Estate Treatment of Saving Bonds

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    Probate Process

    • A savings bond allows you to name a beneficiary for the bond or a co-owner named on the bond. You may purchase the bond with a co-owner, but if you need the bond reissued to reflect the addition of a co-owner after the initial purchase, you may fill out form PD F 4000. If you are the only owner, the entire bond becomes part of your estate and is subject to probate. In that case, only the estate administrator has the authority to deal with the bonds. If you named a beneficiary or co-owner, ownership of the bonds passes directly to that person, bypassing probate and allowing the beneficiary or co-owner to handle the bonds as he sees fit.

    Interest and Taxes

    • A bond that passes directly to a co-owner or beneficiary at the original purchaser's death does not need to be redeemed immediately, as it would if it were only in the name of the deceased. This allows the co-owner or beneficiary the option of keeping the bond at the current rate of return, which can be beneficial if the rate is higher than the prevailing rate at the time of the purchaser's death. It also allows the co-owner or beneficiary to defer taxes until the bond matures or until a time when the surviving owner might be in a lower tax bracket.

    Estate and Inheritance Taxes

    • The disadvantage to savings bonds is that they do not escape estate or inheritance taxes even if a beneficiary is named. As of 2011 federal estate tax applies to estates of over $5 million, however, state inheritance taxes may kick in at a lower maximum. When the deceased bond owner named a beneficiary, the entire value of the bond on the date of death is part of the estate. For bonds with co-owners 100 percent of the date of death value is included in the estate unless the co-owner can prove she contributed to the bond purchase, in which case the amount going into the estate would be prorated.

    Income Taxes

    • Since taxes on savings bond interest are usually not paid until the bonds are redeemed, co-owners and beneficiaries receive no "step-up" for income tax purposes. This means they will be responsible for income taxes on all interest, not just the amount accrued since the date of death (unless the deceased had reported interest as it accrued). However, there is the option to include interest up to the date of death on the final return of the deceased bondholder, if this turns out to be more advantageous.

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