Savings Bonds, estate planning, living trusts, and avoiding probate

Tuesday, February 28th, 2006
Categorized as: Inheriting and bequeathing US Savings BondsSavings Bond taxes

What is a Living Trust?

Before we begin, let me warn you not to confuse a living trust with a living will, which is another name for an advance health care directive.

A living trust is used in estate planning as a legal alternative to a last will and testament. Instead of leaving what you own to your heirs using a will, you give everything to the living trust before you die. The living trust will have a legal lifetime that extends beyond yours.

Typically when you set up a living trust you name yourself as the trustee who controls the property in the trust. You also designate another person who will become the trustee after your death.

The primary attraction of a living trust in estate planning is that, done right, it allows your heirs to avoid the delay, expense, and lack of privacy of Probate Court. This is because you won’t own anything when you die – you will have given it all to the Living Trust.

What is probate?

If you die owning property, on the other hand, a Probate Court has the responsibility to determine who your heirs are. The court’s determination becomes part of the public record. If you have a Will, the court will examine it and hear arguments about its validity. If you don’t leave a Will, the court will determine the disposition of your property using state law.

The probate process typically takes about six months but can take longer if the estate is complex or if there are disagreements about the will. The court will appoint an executor to handle the process. The executor will hire a lawyer to help move the case through court. Both the executor and the lawyer are entitled to fees that can be based on the dollar value of the probated estate.

If your will doesn’t name a friendly executor, the court can appoint anyone to do the job and can determine how much they should be paid. In some jurisdictions, there are concerns that the court appoints cronies who, in turn, financially support the judge’s political party.

Problems of Living Trusts

Of course, there will also be legal fees associated with setting up a living trust. Moreover, if the trust paperwork – such as retitling property to the trust – isn’t properly completed, all your property ends up in Probate Court anyhow.

As the Office of the Attorney General of New York points out on its page on living trusts:

Contrary to the impression created by many living trust salespeople, the grantor must take affirmative steps to transfer assets and fund the trust. Merely executing the living trust itself will not cause the trust to become funded.

Consequently, even if you have a living trust, you should also have a will, known as a pour-over (to catch what pours over the brim of your living trust, I guess), to make sure any property that doesn’t get into the trust is distributed as you wish.

Moreover, in terms of privacy, the NY Attorney General’s office warns:

A “pour-over” becomes a matter of public record when it is submitted for probate, and the “pour-over” often incorporates the living trust by reference. In addition, when title to real property is transferred into a living trust as part of the funding process, the consent of the mortgagee is required. Before giving consent to the transfer of mortgaged property, the mortgagee typically requires that the living trust document be recorded, with the deed, at the office of the county clerk. The living trust can then become part of the publicly-accessible records.

How do Savings Bonds fit into all this?

Some types of property, including Savings Bonds, can pass to heirs outside of your will and probate court. They’re like a living trust without the paperwork. These types of property have a co-owner or beneficiary and, besides Savings Bonds, include jointly owned accounts, bank accounts registered in-trust-for, life insurance, and IRA, pension, and Keogh accounts.

Any Savings Bond with a living co-owner or beneficiary automatically avoids probate. If you’d like to change how your Savings Bonds are registered after reading all this, see my post Adding a co-owner or beneficiary to a Savings Bond registration.

On the other hand, Savings Bonds registered with a single owner go through the probate process and are distributed according to the owner’s will. If a Savings Bond registration includes a co-owner or beneficiary who died before the owner, the bond is actually a sole-owner bond, even though it has two names on it. It, too, must go through the probate process.

It’s also possible to have Savings Bonds registered in the name of a living trust. This is bit more complicated, but my book, Savings Bond Advisor, has all the details you need to accomplish this at the end of the chapter called Changing the registration.

A word about estate taxes

It’s important to understand that keeping your property – Savings Bonds included – out of Probate Court won’t lower estate taxes. Again, from the NY Attorney General’s office:

There is no inherent estate tax advantage to using a living trust. While a trust may contain provisions taking effect at death which do save on taxes, the identical tax savings can be contained in the grantor’s will instead of a living trust.

Although the level at which federal estate taxes begin is quite high, many states have estate taxes that begin at much lower levels. Consulting an advisor to make sure your estate pays the minimum amount of estate tax is a good idea, but doesn’t require setting up a living trust. However, it may require having your Savings Bonds pass through your will or living trust rather than through the registration.

