How You Title U.S. Savings Bonds Can Have Big Tax Consequences

Closeup of Series EE savings bonds

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How you hold ownership or title to your U.S. savings bonds can have major tax and inheritance implications for you and your family. This is the case whether you choose Series I savings bonds, Series EE savings bonds, or both. You can title your savings bond ownership or any bond investment you make in one of three ways.

Common Types of Savings Bonds

Series I and Series EE bonds are available for purchase in 2020. Each has some distinct features.

  • 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 sacrifice 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 and can change every six months. The same rule for cashing in before five years applies.

U.S. Savings Bond Advantages

Although they're frequently written off as not worthy of serious consideration for an investor's portfolio—maybe because of their association with old-fashioned gifts received by children from distant relatives—a substantial percentage of American families should keep savings bond investments in the back of their minds. This is particularly the case when interest rates are reasonably attractive and equity prices are rich. 

Savings bonds provide absolute safety of principle 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 the 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. These limits are $10,000 as of 2020 if you purchase them electronically on the TreasuryDirect website, but only $5,000 if you buy paper bonds with your IRS refund—the only option available for paper bonds. These limits don't include bonds you buy as gifts, however.

If You Hold Title As an Individual

Titling a savings bond in the name of a single owner is the easiest option. It becomes part of that individual's estate when they die, but this can present some challenges. The savings bonds will be subject probate and possibly to laws of intestate succession if there's no valid will and testament—unless you select and name a beneficiary.

Intestacy laws vary from state to state and they're known for taking time, money, and effort from your heirs. They effectively transfer your property to your closest living relatives in an order of succession. Distant relatives rarely inherit unless everyone ahead of them in line is deceased.

Your spouse will receive half of your property in some states if you don't leave a will, while your parents receive the other half. In other states, your spouse might receive a fixed amount of your estate with the balance equally divided between your spouse and your children.

If You Assign Title to a Trust

One way to avoid probate and intestate succession while still having single ownership is to title the savings bonds in the name of a living trust. Your named trustee of the trust can continue to transact trust business when you die, with your heirs receiving the benefit of the property in a way that's spelled out within the trust instrument or its formation documents.

Name a Beneficiary

Explicitly 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 U.S. savings bond. The beneficiary establishes their own TreasuryDirect account and follows a straightforward process to have ownership of the bonds transferred upon the death of the original, titled savings bondholder. 

It doesn't matter if the original owner left a will in this case because the beneficiary designation on a savings bond overrides the will. 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 either 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 the latter.

A beneficiary can then elect to have all the interest earned on the savings bonds included on the last federal tax return of the original, deceased owner of the bond. This makes the tax due a liability of the estate. The bonds are therefore effectively passed tax-free with the estate picking up the tab.

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 the bonds without the permission or knowledge of the others, triggering a taxable event for everyone. This is generally only an option if you have total, absolute faith in your co-owner.

The surviving co-owner becomes the sole owner of the bonds if the other owner dies. Bonds titled in this way pass directly to the surviving, titled owner and they therefore avoid probate and intestate succession laws, at least until the last living owner dies. The bonds would then become part of that individual's probate estate.

NOTE: The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.