What to do with inherited savings bonds

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Q. When my father died, he owned six EE savings bonds that were POD to me. Can I hold them to maturity or must I cash them now?
— Heir

A. Generally speaking, a payable-on-death “POD” account is a special type of account recognized under the law which provides that any assets remaining in an account when the account owner dies will pass directly to the beneficiaries who have been named by the account owner.

Designating someone as a POD beneficiary does not affect their rights to the account until the account owner dies, said Matthew Rheingold, an associate with Einhorn Harris in Denville.

In contrast with joint ownership, the POD-named individual does not have access to the money while the account owner is alive, Rheingold said.

He said a POD account will generally avoid probate and the named beneficiary can generally claim the funds immediately after death.

As a reminder, probate is the legal process of distributing assets after one passes away.

“Avoiding probate by naming a POD beneficiary is generally a much faster and cheaper process, and helps to ensure that certain property is distributed exactly as intended,” he said.

But, Rheingold said, a POD account is not for everyone.

“Since the POD account will pass outside of the terms of the account owner’s last will and testament or revocable trust, there may be unintended consequences, including unequal distributions among beneficiaries and lack of creditor protection,” he said. “For instance, if the account owner has set up any trusts for the benefit of his beneficiaries, then the trusts will not be funded by the POD account.”

Rheingold said it’s very common for people to name POD beneficiaries for several kinds of property, including U.S. Savings Bonds.

In your case, he said, following your father’s death, as the sole POD beneficiary, you took ownership of your father’s bonds immediately after your father’s death. As the sole owner of the bonds, you may redeem the bonds or have the bonds reissued (reregistered) in your name.

There is no need to hold bonds until maturity and they may be redeemed at any time, he said.

Rheingold said to redeem the bonds, you will need to take the bonds to your local bank or financial institution along with a certified copy of your father’s death certificate.

If you instead want the bond reissued, you must complete the Treasury Department’s Form 4000, Request to Reissue United States Savings Bonds, he said. The form is available from a bank or at www.treasurydirect.gov.

Rheingold said Series EE bonds are no longer reissued into paper form, but instead would be reissued as electronic bonds.

As part of the process of reregistering the bond, you may add a co-owner or a POD beneficiary of your own, he said.

Rheingold said you should remember that even though a savings bond with a POD designation passes outside of probate, this does not mean it is exempt from estate taxes.

“If your father’s estate is subject to either federal or New Jersey estate taxes, the savings bonds will be included as part of his estate,” he said.

Plus, if you redeem the bond, income tax will be due on all of the interest that the bond has ever earned unless your father opted to recognize the interest that accrued on the bonds each year as part of his taxable income.

“On the other hand, if the registration is changed, the bond will continue to keep its tax-deferred status and any income taxes will continue to be pushed into the future,” he said.

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.