Legal Blog

The Weekly Scenario: Savings Bonds Options

Question: I recently inherited some EE savings bonds I’m not sure what options I have.

Answer:  The inclination of many people who inherit savings bonds (EE and I for example) is to immediately cash them out.  But this first inclination may prove to be an unwise move.

To answer this question, there are a few general rules to be aware of.

Savings bonds are considered ‘non-probate’ assets.  As such, they are not inherited according to the terms of the Will; rather, they are payable on death to the person (or sometimes trust) named as co-owner or beneficiary and therefore can be distributed immediately after someone passes away.

If no survivor is named or the person named has already died, the bond becomes an asset of the estate and this can complicate matters.

In order to make an informed decision, there are a few things that have to be done:

  1. The first thing to do is to determine what the bonds are worth.  It is important to know whether the bonds are still accruing interest and if so, what the interest rate is. This information is easy to find on TreasuryDirect (Savings Bond Calculator).
  2. Once you know the value, interest rate and redemption date of the bond, you will need to determine whether to redeem the bonds or have them reissued.  Most people who inherit savings bonds will redeem them if the bonds have matured and stopped earning interest. However, some bonds continue to accrue interest at substantially higher rates than current rates on similar type investments like CDs and Treasury Bills.  In that case, it may make sense to hold on to them.
  3. In terms of taxes, interest on EE and I Bonds gets added to the bonds initial value until the bonds are redeemed.  The difference between the purchase price of the bond and the redemption value is subject to federal income taxes (exempt from state taxes).  As far as paying the tax, one option is to ‘accrue’ annually and report the interest and pay the tax each year. The other option is to postpone the tax until the year in which the bond is redeemed.

Comment: A person who inherits a bond generally has two choices. When an inheritor redeems a bond on which the tax has been deferred, they will owe tax on all the accumulated interest.

However, if the person instead chooses to have the bond reissued, they have the option of paying tax on the interest accumulated up until the original bondholder’s date of death, and then they can accrue or defer any subsequent tax. Note that while it is not requited to have an inheritor reissue the bond in their own name, it is a good idea so they can name a new beneficiary on the bond.

As always, if you have any questions or would like to learn more, please let me know.

If you have any questions or would like more information please contact Steve Shane at: sshane@offitkurman.com | 301.575.0313.

ABOUT STEVE SHANE

Steve Shane Head Shot for webSteve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.

 

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