How you hold title to U.S. savings bonds can have major tax and inheritance implications. This is the case whether you choose Series I savings bonds, Series EE savings bonds, or both. You can title your bond ownership or any bond investment you make in one of three ways.
- There are tax and inheritance implications for how you hold title to a savings bond.
- Titling a savings bond in the name of a single owner is easiest, but the bond will be subject to probate after that person’s death.
- You have options to avoid probate, from naming a beneficiary to titling the savings bonds in the name of a living trust.
- A beneficiary can choose to have the interest earned on the bonds included on the last federal tax return of the deceased owner.
Common Types of Savings Bonds
A Series I bond pays interest based on a fixed rate, plus an inflation rate. The fixed rate remains the same throughout the life of the bond. You can cash a Series I bond in after one year. But you'll give up the last three months' interest if you don't wait at least five years.
Series EE bonds purchased after April 2005 earn a fixed rate of interest that remains the same for the first 20 years. The interest rate on older Series EE bonds is variable. It can change every six months. The same rule applies for cashing in before five years have passed.
U.S. Savings Bond Advantages
Savings bonds are often written off as not worthy of serious consideration for an investor's portfolio. This is particularly the case when interest rates are attractive and equity prices are rich. Savings bonds have a reputation as being old-fashioned gifts received by children from distant relatives.
But these bonds provide absolute safety of principal backed by the full faith and credit of the U.S. government. They offer meaningful protection against interest rate and duration risk. They can even keep pace with inflation to some degree if you select Series I savings bonds.
U.S. Savings Bonds Disadvantages
The biggest drawback of investing in savings bonds is the annual purchase limits that Congress places on them. The limit is $10,000 as of 2021 if you purchase bonds on the TreasuryDirect website. This drops to only $5,000 if you buy paper Series I bonds with your IRS refund. Using your refund is the only option you have for buying paper bonds. These limits don't include bonds you buy as gifts.
If You Hold Title As an Individual
Titling a savings bond in the name of a single owner is the easiest option. But it becomes part of that person's estate when they die. This can present some challenges. The savings bonds will be subject to probate. They could also be subject to laws of intestate succession if the owner leaves no valid will and doesn't select and name a bond beneficiary.
Intestacy laws vary from state to state. They're known for taking a lot of time, money, and effort from your heirs. They transfer your property to your closest living kin in an order of succession. Distant relatives rarely inherit unless everyone ahead of them in line is deceased, and friends and unrelated loved ones are left out entirely.
Your spouse will receive half of your property in some states if you don't leave a will. Your parents would receive the other half. Your spouse might receive a fixed amount of your estate with the balance equally divided between your spouse and your descendants if you have children.
If You Assign Title to a Trust
One way to avoid probate and intestate succession while still having single ownership is to title your savings bonds in the name of a living trust. The named successor trustee of your trust can continue to transact trust business on your behalf when you die with regard to the assets the trust holds. Your heirs would receive the benefit of the property in a way that you've spelled out within the trust instrument or its formation documents, similar to what you would do in a will.
Name a Beneficiary
Naming a beneficiary with the U.S. Treasury Department through TreasuryDirect is another way to avoid probate when you're using a single ownership title on a savings bond. The beneficiary must set up their own TreasuryDirect account, then they can follow a process to have ownership of the bonds transferred upon the death of the titled bondholder.
It doesn't matter if the original owner left a will when a bond has a beneficiary designation. Taking this step overrides any will that might exist. The bond won't require probate to pass to a living beneficiary, so state intestacy laws are dodged as well.
Tax Advantage of a Beneficiary Designation
You can pay taxes on the interest that's added to your bonds each year if you elect single ownership, or you can wait until you cash in the savings bonds and pay all the taxes at once. Most people choose to do the latter.
The beneficiary can then have all the interest earned on the savings bonds included on the last federal tax return of the deceased owner of the bond. The tax then becomes a liability of the estate rather than of the beneficiary.
U.S. savings bonds aren't taxed by states or localities. Their earnings are tax-free at the state and local level.
Hold Title As a Co-Owner
Co-ownership between spouses, family members, parents, children, or other parties means that two or more people hold title to the savings bonds together. Any of them can cash in the bonds without the permission or knowledge of the others. This can trigger a taxable event for everyone. Holding title this way should only be an option if you have total faith in your co-owner.
The surviving co-owner or co-owners become the sole owners of the bonds if one of the other owners dies. Bonds titled in this way pass straight to the surviving, titled owners. They avoid probate and intestate succession laws, at least until the last living owner dies. The bonds would then become part of that person's probate estate unless steps were taken to avoid it.