A Series I bond is a non-marketable interest-bearing U.S. government savings bond.  It’s a low-risk investment that earns a variable inflation rate adjusted every May and November and an interest rate fixed for the bond’s life.  The non-marketable feature means you can’t sell or buy it in a secondary market.

Determining the Interest Rate of a Series I Bond

The composite rate, the actual rate on the bond, combines the inflation and fixed rates.  The fixed rate doesn’t change during the life of the bond.  The inflation rate depends on the consumer price index (CPI).

The U.S. Treasury Department announces the inflation and fixed bond rates every May and November.  The announced fixed rate will apply to all Series I bonds issued during the following six months and doesn’t change during the bond’s life.  The announced inflation rate, however, will change every six months after the bond’s issue date.

Understanding Interest Income and Taxation

Interest on Series I bonds is compounded semiannually.  They earn interest every month from the first day of the month the bond is issued.  Instead of paying interest during the bond’s life, the interest adds to its principal value.

Interest income is taxable at the federal level.  However, it’s not taxed at local or state levels.  As a bondholder, you have two taxation options – the accrual method or the cash method.

The accrual method applies taxes on the assigned interest earned every year.  The cash method doesn’t apply a tax unless you redeem the bonds.

Incorporating Series I Bonds into Estate Planning

Many estates must go through probate, a legal process whereby a court validates a will and authorizes the distribution of assets.  It can be costly and time-consuming.  Beneficiaries can’t automatically take ownership of probate assets upon their family member’s death.  Instead, they must wait for the court to grant the power to make the transfer to a personal representative.

If you purchase a savings bond in your name only, it is part of your estate.  It must go through probate even if your will specifies who should receive it when you die.  You should consider setting up your Series I bond to avoid probate.  Your loved ones can access the funds automatically upon your death without waiting for a judge to review your will.

The two most common methods for establishing a non-probate I bond are:

  • Co-owner: List another person on the savings bond title as a co-owner.  The title will pass directly to the co-owner when you die.  They don’t have to go through the probate process to cash out the bond.
  • Beneficiary designation: You can designate a beneficiary of the I bond with the U.S. Treasury Department.  It will bypass probate and transfer ownership to your beneficiary upon your death.

Learn More About Series I Bonds

A savings bond can be a valuable investment during your lifetime.  You should consider how you want to pass it down to your loved ones when you die.  If you don’t execute the appropriate legal documents, the asset can get stuck in probate for a time, preventing your family from benefiting from the funds immediately.

Contact our Phoenix, Arizona probate lawyers today to discuss how to include a Series I bond in your estate plan.  We will provide the guidance you need to protect your assets and your family’s interests.   Call our law firm at (602) 274-4400 to schedule a consultation.