Should the heirs or the estate pay the tax?
Friday, February 18th, 2005
Categorized as: Inheriting and bequeathing US Savings Bonds
My brother and I inherited a large sum of E and EE bonds upon my mother’s death. Does your book clearly explain if it would be more beneficial from a tax standpoint to have the estate redeem the bonds and pay the income taxes, or for me and my brother to redeem the bonds and pay the taxes?
Tom’s response
Like any book, covers issues in a general way and shows you how to do the analysis. But there’s no single right answer to this question, so the book can’t do the analysis for you.
You’ll have to look at your mother’s marginal tax rate as compared to yours and your brother’s. I suspect it will work best to have the estate cash some of the bonds, but pass most of them to you and your brother, which you eventually cash over several years.
You and your brother are exactly the kind of people I wrote the book for. There are ways to reduce your taxes and get the most value out of the bonds.
Other than the education deduction, you’re in a position to be surprised by every tax issue the book covers: the deferred-tax time bomb, the double-taxation trap, and the state tax deduction. You could also be hurt by the hidden redemption penalty.
I encourgage you to take a look at the book. Before you redeem the bonds you need to understand why they’re not as frumpy an investment as they appear to be.
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Tom Adams
My mother has a large amount of US Savings bonds in only her name. I am her only child and beneficiary. We cash some every year to supplement her social security.
I want to simplify matters in the event of her death and spread out tax liability on deferred interest over several years.
Should my name be on the bonds as a co-owner or as POD beneficiary?
Hi Eleanor - yes, it would greatly simplify matters if you were a co-owner or even a beneficiary of the bonds. Here’s the info your mother needs to make you a co-owner or beneficiary on her Savings Bonds.
Tom Adams
Don’t forget if the bond are included in the estate and subject to estate tax, then there is miscelleanous itemized deduction NOT subject to 2% Adjusted Gross Income (AGI) limit to lessen the effect of the income taxes due when the bonds are redeemed.
Mark - looking at it another way - when you pay estate taxes on Savings Bonds, part of the value of the Savings Bonds is unpaid income taxes - so you’re paying estate tax on money you’ll never get - you’ll pay it in taxes. So there is a deduction for the person who cashes the bonds and owes the income tax; but sometimes it’s better to handle this in other ways.
Tom Adams
Are estate taxes different from federal taxes paid over the year of the person’s death? My father’s estate tax return paid taxes on the interest on savings bonds, but there were no taxes paid on that interest on his federal tax return. Would he have to pay taxes on that bond interest twice?
Bernie - if by twice you mean estate taxes and income taxes, yes, your family owes both.
However, there’s a deduction you can take for the estate tax that was paid on the Savings Bond interest when you cash the bonds and pay the income tax. This is pretty complicated and will require your tax advisor to look up the IRS rules on this.
Tom Adams
As executrix for my mother’s estate, I recently cashed and deposited her savings bonds into the estate account. Do I have to make an estimated tax payment on the interest now or do I wait until I receive the 1099 at the beginning of next year and pay the taxes then? My mother died last year, so it is not possible to include it on her last tax return.
Kathy - Although this sounds like a Savings Bond question, it’s a tax question (the answer would be the same for any kind of interest-bearing investment). It would be best to ask the lawyer handling the estate or your tax advisor.
Tom Adams