Inherited Savings Bonds: What You Need to Know

Inheriting savings bonds requires specific steps to identify, value, and claim these assets. Savings bonds are debt securities issued by the U.S. Department of the Treasury, backed by the full faith and credit of the U.S. government. They are low-risk investments designed to offer a secure way to save money while earning interest. When a bondholder passes away, these bonds become part of their estate, and understanding the process to manage them is important for beneficiaries. This guide provides clarity on navigating inherited savings bonds, from initial identification to their eventual redemption and tax implications.

Identifying and Valuing Inherited Savings Bonds

Managing inherited savings bonds involves identifying their type and current value. The most common types are Series EE and Series I bonds, though older Series E and HH bonds may also be inherited. Series EE bonds have a fixed interest rate and are guaranteed to double in value over 20 years, continuing to earn interest for up to 30 years from their issue date. Series I bonds feature a combination of a fixed rate and a variable rate adjusted for inflation, also earning interest for up to 30 years. Series HH bonds, issued between 1980 and 2004, paid interest semi-annually and had a 20-year maturity, with all HH bonds having reached final maturity as of August 1, 2024.

Determining whether the inherited bonds are physical paper bonds or electronic bonds held in a TreasuryDirect account is important. Paper bonds ceased to be sold at financial institutions in 2012, with electronic bonds becoming the primary issuance method. For physical paper bonds, their series, denomination (e.g., $50, $100), and issue date are printed on the bond. Electronic bonds are managed through TreasuryDirect.

To ascertain the current value and accrued interest of paper bonds, the TreasuryDirect website provides a Savings Bond Calculator. This tool requires the bond’s series, denomination, and issue date for an accurate valuation, including interest earned and maturity date. For electronic bonds, accessing their value requires logging into the TreasuryDirect account where they are held. The issue date is particularly important as it dictates the bond’s interest accrual period and maturity date, influencing its total value.

Identifying the registered owner, any co-owners, or named beneficiaries determines who has the right to claim the bond. Savings bonds are “non-probate” assets if a beneficiary or co-owner is named, meaning they can often be directly transferred without a lengthy probate process. If no beneficiary is named, the bonds become part of the decedent’s estate and are distributed according to their will or state law. This initial identification and valuation process lays the groundwork for the subsequent steps of claiming and redeeming the bonds.

Claiming and Redeeming Inherited Savings Bonds

Once inherited savings bonds are identified and valued, the next step involves claiming and redeeming them. The process differs depending on whether the bonds are physical paper bonds or electronic bonds held within TreasuryDirect. For paper savings bonds, the process involves submitting specific forms and documentation. If you are a named beneficiary or co-owner, use FS Form 1522, “Request for Payment of a Deceased Payee’s United States Savings Bonds,” to redeem the bonds directly.

If the bonds are part of an estate being settled without formal administration, or if there is no named beneficiary, FS Form 5336, “Disposition of Treasury Securities Belonging to a Decedent’s Estate Being Settled Without Administration,” is used. If the estate is undergoing a probate proceeding, FS Form 1455, “Request by Fiduciary for Distribution of U.S. Treasury Securities,” is required. These forms can be obtained from TreasuryDirect. Completing these forms requires information gathered during the identification phase, such as bond serial numbers and decedent’s details.

Submission of paper forms necessitates a signature certification, obtainable at a financial institution. The certifying official must sign, include their title, and affix the institution’s official stamp or seal. A certified copy of the decedent’s death certificate is also required. The package is then mailed to the Treasury Department. Processing times for paper bond redemptions can vary, often taking several weeks to a few months.

For physical EE or I bonds, you can have them reissued in your name as electronic bonds in a TreasuryDirect account for easier future management. This reissuance requires you to have or create a TreasuryDirect account.

For electronic bonds held in a TreasuryDirect account, the process is streamlined. If you are a named beneficiary with a TreasuryDirect account, the bonds can be transferred to your account or redeemed directly online. If you need to access the decedent’s account or establish an inherited account, specific forms are still required. For instance, FS Form 5336 is used for disposition when there is no formal administration, similar to paper bonds.

Electronic bonds can be redeemed online through the TreasuryDirect system. For beneficiaries wishing to transfer electronic bonds into their own TreasuryDirect account, FS Form 5511 can be used, while FS Form 5512 is for redemption. Once the bonds are in your TreasuryDirect account, redemption proceeds are electronically deposited into your linked bank account within a few business days.

Tax Treatment of Inherited Savings Bonds

Understanding the tax implications of inherited savings bonds is important. Interest earned on U.S. savings bonds is subject to federal income tax, but exempt from state and local income taxes. Savings bond interest can be deferred for federal income tax purposes until the bond matures, is redeemed, or changes ownership. Most bondholders choose this deferral, meaning inherited bonds may have years of accrued, untaxed interest.

When savings bonds are inherited, reporting this accrued interest falls to the beneficiary or the estate. The decedent’s estate can elect to report all accrued interest up to the date of death on the decedent’s final federal income tax return. This can be advantageous if the decedent was in a lower tax bracket in their final year. If the estate does not make this election, the beneficiary is responsible for reporting all interest, from the bond’s issue date until its redemption.

Upon redemption, the interest income is reported to the IRS. This income is reflected on Form 1099-INT, issued by the financial institution or TreasuryDirect. Box 3 of Form 1099-INT shows interest on U.S. Savings Bonds and Treasury obligations. The full amount of accrued interest is reported on this form, even if a portion of it was earned before the bond was inherited. If the estate previously reported interest, the beneficiary must adjust their tax return to avoid double taxation.

While interest is federally taxable, an exclusion is available if proceeds from Series EE or Series I bonds are used for qualified higher education expenses. This exclusion has income limitations. Inherited savings bonds are also part of the decedent’s estate for federal estate tax purposes. However, federal estate tax generally applies only to very large estates, with a high exemption threshold. Some states may also impose their own estate or inheritance taxes, which could apply to inherited savings bonds, varying by state.