Inherited IBonds

[Corporate ORphan]

My mother passed away last fall and we need to divide up her I bonds that were in a trust between my brother, sister and I. The issue is they aren't all in the same dominations or interest rates and some are paper.

She has some that were held directly by her where she made each of us a beneficiary so that's s all even.

I have read the Treasury Direct site to figure out how to do this but I find it confusing. Anyone have a similar experience on how to divide these bonds up evenly and how to actually do it? Will they let you divide a $5000 bond three ways without cashing it in? How many forms do we need to submit? One for each of us?

There are about 50 bonds in total. Mostly in dominations of $1000. The taxes up to her death were paid on her last tax return.

Any help would be appreciated.
Thanks!

[MooreBonds]

Quote:

Originally Posted by Corporate ORphan My mother passed away last fall and we need to divide up her I bonds that were in a trust between my brother, sister and I. The issue is they aren't all in the same dominations or interest rates and some are paper. She has some that were held directly by her where she made each of us a beneficiary so that's s all even. I have read the Treasury Direct site to figure out how to do this but I find it confusing. Anyone have a similar experience on how to divide these bonds up evenly and how to actually do it? Will they let you divide a $5000 bond three ways without cashing it in? How many forms do we need to submit? One for each of us? There are about 50 bonds in total. Mostly in dominations of $1000. The taxes up to her death were paid on her last tax return. Any help would be appreciated. Thanks!

I don't have personal experience in this, but a little Googling turned up a little info that may be relevant:

https://www.treasurydirect.gov/indiv...rm_reissue.htm

https://www.google.com/url?sa=t&rct=...,d.cGU&cad=rja

Typically, if you are a beneficiary, you can cash it in no problem. And if the owner of a savings bond is a trust AND you or your sibling is a beneficiary, it should be able to be retitled without tax implications.

HOWEVER, typically, if there is a living person named as an owner or (in this case) beneficiary on the bond, ADDING or REMOVING the living owner/beneficiary will have tax implications, in that all deferred interest becomes taxable in the year it is retitled. Same goes for taking a $5,000 bond and reissuing it in the form of five $1,000 bonds - changing the names on the bonds for living owners typically results in taxable events.

So to avoid a massive tax nightmare with part of the interest being due on each bond to some of the heirs, I would highly recommend you merely each take whatever bond was listed with you as the beneficiary, and simply settle up any differences with cash from elsewhere in the estate. Which sounds like it shouldn't be too difficult to do given the dollars involved. And for any bond owned by the trust without any beneficiaries, simply cash it in and distribute the funds, since retitling it out of the trust to one of you could be a taxable event anyway.

[Brat]

Consider amending your mother's tax return to report as much interest income from those bonds as makes sense.

[gauss]

Do you have any idea what type of taxable income would be generated if the estate were to liquidate all of the bonds and cleanly distribute cash to the heirs?

All things being equal I, as an heir, would prefer to receive a simple cash distribution compared to the bond and its complicated tax issues.

If the taxable income is significant then the higher income tax rates paid by trusts/estates on form 1041 may preclude this option.

-gauss

[GrayHare]

Note you may have an opportunity to escape tax on the savings bond interest. If the estate has excess deductible expenses the executor can redeem some/all those decedent's bonds to create interest income for the decedent's estate. When filing the tax return, deduct expenses from that interest income and the income becomes tax fee. Savings bonds are unique in this ability since 1) their interest is considered income in respect of a decedent, and 2) the executor can elect to collect that interest at will.

[Gill]

Quote:

Originally Posted by Corporate ORphan The taxes up to her death were paid on her last tax return.

Didn't anyone notice this from the OP? All that discussion about income from the redemption is irrelevant because it has already been reported by the decedent. Cashing in the bonds and splitting the proceeds would be the easiest and there would be almost no tax consequences of doing so..
Gill

[Corporate ORphan]

Thank you for all the replies. We don't want to cash out the bonds. That's why I posted my original message. I'm trying to figure out the mechanics of how to have these bonds divided up and renamed between my siblings. We are all current trustees of the trust.

I was hoping we could have them divided and reissued so that we all have an equal amount of bonds at the different interest rates.

[ERD50]

Quote:

Originally Posted by Corporate ORphan Thank you for all the replies. We don't want to cash out the bonds. ....

Why not?

I suspect not cashing them is going to really complicate things.

-ERD50

[EastWest Gal]

The value of the bond at the time of death vs. their value when cashed out will be subject to tax as interest income. It is a simple thing to look up the value of a bond at any given month and year at Treasury Direct with the serial number, bond type, and date of issue, so there shouldn't be any complexity there.

I agree with a previous poster about settling the difference elsewhere in the estate. As Executrix I kept a spreadsheet of all my dad's assets and did some uneven dividing, since there was farm property that we did not want to divide. I was able to figure how much went to whom and made sure the totals were even. I shared my spreadsheet with my sister so she could see what I was doing at each step.

One thing I have not read in this thread is if a beneficiary was listed on each bond. If not, how to cash them now or at maturity might not be clear. You may want to call Treasury Direct for advice on this. I found them helpful when sis and I inherited treasuries.


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[Brat]

You don't need to cash the bonds. Her executor can file an amended tax return reporting some/all of the accrued interest on the bonds. In fact you can amend the 2013 return as well.

