If you have a revocable living trust, funding of the trust is an essential step to ensure that the trust operates as intended. Funding your trust with the bonds that you own is just one step in this funding process. In order to transfer your bonds to the trustee of your trust, you will need to identify the type of bond, and select the proper method of transfer. You will also want to make sure that you have carefully considered whether there are tax implications in the transfer.
There are a number of different types of bonds. The U.S. Treasury Department issues government bonds such as Series E, EE, H, HH, & I bonds. Municipalities and school districts can also issue bonds. Funding your trust begins with identifying the type of bond you own.
U.S. Savings Bonds
Funding your savings bonds into your trust is simply accomplished by completing the Federal Reserve Bank PDF 1851 form. Return the completed form, together with an Abstract, Certificate, or Memorandum of Trust, and the original bond certificates to the United States Department of the Treasury, Bureau of the Public Debt, PO Box 7012, Parkersburg, WV 26106-7012. But, before doing so, review the tax considerations discussed below. Retain a copy of everything you send, including a copy of each bond certificate.
PDF 1851 requires a Medallion Signature Guarantee in order to be accepted by the U.S. Treasury Department. You can obtain a Medallion Guarantee from any bank or broker/dealer. If you have difficulty, please see your estate planning or elderlaw attorney.
Preparing the PDF 1851. There are several important issues you should be aware of when preparing the PDF 1851. If the form is not completed correctly, it will not be accepted by the Federal Reserve Bank and will be returned to the sender. When preparing a PDF 1851 form, you must utilize a separate PDF 1851 form for both E series and H series bonds. You may not put two different series of bonds on the same form.
If there are two or more owners on the face of the bond, the first name listed is considered the primary owner and must sign the PDF 1851 on the first signature line. Additionally, if there are multiple owners on different bonds, you cannot list more than one group of owners on any one PDF 1851.
The type of co-ownership, however, does not necessitate the need for an additional PDF 1851 if the group of owners are the same. Thus, it does not make any difference whether the co-owners own the bonds as tenants in common or as joint tenants with rights of survivorship; as long as the owners are the same, only one PDF 1851 is utilized.
Due to the complexities of ownership and funding government bonds, if you have numerous bonds with various types of ownership, with different persons as owners, you should consult with your estate planning attorney before sending the completed form. As slow as an attorney might be in reviewing your form, it is likely to be much quicker than the time necessary for the Federal Reserve Bank to receive, review, reject, and return your form.
Let me reiterate: maintain a copy of everything! It is not uncommon for the Federal Reserve Bank to return the bonds to you in two or more shipments. Keep a copy of the PDF 1851 form. It may be prudent to carefully compare the funded bonds you receive from the Federal Reserve Bank against a retained copy of the PDF 1851 form which will verify what you should have received in return. If you notice that some bonds are missing, you can request a "trace" be placed on the bonds.
Additional Requirements for HH Bonds
If a grantor (creator) of the trust is subject to backup withholding or if the IRS has notified appropriate persons that the trust estate is subject to backup withholding, the applicable statements immediately above the signature line of for PDF 1851 to the effect that the owner, principal co-owner, or trust is not subject to backup withholding should be crossed out. If the trust was created by some person other than the owner or co-owners, the trustee must complete an IRS Form W-9 and submit it with this request for reissue. Forms W-9 are available at financial institutions in the United States and Internal Revenue Offices. These forms can also be found on the IRS website.
The furnishing of Direct Deposit information is a condition of reissue of Series HH bonds bearing issue dates of October 1989 and thereafter. A Direct Deposit form, PDF 5396 or SF 1199A which can be obtained here, must be completed for Series HH bonds dated October 1989 and thereafter. The Direct Deposit form must be completed by a trustee providing the appropriate information for direct deposit of the semiannual interest payments. Forms SF 1199A are available at financial institutions in the United States. The financial institution designated to receive the payment can assist in the completion of the Direct Deposit form.
Funding U.S. Savings Bonds needs to be done with some extra care to avoid acceleration of income tax. The IRS has ruled that transferring a U.S. Savings Bond into a revocable living trust is not an income taxable event so long as the bonds were transferred to the trust of the maker that provided the proceeds to purchase the bonds. Treas. Reg. §1.454-1(a)(iii); Rev. Rul. 79-409, 1979-2 C.B.208; Rev. Rul. 58-2, 1958-1 C.B. 236. In other words, the grantor of the trust must also be the purchaser of the bonds. If the bonds were not originally owned by the grantor of the trust, an acceleration of the accrued income will occur and you will be obligated to pay additional income tax.
Because of the taxable concerns regarding U.S. Savings Bonds, exercise extreme caution when attempting to fund savings bonds to a revocable living trust. If you are not certain whether the funding of a particular U.S. Savings Bond will result in a taxable event, you should seek counsel from your estate planning attorney.
Municipal Bonds, School District Bonds, & Capital Improvement Bonds
Like stocks, ownership of this type of bonds may be on account with your broker/dealer, or by possession of an actual bond certificate. If the bonds are held in an account, simply change the title on the account.
Ownership of bonds may be evidenced in the form of a bond certificate that is similar in appearance to a stock certificate. Funding these types of bonds is accomplished through the use of a Bond Power. The Bond Power can be obtained from an financial institution or broker/dealer. One such form can be obtained here (Hint: it is found under stock/bond power). The Bond Power will generally need to be Medallion Signature Guaranteed in order to be re-titled. For assistance in preparing a Bond Power and obtaining a Medallion Signature Guarantee, consult with an elderlaw or estate planning attorney with experience in trust funding.
Attorney Monty L. Donohew practices in many areas of estate planning, successor planning, asset protection, wills, trusts and probate. He concentrates his practice in strategic trust planning and wealth advisory law. You can learn more about Monty, his practice, background, credentials and education at the Estate Planning Information Center, http://www.donohew.com.
[Administrator's Note: For more information on transferring bonds to a living trust, see Transferring Intangible Property to a Living Trust.].