By Dan Miller, WCI ContributorThere are many different ways to invest, and it makes sense to diversify your investments. This is especially true the older you get (and hopefully the more assets you accumulate). When you're young, it may make sense to just put 100% of your investments in an S&P 500 index fund and “set it and forget it.” But as your portfolio grows, diversification can make a big difference in reducing risk and volatility. Government I Bonds can be a great addition to your portfolio, but they present some challenges in how they are passed down to your heirs.
In this article, we'll take a look at I Bonds and how they're handled when the account holder passes away.
What Are I Bonds?
Before we start, let's take a look at what I Bonds are and how they work. The US government issues two types of Savings Bonds: “Series EE” and “Series I.” I Bonds have two components to the amount of interest they yield. There is a fixed portion that is set at the time you purchase the bond, and a variable amount that changes every six months. This variable amount of interest on an I Bond varies with inflation and changes with the Consumer Price Index.
I Bonds were most recently in the news in late 2021 and early 2022, as inflation soared across the country. The variable amount of the I Bond yield was as high as 8.3% in April 2022, which made I Bonds a very popular investment. They were so popular, in fact, that people crashed the TreasuryDirect website trying to buy them.
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Understanding I Bonds and Inheritance
Like just about any other personal property, I Bonds can be included in a will and inherited by a person's beneficiaries. Making sure you understand how I Bonds can and can not be inherited can help in deciding if I Bonds are right for you.
Transferring I Bonds Through a Will or Trust
The US Treasury website has an outstanding article about what happens when a savings bond owner dies and answers many of the frequently asked questions. One of the simplest ways to transfer I Bonds to your heirs is to name a beneficiary of the bond. This is something that you can do through the TreasuryDirect website. If a surviving co-owner or beneficiary is named on the savings bond, the bond goes directly to that person. It does not become part of the estate of the person who died.
If you do not name a co-owner or beneficiary for your I Bonds, then they are administered as part of the estate during the probate process. If your estate has more than Treasury securities (including savings bonds) with over $100,000 in redemption value, the estate must be administered by a court.
Another option is to hold your savings bonds in a trust or transfer your savings bonds into a trust. If you choose to do this, the bonds must be titled in the name of the trust. If you are transferring I Bonds from your personal account into a trust, the bonds will be retitled.
Tax Implications for Heirs
I Bonds, like other types of bonds, earn interest each year that you hold them, up to a certain point. For I Bonds, that is 30 years—any bonds held for longer than 30 years are said to have matured and no longer earn interest. Interest earned on I Bonds is exempt from state and local taxes, but you will owe federal income tax on any interest accrued on an I Bond.
In many cases, bondholders choose to defer paying the income tax on bonds in the year that it is earned. This means that if you redeem inherited bonds, you will owe tax on all the interest that has accumulated. This is an important thing to be aware of when inheriting I Bonds or any other type of savings bonds.
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Redeeming or Retitling Inherited I Bonds
There are generally two ways to handle inherited I Bonds. You can choose to redeem the I Bonds—in this case, you will receive the face value and any accumulated interest, while paying federal income tax on any interest, as mentioned above. The other option is that you can retitle the I Bonds into your own name and continue to hold them.
Deciding which option is best for you will depend on your own specific financial situation. You can consult with a WCI-vetted financial advisor if you're not sure the best way to handle your situation.
The Bottom Line
I Bonds are a popular form of government savings bond, where there is a fixed rate of interest that is set when you buy the bond as well as an inflation-adjusted rate that changes every six months. If you want to pass I Bonds to your heirs or beneficiaries, the easiest way to do that is to name them as a beneficiary through the TreasuryDirect website. If you do not name a beneficiary, then your bonds will be handled with the rest of your assets as part of the probate process.
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