Are your clients thinking about U.S. Savings Bonds?
Don't let your clients, or their heirs, lose out by ignoring savings bonds.
U.S. Government Savings Bonds are rarely considered as either an investment option or as assets that should be addressed as part of an estate or financial plan. But many people own them; some, especially older people, own a considerable number, and they are often socked away in safe deposit boxes or file cabinets.
Frequently, the client's dilemma is that many older savings bonds have stopped earning interest and therefore should be redeemed, but significant tax will be due if they are cashed in. Owners of EE bonds may still earn interest by converting them to HH bonds, but when the bond is finally redeemed, the interest income is taxed, unless the owner filed a Sec. 454(a) election to recognize taxable income as the interest accrues (which is very rarely done).
Every lifetime transfer of savings bonds triggers income tax on the accumulated interest except when they are put into a revocable living trust. But the bonds will still be taxed if the trust redeems them, and of course, they will be included in the estate for tax purposes. This may or may not be problematic, depending on the size of the estate and the estate tax exemption amount on the date of death. However, when the bond is finally redeemed by the new owner, the untaxed, accumulated interest on the bonds constitutes income in respect of a decedent (IRD), resulting in the same tax issues as transfers of IRAs and other qualified retirement plans.
There is not even an easy way to even donate savings bonds to charity during a donor's lifetime, although with a charitable gift the donor may be able to claim an offsetting charitable income tax deduction.
But just as with retirement plans and other IRD assets, these bonds are very efficient sources of charitable gifts after an owner's death. Because so much of their value is attributable to untaxed interest income, any heir would have a sizable tax bill when he or she redeemed the bonds. But if the bonds are given to a charitable organizations, when the charity cashes in the bonds the entire value is available for charitable purposes-since these organizations are tax-exempt-and the estate is entitled to a charitable deduction.
The charitable gift can accomplished by making a specific bequest of the bonds or by including a blanket provision that any charitable gifts are to be satisfied first with IRD assets. Here is sample language for a charitable bequest.
I instruct that all of my charitable gifts, bequests, and devises shall be made, to the extent possible, from property that constitutes "income in respect of a decedent" as that term is defined in the Internal Revenue Code.