Parting advice

The NY Attorney General’s page ends like this, and now, so does mine:

When you are planning for the disposition of your estate, avoid dealing with anyone but a trusted and well-referred professional in your community. Do not agree to contract for any legal service from someone selling door-to-door or over the phone. If you have already purchased a living trust on that basis, take the time to show it to an attorney.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

17 Comments

On January 5th, 2009 Deanna said:

We want the direct deposit of the interest on the HH bonds to go to a new checking account. They are now in my husband’s name as trustee of a revocable living trust. Since he is deceased, we have a new ID number for his estate and I am the trustee of the revocable living trust.

Can we just fill out a direct deposit sign up form with the new ID number?

On January 6th, 2009 Tom Adams said:

Deanna – Since your husband is listed on the bonds as the Trustee, I think they will be looking for his signature.

This means you’ll probably first need to have the registration updated with your own name as the Trustee. However, before you go to that effort, scroll up this page and click on the link at the right where it says “Ask the Treasury” and get their advice on what you need to do. It would also be helpful if you report back on what they told you.

Also – I’m not an expert in the area of Trust taxation, but I suspect if you ask an expert they will tell you not to change the tax ID of the bonds to the estate’s ID, but to the tax ID of the beneficiary of the Trust, who is probably you.

Tom Adams

On March 1st, 2009 Janet McIvor said:

I received a form for transfering bonds into a Living Trust from the bank which stated to submit them to the Kansas City office. They were returned because of the incorrect address. Has the form been updated, before I submit it again to the Minneapolis office?

On March 2nd, 2009 Tom Adams said:

Janet – there hasn’t been a Savings Bond office in Kansas City for a long time, so that’s a pretty old form.

There are a lot of pros and cons to putting Savings Bonds into a trust. My recommendation is that you spend a weekend reading about these issues in my book before you go ahead with this. The book will also provide you a link to the current version of that form.

Tom Adams

On March 3rd, 2009 Bill said:

Both my parents are in assisted living with dementia. I have POA for both and have just established an Irrevocable Trust, which I am the trustee. My parents have Series EE bonds (About $50,000). Half of the bonds are titled in my father’s name, with my mother also listed. The other half, are reversed, with my mother as the owner. What do you recommend I do with the bonds-keep them as they are, re-issue with my name on also, or place in trust?
Thank you.

On March 4th, 2009 Tom Adams said:

Bill – You’d be better off consulting with a lawyer who specializes in this area than with me.

But think through exactly why you’ve set up the trust. My guess is that it’s not primarily about taxes or what happens when your parents die, but mostly about making it possible for a financial fiduciary to handle their financial affairs.

So here’s the tough question – what happens if you die before your parents? Who becomes the Trustee? Will that person have a POA for the Savings Bonds? If not, there are ways to be appointed financial fiduciary for the bonds, but you could take care of all that in advance by putting the Savings Bonds into the Trust. The successor Trustee would have to prove that status to handle the Savings Bonds, but that would have to be done anyhow.

Tom Adams

On April 7th, 2009 Lois said:

Two Questions about EE bonds and Trusts:

My parents were the co-owners of EE bonds. When my father died, my mother made me (the son) a co-trustee on the family trust. We recently changed the bond ownership from my parents names to the Family Trust.

1) My mother would eventually like the bond money, upon her death, to go to her children. My first question concerns the tax event if she dies. Since I am a co-trustee, will I have to pay tax on all the interest, even though the money will be divided among the children?

2) We have also discussed using the bonds for education. Since the bonds are now in the name of the trust, can I, as co-trustee, use the bond for educational tuition?

On April 8th, 2009 Tom Adams said:

Lois – 1.) The best thing to do after your mother’s death is to have the bonds reissued from the name of the trust to the names of the heirs. Then each heir will be responsible for their own taxes when they cash the bonds. If the trust cashes the bonds, the trust – not you personally – is responsible for the taxes. But the tax rate for trusts is quite high, so you probably don’t want to do that.

2.) Assuming your mother agrees, you can use the trust money for whatever you want, including tuition. However, the Trust can’t get the Savings Bond college education tax deduction because of the way the bonds are registered.

Tom Adams

On January 26th, 2010 Barbara Watts said:

Hi Tom,

We have a client who owned E bonds with her lifelong friend in a joint trust with her friend. The two women were co-trustees of the joint trust. One of the women has passed away and I’m not sure how to re-register the bonds.
Thank you.

On January 27th, 2010 Tom Adams said:

Barbara – If your client wants to leave the bonds in the trust, then you would change the registration to reflect the name of the trust and the new trustee. If there are two, put “and” between their names if both must sign for the trust or “or” if you want to require only one signature.

