My wife and I are both 72 years old and we have $80,000 in U.S. Savings bonds dating back to 1989. As we get older we are wondering if we show start liquidating them so our children won’t have a problem cashing them in the future if something should happen to us. We really like your column in the Abq. journal.
Terry Says: Well, you have limited choices. If you cash the bonds in before final maturity (when they stop paying interest), you’ll owe Federal taxes on the gains. If you gift them to your children, they will owe all those taxes at maturity or when they cash them, because the recipient of the gift takes the cost basis of the giver. If they (or your spouse) are named as a co-owner on the bond, and you die, and if the amount is under $100,000, then the co-owner can easily have the bonds transferred into his/her name. But if the bond is in your names and both of you have died, then the bonds become part of your estate, and subject to estate tax laws in your state regarding the need to go through probate.
So, yes this is complicated. And as you can see, it is all part of the need for some professional advice about estate planning, so the potential tax and probate issues can be handled in advance. Your estate planning attorney should know all this about savings bonds, but here’s a link to the government’s TreasuryDirect.gov website, where the issue of death of a savings bond owner is explained, and where you can learn about the potential tax liability, depending on how the bonds are titled.
If your estate is under $5.43 million, your estate planning advisor might tell you that you would have no estate tax liability by dying with the bonds as part of your estate. And the executor can elect to include all that accrued income in the estate — and the beneficiary who gets the bonds and keeps them pays taxes only on the interest earned after the date of death of the original owner. (Or the executor can pass on that liability to the beneficiary, who can keep the bonds and pay all the interest at final maturity or when the bonds are cashed in.) But that will still involve some legal proceedings by the executor of the estate to show proof of death and cash the bonds on behalf of the estate, which will then direct the distribution of the proceeds according to your estate plan.
I don’t want to “play lawyer” here — which is why I ALWAYS suggest getting professional estate planning advice, because if you make a mistake you won’t be around to fix it when it is discovered!