Series EE Bonds, Income Tax Planning and Estate Planning

Series EE Bonds, Income Tax Planning and Estate Planning

I have always prided myself in my research abilities, whether it be during my undergraduate years, post-graduate education, or during my working career.  In fact I would have to say at least I spend at least 5 to 10 hours a week researching random questions for planners at my firm.  While clerking (basically working for cheap at a law firm while you don’t have a degree) for the law office of a major major auto insurance company I found some obscure case that got the insurance company out of a law suit where the beneficiaries were two children whose parents had been killed due to the alleged negligence of someone we insured.  I tried to justify it to myself saying the plaintiff’s attorney should have been aware of this case, but in the end I knew from that day on – Defense Insurance work was NOT my life’s calling even though I let it pay the bills for a while (for all those nosy attorneys out there it was a statute of limitations issue).

But, I digress, the other day the mother in law needed me to research some information about 30 year old Series EE Savings Bonds, because Grandma in law has a lot of them dating back to the late 1970’s.  Grandpa in law is named as a joint owner but unfortunately he has predeceased.  The main issue is, what is the best way to cash in these bonds while minimizing income taxes both now and upon death?  Instead of letting my research go to the sideline after sharing it with her, I thought I’d share it with everyone.

Estate Planning/Tax and EE Bonds

First thing is first – what is a Series EE Savings Bond.  According to TreasuryDirect.gov (the selling arm of the Treasury) Series EE Bonds are,

EE Bonds are reliable, low-risk government-backed savings products that you can use toward financing education, supplemental retirement income, birthday and graduation gifts, and other special events.

They are broken into two types:

Buying Electronic EE Bonds

  • Sold at face value; i.e., you pay $50 for a $50 bond and it’s worth its full value when it’s available for redemption.
  • Purchase in amounts of $25 or more, to the penny.
  • $5,000 maximum purchase in one calendar year.
  • Issued electronically to your designated account.

Buying Paper EE Bonds

  • Sold at half their face value; i.e., you pay $25 for a $50 bond but it’s not worth its face value until it has matured.
  • Purchase in denominations of $50, $75, $100, $200, $500, $1,000, and $5,000, and $10,000.
  • $5,000 maximum purchase in one calendar year.
  • Issued as paper bond certificates.

When you redeem the Paper EE Bonds you will owe Income Taxes, but Grandma doesn’t need the money, so the question morphed into – if we just kept the bonds until the estate needs to be probated, would there be a benefit?  The answer simply is, No.

There is something most attorneys and CPAs don’t know or don’t understand known as Income in Respect of a Decedent.  It is a post unto itself, but simply put…the government wants its deferred income taxes (it comes up with qualified retirement plans also).  So when an estate is probated or administered the government gets their income tax – all of their tax at once, so all the bonds would be cashed in pushing Grandma into a higher marginal tax rate.

So in the end Mother in Law was doing the right thing without knowing it!  Mother in law will continue to do so small increments every year to keep taxes low.

Does anyone else know of strategies associated with Savings Bonds?

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