(If the registration says “or” now and one of the two names is your client, I don’t see a reason to bother changing the registration unless you’re adding a new co-trustee.)

Tom Adams

On March 7th, 2010 Pat said:

I am the co-owner on EE HH And I bonds, the primary owner is now deceased. Can I cash the bonds with my SS# now or any time in future,as when my tax bracket is lower? From your prior advice, I believe that the bonds do not go into probate for her estate. Is that correct? Note: my father is still alive and the beneficiary named in the will.

On March 8th, 2010 Tom Adams said:

Pat – the bonds are yours and do not go through probate. You would benefit from a weekend reading my book about Savings Bonds to determine the best time to cash the bonds and other information you – and anyone with a large portfolio of Savings Bonds – needs to have.

Tom Adams

On March 29th, 2010 Andy said:

Tom, My wife and I own several I bonds jointly in electronic form. We are interested in a reissue into a trust registration. I’ve reviewed the Treasury’s Reissue Form P DF 1851, and it seems that it’ll only work if you can mail them paper bonds first. Do you know the bottom line on this? Thanks.

On March 30th, 2010 Tom Adams said:

Andy – The best answer to this question will come from logging into your TD account and using the menu item there to ask the TD people directly.

My guess is they will tell you to open another TD account in the name of the trust and then transfer the bonds from your current account to the the trust account. However, a TD account transfer like this is typically a taxable event, while a transfer to a trust is typically not, so you need to ask them exactly how to do it.

And when the transaction is complete, please come back and tell us what you had to do!

Tom Adams

On March 30th, 2010 Andy said:

Tom, As usual you are correct. TD is telling me to use Form PD F 5511 E, called Transfer Request, to transfer from joint registration to a trust. Appaerntly you mail in trust docs with the Transfer form. See below a copy of an email i received from TD. I’ll let you know how it goes.

Hi,

Trust registrations in TreasuryDirect are only available when you establish a TreasuryDirect account in the name of the trust. Therefore, you must establish a trust account to accomplish the transfer.

Information regarding trust registrations in TreasuryDirect is shown below.

Trust (trustee of a trust): The registration must identify the trust with specificity; at a minimum, it must include the authority or document creating the trust, the date the document was executed (except in the case of a probated will when the date is not necessary), the name of a trustee of the trust who is authorized to act alone on behalf of the trust with regard to the account, and any information that is necessary to distinguish the trust from any other trust, including the name of the grantor(s). The registration may also include the names of additional trustees and the full name of the trust. If one or more of the trustees are individuals, and the entity account manager is an individual trustee, the entity account manager must be named in the registration. If an organization serving as a trustee of the trust will administer this account, the entity account manager must be a duly-authorized employee of that organization who has the authority to act alone on behalf of the organization in its role as trustee of the trust with regard to the account, and the organization must be named in the registration. In either case, the entity account manager must certify that he or she has the authority to act alone on behalf of the trust with regard to the account.

Registration examples: “John Doe, Trustee under Declaration of Trust dated January 1, 2001, SSN 123-45-6789;” “First National Bank, Trustee under Declaration of Trust dated January 1, 2001, EIN 12-3456789;” “John Doe or Sarah Jones, Trustees under Agreement with Jane Doe dated January 1, 2001, SSN 123-45-6789;” “Sarah Jones, Trustee under the Will of Matthew Smith, deceased, SSN 123-45-6789.” The EIN of the trust or the SSN of the grantor will be used.

The trust form of registration is not available where the trustee is acting on behalf of a federal, state or local government.

However, before we can transfer the securities to your trust account, we will need a copy of the trust.

You must provide one of the following:

A copy of the trust agreement with amendments.
The relevant trust excerpts and amendments.

The copy of the trust must be certified to be a true and correct copy of the original and the following pages must be included:

The page showing the name and date of the trust.
The page(s) identifying the successor trustee(s). If more than one successor trustee is named and each can act independently, submit that portion of the trust.
The signature page.
Any amendments to the trust that may alter the information on the pages submitted or limit the authority of the trustee(s) to request the transaction.

We will also need the attached PD F 5511.

Our mailing address is:

TreasuryDirect
POB 7015
Parkersburg WV 26106-7015

On March 31st, 2010 Tom Adams said:

Andy – thanks for the info. The 5511 form isn’t available on the Treasury’s Savings Bonds forms web page, which is a key reason why you need to contact TD directly – to get a copy of the form you need.

Tom Adams

[…] Savings Bonds, estate planning, living trusts, and … – FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:… […]

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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