What Happens to Savings Bonds When the Owner Dies?
Savings bonds are low-risk investments considered safe and sometimes purchased as gifts or to save for the future. The U.S. Treasury Department issues them as a way to borrow money from the public.
There are two types of bonds, Series EE and Series I. A Series EE earns a fixed rate of interest, while Series I bonds make a variable rate adjusted for inflation. They can be purchased in person or through the U.S. Treasury Department’s website for as little as $25 up to $10,000 per person, per series.
Savings bonds are subject to federal income taxes but are exempt from paying local and state taxes. The interest earned is also exempt from federal taxes if the bond is used for certain higher education expenses. It is best to consult with a tax professional before making decisions about savings bonds.
Federal savings bonds can be redeemed any time after a year of their purchase date. But, if they are redeemed before the fifth year from the date issued, a penalty will be applied of the value of three months’ worth of interest. Following five years, there is no penalty for redeeming.
But, What Happens if the Bond Owner Dies?
There is not one concrete answer, so let’s take a look at some of the possibilities of what happens when a bond owner passes away. Much will depend on how the bonds were held and who are the designated beneficiaries. Listed below are a few possible results.
The Individual Bond is Held Only in the Owner’s Name
If the individual who owned the savings bonds had them in their name only and listed no beneficiary or co-owner on the bond, then the bond becomes a part of the bond owner’s estate when they die.
This means the bonds will be distributed according to the owner’s will. If no will exists, the estate laws in the state where the owner lived will dictate what happens to the bonds. The estate’s executor will be responsible for ensuring the bonds make their way to the appropriate heirs or beneficiaries.
Jointly Held Bonds
In bonds that are held jointly, as is often the case with marital partners, the surviving co-owner becomes the sole owner. In this way, bonds avoid going into probate upon the death of one of the bondholders. The survivor can simply present them to the United States Treasury Department with proof of the other owner’s death. The U.S. Treasury Department will then reissue the co-owner a bond in their own name.
Beneficiary Designated Savings Bonds
Sometimes, the beneficiary is designated on the savings bond. The bond will then go to the beneficiary when the bond owner dies. The U.S. Treasury Department will require a certified death certificate and other documentation so that the beneficiary may claim the bond.
When there are multiple beneficiaries listed on the bond, they will share equal ownership of the U.S. savings bond.
Savings Bonds After The Owner Passes
What happens to a savings bond following the passing of its owner depends on how they were held and if a beneficiary was named. Typically, bonds become a part of the owner’s estate and are distributed according to their last will and testament. Probate can be avoided if there is a designated beneficiary or a surviving co-owner.
It is crucial to speak to an estate planning professional with Brady, McFarland & Lord, LLC, about the tax implications of owning and cashing in savings bonds. This will ensure that the money is protected and can be of the most use to the person or people the owner intends for it to serve.