:
- Marriage/divorce
- Birth/adoption of a child
- Death of a beneficiary
- Pro Tip: Review beneficiaries every 2 years or after major life changes.
3. Add Contingent Beneficiaries
- Designate a backup to avoid probate if the primary beneficiary dies first.
4. Use a Trust for Complex Situations
- When to Use a Trust:
- Minor beneficiaries (avoids court guardianship).
- Special needs heirs (preserves government benefits).
- Spendthrift heirs (controls irresponsible spending).
- Warning: Trusts must be carefully drafted to comply with TSP rules and avoid tax penalties.
Tax Implications for TSP Beneficiaries
1. Spouse Beneficiaries
- Rollover Option: Spouses can transfer TSP funds into their own IRA or TSP account.
- Taxes: Traditional TSP withdrawals are taxed as income. Roth TSP withdrawals are tax-free if the 5-year rule is met.
2. Non-Spouse Beneficiaries
- 10-Year Rule: Most non-spouse beneficiaries must empty the account within 10 years (post-SECURE Act).
- Taxes: Withdrawals from Traditional TSP are taxed as income.
3. Estates or Trusts
- Higher Tax Rates: Estates pay up to 37% federal tax on income over $14,450 (2024).
- No Stretch Option: Estates must distribute funds within 5 years if the participant died before 2020.
State-Specific Risks to Know
1. Community Property States
- States: AZ, CA, ID, LA, NV, NM, TX, WA, WI.
- Rule: Spouses may claim 50% of TSP funds earned during the marriage, even if not named as beneficiaries.
2. Medicaid Recovery
- States can claim TSP assets to repay Medicaid costs if the deceased received long-term care.
3. Minor Beneficiaries
- Courts may require a guardianship or custodial account (e.g., UTMA/UGMA) to manage funds until age 18–21.
What Happens If the TSP Goes Through Probate?
- File a Probate Petition: The executor submits the will (if any) to the court.
- Transfer TSP to the Estate: The TSP is liquidated, and funds are placed in an estate account.
- Pay Debts and Taxes: Creditors, funeral costs, and taxes are settled first.
- Distribute Remaining Funds: Heirs receive shares per the will or state intestacy laws.
FAQs
Can a Will Override a TSP Beneficiary?
No. The TSP-3 form supersedes wills.
What If the TSP Participant Lived Overseas?
U.S. probate laws apply based on their state of legal residence.
Can I Correct a Mistake on the TSP-3 Form?
Yes. File a new TSP-3 form to update beneficiaries.
What Happens If the TSP-3 Form Is Lost?
The TSP defaults to the standard order of precedence (spouse, children, estate).
Checklist for TSP Participants
Complete and submit a TSP-3 form.
Name primary and contingent beneficiaries.
Update beneficiaries after life events.
Avoid naming your estate.
Consult an attorney for blended families or complex heirs.
Need Help? Key Resources
- TSP Beneficiary Designation Form (TSP-3)
- TSP Death Benefits Guide
- State Probate Laws
- Free Legal Aid for Federal Employees
Disclaimer: This article is for informational purposes only. Consult a tax advisor or estate planning attorney for guidance tailored to your situation.