When you have retirement accounts with a private financial institution, you can designate beneficiaries for the account. Some financial institutions also allow Pay On Death (POD) or Transfer On Death (TOD) designations for non-retirement accounts. After reading the previous post How To Grant Transact Right on I Bonds to the Second Owner, someone asked whether it’s easier and better to set up the I Bonds in TreasuryDirect with a beneficiary as opposed to a second owner.
One difference between TreasuryDirect and other financial institutions is that the beneficiaries and the second owners in TreasuryDirect are set at the holdings level, not at the account level. Theoretically, within the same account, you can hold some I Bonds without any second owner or beneficiary, some I Bonds with Person A as the second owner, some I Bonds with Person B as the second owner, some other I Bonds with Person C as the beneficiary, and yet another set of I Bonds with Person D as the beneficiary, and so on. Even though you may not need this much granularity, you can’t simply set a second owner or beneficiary for the entire account.
After you die, your second owners and/or beneficiaries need to contact TreasuryDirect by phone or email, effectively saying:
The owner of this account died. I’m the [second owner or beneficiary] of some bonds in the account. Please give those bonds to me.
If your beneficiary has their own TreasuryDirect account, you can let the beneficiary see which I Bonds they’re a beneficiary of by granting them View rights on those I Bonds. The process to grant View rights to the beneficiary is the same as the process to grant Transact rights to the second owner, as I showed in the previous post. You also have to do it bond by bond.
You can have either a second owner or a beneficiary on a bond, but not both on the same bond. Your second owner or beneficiary on the bond has to be a person, not a trust.
Whether you should set up your I Bonds with a beneficiary versus a second owner depends on whether you want to let someone transact on those bonds on your behalf when you’re still living. A beneficiary can only be granted View rights. A second owner can be granted either View or Transact rights. In a sense, the second owner with Transact rights is like a beneficiary plus a power of attorney. The second owner with only View rights can’t do anything more than a beneficiary.
| Beneficiary | Second Owner | |
|---|---|---|
| Set on each bond | Yes | Yes |
| Receive bonds after your death | Yes | Yes |
| Can be granted View rights | Yes | Yes |
| Can be granted Transact rights | No | Yes |
As the primary owner of the I Bonds, you can change the arrangement at will. You can add or remove a beneficiary or a second owner at any time. If you started with a beneficiary and now you want a second owner, you can remove the beneficiary and add a second owner. If you started with a second owner and now you want to downgrade to a beneficiary, you can revoke the Transact rights or remove the second owner altogether and add a beneficiary. It’s all up to the primary owner.
Reference: Registering a Savings Bond: Series I
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Mark L says
Is there a tax advantage for the case of having a co-owner? If the owner passes away the ownership is transferred to the co-owner and taxes can be continued to be deferred. Can the same be been done with a beneficiary or will the owner’s estate or beneficiary have to pay taxes at time of inheritance?
Harry Sit says
The treatment after death is the same whether you have a second owner or a beneficiary. The beneficiary can also keep the bonds and defer the taxes until the bonds mature or are redeemed. The owner’s spouse or estate can choose to include the accrued interest up to the owner’s death on the owner’s final tax return. If they make that choice, the beneficiary will pay taxes only on the interest earned after the owner’s death, but the beneficiary will have to remember how much interest was already accounted for because the 1099 will include 100% of the interest. See pages 8-9 in IRS Publication 550.
https://www.irs.gov/pub/irs-pdf/p550.pdf