Should the elderly redeem their bonds before passing them to heirs?
Tuesday, March 28th, 2006
Categorized as: Inheriting and bequeathing US Savings Bonds • Savings Bond taxes
My dad is 92 and in pretty good health. He has a large investment in Savings Bonds. Should he cash the bonds in or leave them to be cashed after his death? He is widowed and there are three of us children. I have Power of Attorney. He doesn’t need the money now, but might later on.
First, are they still paying interest? If not, you should redeem them. The tax on these was officially due in the year they stopped paying interest.
If your father bought these bonds on a regular basis, filing amended returns for the years in which the bonds expired may actually be advantageous, as it can even the large lump of income out over several years.
If your dad likes Savings Bonds he can just reinvest in new ones. But save back enough money to pay the income tax. You’ll find my post about calculating how much to hold back for taxes helpful.
If his bonds are still paying interest, there’s still good reason to consider rolling them over into new bonds. When you do this your dad will owe tax on the interest, but as long as his tax rate is lower than the rate of his heirs, it makes good sense.
If he doesn’t pay the tax on them now, his estate will either pay it on all of his bonds at once on his final tax return or his heirs will pay it at their rates – there’s no way to get out of it. Paying a bit year by year usually lowers the family’s total tax bill.
You’d benefit from a weekend reading my book, Savings Bond Advisor, especially the chapter called Managing the deferred-tax time bomb.
You should also make sure your Power of Attorney specifically mentions Savings Bonds.