When someone dies and leaves savings bonds behind, the way the estate heirs or executor handles them depends on what arrangements were made before the decedent passed away. If some effort was put into estate planning, the transfer of ownership can be so simple that the beneficiary might not have to do anything at all. In other circumstances a probate court and executor may have to unravel a snarl of ownership and tax issues before anyone gets a dime.
Savings Bonds for Survivors
A savings bond owner may hold the bond jointly or name a survivor beneficiary. Either choice makes things easy because ownership goes directly to the survivor. The new owner can just hang on to the bonds and do nothing, redeem the bonds or ask Treasury Direct to reissue them once they are at least a year old. If no survivor is named or there is no living survivor, ownership of the bonds goes to the estate of the person named on the savings bonds who died most recently.
According to Treasury Direct, savings bonds that become part of an estate only have to go through probate when the total value of the bonds is over $100,000 as of the date of death. For lesser amounts, some states have special rules for small estates. Otherwise, the heirs need to fill out form PD F5336, available on the Treasury Direct website. The savings bond certificates have to be signed on the back and must have a signature guarantee from an authorized representative of a financial institution like a bank. A notarized signature won’t cut it for transferring inherited savings bonds. Send the bonds, completed form and a copy of the death certificate to the address on the form.
Savings Bonds in Probate
When the total value of savings bonds on the date of death is greater than $100,000, the bonds must go through the probate process. Smaller amounts can be probated, but it isn’t required by Treasury Direct. The executor can’t do anything with the savings bonds until the court reviews the estate. Once the court issues a letter authorizing the executor to act as the decedent’s representative, she can redeem the bonds. After all financial obligations of the decedent are paid off the remaining money is distributed to the heirs according to the terms of the will or the directions of the probate court when there is no will.
Savings Bonds and the IRS
A savings bond owner can pay income taxes on savings bonds interest each year or defer payment until the bonds are redeemed. People usually opt for deferral. This leaves the executor with the job of figuring out the amount of accrued interest on the bonds and adding it to other income on the decedent’s final tax return. In addition, the executor must determine if estate taxes apply. For example, in 2013 federal estate taxes kicked in starting when an estate was worth $5.25 million or more. State estate taxes may also apply. Only when the executor has paid these taxes does he send the cash from redeeming the savings bonds to the heirs.
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