Estate planning involves myriad little details: you must account for everything you own and figure out how it's going to pass to your beneficiaries or heirs. Add to that the complexities of probate and possible estate taxes, and it's no wonder people often postpone dealing with an estate plan until it's too late. Savings bonds are one such asset you don’t want to overlook. Whether they become part of your estate – and which estate they become a part of – depends on several factors.
Your Probate Estate
If you're the only person named on your savings bonds, they'll become part of your probate estate when you die. Your probate estate includes all assets that aren't set up to pass to a beneficiary in some other way. For example, a life insurance policy or retirement account with a named beneficiary would not be part of your probate estate – these assets would go directly to that person at your death without court intervention to facilitate transfer. A savings bond can usually only be redeemed by the individual whose name it bears, so it would go into your probate estate if it's in your name alone.
For tax purposes, your estate is defined a little differently. Your taxable estate is everything you own or even have an ownership interest in, less certain allowable deductions, such as debts you leave when you die and assets you pass to your spouse or to a charity. Therefore, even if you share ownership of your bonds with someone else, your ownership interest would be included in your estate for tax purposes. As of 2013, however, the estate tax exemption is $5.25 million, so you'd have to own or have an interest in a great deal of property before your taxable estate becomes a factor.
Living trusts bypass probate, and it's possible to fund one with savings bonds, transferring ownership of them into the name of the trust. If you do this, your savings bonds would not be included in your probate estate. They might still be part of your taxable estate, however, depending on what type of trust you've established. If you created a revocable trust and you've maintained control of it and your assets during your lifetime, the Internal Revenue Service says these assets are subject to estate taxes. Therefore, your bonds would be included in your taxable estate. If you created an irrevocable trust, giving up control to another trustee, the bonds would not be part of your taxable estate.
An exception exists to the usual rules when a savings bond names two owners. In this case, ownership would pass to the other person when you die. Half the value of the bond would be included in your estate for tax purposes, but it would not be part of your probate estate – there's no need for the court to transfer ownership. If your co-owner doesn't redeem the bonds before her death, they become part of her probate estate.
- IRS: Publication 950
- IRS: Frequently Asked Questions on Estate Taxes
- Treasury Direct: Death of a Savings Bond Owner
- Living Trust Network: Funding Your Living Trust with Bonds
- Law Offices of Ann-Margaret Carrozza: Revocable Vs. Irrevocable Trusts
- Paul S. Ward: Avoiding Probate
- FinancialWeb: Distribution of a Savings Bond after Death
- Forbes: After the Fiscal Cliff Deal – Estate and Gift Tax Explained