For younger people who might not know what a savings bond is, it’s a debt instrument secured by the U.S. government. A debt instrument, also known as a bond, is evidence that you loaned the bond issuer money and are entitled to receive interest and, eventually, the return of the money you loaned. These particular bonds are issued in small amounts, from $25 to $10,000, to individuals.
They were first issued in 1941. At that time, they were called “war bonds” and patriotic advertising was used to induce people to buy them. War bonds – bonds issued by the federal government to help pay for wars, have actually been around since the beginning of our country. But, unlike previous wars, after WWII the bonds never went away; they just got a new name. For a long time, they were very popular gifts for birthdays and weddings, and many large employers offered employees the option to buy savings bonds with part of their paychecks. But their popularity has declined over the years.
Savings bonds used to be issued as small paper certificates (actually, they were printed on card stock) which made them easy to give as gifts or to collect in a safe deposit box. But now they are only issued electronically. Savings bonds are very safe because the payment of interest is guaranteed by our federal government. Of course, because they are so safe, the interest rate on them is very low. When a paper savings bond matures, the holder can cash them in at a local bank (called “redeeming”). Taxes on the interest are due in the year the bond is redeemed.
So, many people over the age of 60 have these paper savings bonds lying around – in desk drawers, in safe deposit boxes, or even stuck in books and in other hidey-holes around their homes. They may be registered in the name of one individual, joint with one or more co-owners, or in the name of an individual with a named beneficiary. If a joint owner or beneficiary is alive when an owner dies, there’s no problem. Just submit some paperwork to get the bond re-issued (electronically) in the correct name. But if the bond is only in the deceased person’s name, or everyone named on the bond is deceased, things get a bit trickier.
Treasurydirect.com has all the rules and forms needed, but the bottom line is that the bonds are subject to your state’s probate laws. If no probate is needed under state law and the total redemption value of all the bonds is less than $100,000, you can likely work directly with the Treasury Dept. Otherwise, the bonds will go through your state’s probate process.
Most people try to avoid probate, if they can, to make things easier on their loved ones. So, is there a way to avoid a potential probate if someone owns paper savings bonds? Perhaps. But every change to a paper savings bond now requires that the owner open an online account to hold, change and redeem savings bonds. Many older people aren’t comfortable with this.
To add a beneficiary, paper bonds can be converted to electronic bonds, and a beneficiary can be named once the bond shows up in the online account. To add a joint owner or change the owner to a revocable living trust – same process, except the Treasury Dept. considers that a change of ownership, and the current owner will owe taxes that year on all the interest accrued to the date of the ownership change. The same goes for ownership changes due to divorce.
And here’s the fun part – the IRS requires YOU, the owner, to keep track of all of that because when you do eventually redeem paper bonds where ownership was changed (maybe years ago), the 1099 you receive from the Treasury will show all of the interest from the original issue date to the final redemption date – and the IRS will be looking for the tax due on the entire amount! And do-it-yourself tax preparation programs, such as TurboTax, don’t have the capability to deal with explanations to the IRS about taxes already paid (as I found out the hard way when I did my Mom’s taxes).
The treasurydirect.com website has a ton of useful information and all the forms you’ll need. Savings bonds certainly serve a purpose for risk-averse investors, but just be aware that the paper form of these bonds can create some headaches. Ask your parents now whether they own any savings bonds – and where they are and whose name is on them – so you don’t have a potentially nasty surprise later on.
Questions about probate or proactive estate planning? Give Cindy Clark a call at (941) 444-5958.
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