Savings Bonds, estate planning, living trusts, and avoiding probate
Tuesday, February 28th, 2006
Categorized as: Savings Bond taxes • Inheriting and bequeathing US Savings Bonds
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 paper Savings Bonds, but not TreasuryDirect's electronic 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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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?
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
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?
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
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.
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
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?
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
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.
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
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.
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