Of course this depends to some extent on your Mother's tax rate but it can be done.

Make a worksheet, list each bond by number and residual beneficiary if any. Calculate the accrued interest on each. Pick and choose the interest you want to declare for each bond for each year. File amended returns. Give each heir a copy of the worksheet and the amended return(s) and tell them to hold on to that worksheet until they have liquidated all their bonds.

[Gill]

Quote:

Originally Posted by Brat You don't need to cash the bonds. Her executor can file an amended tax return reporting some/all of the accrued interest on the bonds. In fact you can amend the 2013 return as well. Of course this depends to some extent on your Mother's tax rate but it can be done. Make a worksheet, list each bond by number and residual beneficiary if any. Calculate the accrued interest on each. Pick and choose the interest you want to declare for each bond for each year. File amended returns. Give each heir a copy of the worksheet and the amended return(s) and tell them to hold on to that worksheet until they have liquidated all their bonds.

This advice is totally incorrect. You have to either report no interest or report it all on the decedent's return. You can't pick and choose the amount you wish to report. Furthermore, the OP said it was all reported on the decedent's return.
Bruce

[Gill]

Quote:

Originally Posted by EastWest Gal The value of the bond at the time of death vs. their value when cashed out will be subject to tax as interest income.

This is incorrect also. The OP said all interest was reported on the decedent's final return. Therefore, the amount which will be taxed to the beneficiary is the interest from the end of that tax year to the time of redemption, not measured from date of death. A fair bit of wrong advice on this thread.
Bruce

[EastWest Gal]

I stand corrected, but now uncertain who is correct. When my dad's income tax and estate tax returns were done, his tax return from that year was based on income up to his date of death. So my experience was that there was a stepped up basis based on the date of death and not the end of the year. After that the bond interest income was reported on the trust estate tax return. His treasuries were held in trust, and the trust instructions were that the trust was to be dissolved upon his death. I transferred the bonds to myself and my sister, and have either cashed out or reinvested mine as they reached maturity. I took over reporting the interest when the bonds and notes were transferred to my account. This interest is reported when the bonds are cashed out or reinvested. My advice was also to contact Treasury Direct with questions. Contact Treasury Direct, not us for advice since apparently we might be all wrong.


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[Gill]

EastWest Gal,
You're confusing step up in basis with reporting of interest on I Bonds. I Bonds do not get a step up in basis. We are talking the taxation of the accrued interest on the I Bonds. The OP said this was reported on the decedent's final return. Accordingly, all interest earned on the bonds beyond that reported on the decedent's final return will be reported on redemption. If the decedent hadn't reported any accrued interest on their 1040 all interest from the date of purchase would be reported on redemption by the beneficiary.
Bruce

[Brat]

I was unaware that all the interest on Bonds had to be reported if any were reported. It may be that Mother reported all the interest on specific Bonds in older returns (I see the $ but not the supporting details) - some one year, others the next, then the balance of all the accumulated interest on her last return.

That said, if a mistake were made, the SOL has expired on her return.

[gauss]

Quote:

Originally Posted by EastWest Gal . My advice was also to contact Treasury Direct with questions. Contact Treasury Direct, not us for advice since apparently we might be all wrong.

Do think Treasury Direct will answer tax advice questions, or just refer you to a tax professional?

-gauss

[Texas Proud]

Why do you need to have an exact split

You say you have bonds down to $1,000.... so split it as best you can to within $1,000 and then one of you (or two) take an extra $1,000 cash from the estate and you are all even...


The think I would want to make sure if that the interest rate on the bonds are split as evenly as possible.... but that might not be as easy...

[David1961]

Quote:

Originally Posted by Corporate ORphan How many forms do we need to submit? One for each of us?

I went through a similar experience a few years ago. I actually called the Treasury Direct number and eventually talked with a very informative and helpful representative who patiently told me what forms I had to fill out. As I recall, the forms were not that difficult to fill out. (Don't remember exactly how many forms, sorry). But as I said this was about 5 years ago, when they still issued paper bonds. Times have probably changed.

There was a time when local banks could handle savings bond purchases, questions, etc, but not anymore (at least in my experience)

[Corporate ORphan]

Quote:

Originally Posted by David1961 I went through a similar experience a few years ago. I actually called the Treasury Direct number and eventually talked with a very informative and helpful representative who patiently told me what forms I had to fill out. As I recall, the forms were not that difficult to fill out. (Don't remember exactly how many forms, sorry). But as I said this was about 5 years ago, when they still issued paper bonds. Times have probably changed. There was a time when local banks could handle savings bond purchases, questions, etc, but not anymore (at least in my experience)

Thank you for your reply. I called Treasury Direct and the woman was wonderful. Picked up on the third ring which is better than all the other 12 financial institutions (Banks, Fidelity, etc.) I have been dealing with on my mother's accounts. The paperwork is even less than all of them. oh, and they can divide each bond THREE WAYS if it's $75 or more. Yippee!!! Still need more medallion signatures but I was in shock on how straightforward and easy it seems to be.

I thought the government would be the worst with all the spending cuts. I wanted to fill out a survey and say how good she was but, alas, they didn't have one.