How to Handle Savings Bonds in Estate Planning and at Death
Fri 17 Sep, by FritzLaw on Estate Planning, Probate
A savings bond is defined as “a debt security issued by the U.S. Department of the Treasury to help pay for the U.S. government’s borrowing needs.” In effect, when you buy a savings bond, you are loaning the U.S. government money which is repaid with interest after a fixed period of time.
There are currently two types of savings bonds: Series EE U.S. Savings Bonds are currently sold at face value and worth their full value upon redemption with interest. Series I U.S. Savings Bonds are inflation-indexed, i.e., they offer a fixed rate of interest that is adjusted for inflation and are often used as a long-term investment. Series HH bonds are no longer available for purchase.
Savings bonds are a safe investment and are attractive during periods of economic volatility, as they do not fluctuate in value. However, they are generally not redeemable for at least five years (unless you don’t mind forfeiting the last three month’s interest as a penalty). This means that you may not have easy access to the money invested in the savings bonds. Those who invest in savings bonds can purchase them in increments as low as $25 or as high as $10,000.
There are several estate planning issues you should keep in mind if you have savings bonds or plan to invest in them.
Will Savings Bonds Avoid Probate?
Probate is the court-supervised process for proving the validity of a will (if there is one) and ensuring that the deceased person’s money and property are transferred to the correct beneficiaries and that any debts or taxes are paid. People often seek to avoid probate, as it can be a time consuming, expensive, and public process. Whether a savings bond will have to go through the probate depends upon how it is titled, i.e., how it is owned.
Single owner. It is very common for an individual to purchase a savings bond titled in their own name. However, if you choose to do this, the savings bond will become part of your estate and will have to go through the probate process, even if you have a will specifying who you would like to inherit it. If you do not have a will, the savings bond will be passed on to a beneficiary chosen by your state’s intestacy statute (“intestacy statutes” are the state’s default estate plan rules for those who don’t do their own planning).
Name a co-owner. Two or more people can hold title to a savings bond as co-owners. Each of the co-owners is allowed to cash the bond, even without the knowledge or permission of the other owners. Savings bonds titled in this way pass directly to the surviving co-owner(s) without probate. However, when the last owner dies, the savings bonds are part of that person’s estate, which must be probated in the absence of additional estate planning designed to avoid it.
Name a beneficiary. Another option is to name a beneficiary with the U.S. Treasury Department using the TreasuryDirect website. If you do this, the savings bond will not need to go through probate, because the beneficiary you have named will automatically become the owner upon your death. The beneficiary must also set up a TreasuryDirect account, but once it is established, will only need to deal with a straightforward process to transfer ownership of the bond when you pass away. This beneficiary designation will even take precedence over a contrary provision in your will. This may be fine for some beneficiaries, but it may not be the best course for those who tend to spend money irresponsibly or have lots of creditors that may come after the bonds to satisfy their claims.
Create a trust. If you want to continue to benefit from the savings bond individually, without naming a beneficiary with the Treasury Department, but also want to avoid probate, you can create a trust and transfer title of the savings bond to the trust. Beneficiaries you name in the trust can receive the benefit of the savings bond, and you can name someone you trust as the trustee to manage the savings bonds. When savings bonds are held by a trust, you can protect beneficiaries who tend to be financially irresponsible from themselves by preventing them from cashing and spending the bonds until the terms of the trust allow them to be distributed to the beneficiaries. In addition, certain types of trusts can protect the savings bonds from being reached by your beneficiaries’ creditors.
What If I Have Found Savings Bonds That Belonged to Someone Who Has Died?
Because savings bonds often take many years to mature, they may be stashed in a safety deposit box or filing cabinet and forgotten. The Department of the Treasury has provided instructions about what should be done if the owner of a savings bond has died.
Electronic savings bonds. If the savings bonds are electronic, the person who died likely has a TreasuryDirect account. If so, you should contact the Treasury Department’s Bureau of Fiscal Service, which will put a hold on the account and provide instructions for your specific situation.
Paper savings bonds. For paper savings bonds, you must first determine who owns the bond. A savings bond typically prints the names of the owner or owners on the bond. If all owners named on the bond have passed away, the bond is part of the estate of the person who died last. In order to properly handle the savings bond, you must establish that you are entitled to the bond or that you have the authority to act on behalf of the beneficiary of the bond, for example, you are the personal representative of the owner’s estate.
If the savings bond is part of the owner’s estate, the Treasury Department has spelled out several procedures:
- If the bonds are valued at $100,000 or less and the estate was not formally administered through a court process, the beneficiary simply must mail in the bond, an FS Form 5336 that has been signed and notarized, and proof of the owner’s death to the Bureau of Public Debt.
- If the value of the bonds exceed $100,000 or the estate is being administered by a court, the personal representative of the estate can redeem the bonds by mailing evidence showing his or her appointment as personal representative, a certified copy of the owner’s death certificate, and FS Form 1455, and the bond.
- In a situation in which the bond is a found long after the owner has died and the owner’s estate has already been administered by a court, the beneficiary must send the bond, proof of death, a notarized affidavit explaining that the bonds belong to named individuals (for small estates) or a final accounting from the estate (for any other estate) to the Bureau of Public Debt. If there is more than one person who may be entitled to inherit the bond, an FS Form 5394 must be mailed in by the heirs, who must all agree with the distribution of the bonds.
If a survivor is named on the savings bond, it does not become part of the deceased person’s estate. Rather, the savings bond belongs to the survivor, who can choose to do nothing, redeem the bond, or have it reissued. If the survivor does nothing, the bond will continue to earn interest until the bond matures. The survivor could also cash a paper bond by going to a financial institution that pays savings bonds and provide the identification and other documentation required by that institution (however, only the Treasury Department can cash HH Series bonds). Alternatively, the survivor can have the bond reissued in his or her name alone. Series EE and I savings bonds are only reissued in electronic form, but Series HH bonds are still reissued in paper form.
Let Us Help You
If you own savings bonds or are considering investing in them as part of your financial plan, we can help you consider the pros and cons, as well as the best ways to title them in order to achieve your estate planning goals. We can also help you determine the best course to follow if you have found savings bonds that were owned by your parent or another loved one. Please call us today to set up an appointment so we can assist you with this or any other estate planning concerns. We are more than happy to meet with you virtually or by phone if you prefer.