Many people have tens of thousands of dollars' worth of saving bonds hidden in drawers and safety deposit boxes and forget to address what to do with these bonds as part of their estate plan.
Q- Do you need to have something special in your estate planning documents to address savings bonds like EE or I bonds?
A- Many people use savings bonds as a major tool for saving but when they sit down with their attorney to discuss their estate plan they forget to mention these bonds and that could cause a lot of extra paper work and money going through probate. Also there are some income tax traps with savings bonds that you need to be careful to avoid.
Q- Well let's discuss probate first. How can you avoid probate on savings bonds?
A- If possible title the bonds in joint and survivor ownership or make them payable on death to one or more beneficiaries. That way if you pass away you avoid probate and the survivor or beneficiary becomes the owner. Be careful in making someone a joint owner of the bond, they have equal rights to cash out the bond even without your knowledge. That's why I typically recommend to my clients not to put assets in joint and survivor ownership with their children. If they want to avoid probate they should use the pod beneficiary designation naming their children. If you do not have the bonds titled properly there are Treasury forms you can use to retitle your bonds into a beneficiary form or into a trust.
Q- What if the bonds are never retitled then does that mean you have to probate the bonds on death?
A- Yes. However, depending on the amount of bonds there are ways to reduce the paperwork. There is a form issued by the US Department of Treasury that will allow you to retitle bonds without going through probate if there are no other probate assets in the estate and the bonds do not exceed $100,000. However, if the bonds are worth more than $100,000 or you have other probated assets you will have to probate the bonds.
Q- What are the income tax traps that you need to worry about?
A. Most people who buy saving bonds elect to defer the tax. So over the years a lot of untaxed income is built up. Whoever inherits the bond has several choices that have significant income tax consequences. Obviously you can keep the bond or cash it in. However there are three ways to tax the bonds.
- Elect to have the tax on the untaxed income included in the income of the deceased person or his estate. The decedent might be in a lower income tax bracket then the person inheriting the bond which will save taxes.
- Include the deferred income the beneficiary's name and pay the tax currently.
- Have the bond reissued and defer all unrecognized income until the bond is cashed out or matures.
IRS Publication 550 is a good source of information on this.
Conclusion - There are over 55 million people who own savings bonds. After all of these years of saving make sure that you avoid costly mistakes when you pass them on to your heirs.