Who pays the tax on inherited Savings Bonds – estate or heirs?
Thursday, July 22nd, 2004
Categorized as: Inheriting and bequeathing US Savings Bonds • Savings Bond taxes
I have inherited some E and EE bonds. If I cash some of them does the estate have to pay tax on the interest they’ve earned? They were in my mother’s name and Social Security Number.
Tom’s response
If you are the Executor of your mother’s estate, you have a lot of flexibility here. If not, you may be limited more by the Executor’s plans than by tax or Savings Bond regulations.
Whether you redeem the bonds or keep them, the estate’s Executor can either have the estate pay the income tax on the interest earned through the date of your mother’s death or allow the bond interest to pass to the heirs untaxed.
If your mother’s tax rate would be lower than that of her heirs (after considering the impact of the big lump of bond interest on her tax rate), it makes more sense for the estate to pay the income tax. If the heirs’ rate is lower, it makes more sense for the heirs to pay it.
Check my page on federal income tax rates for help figuring this out.
You have four choices…
- redeem – heirs pay tax
- redeem – estate pays tax
- keep – heirs pay tax
- keep – estate pays tax
A detailed explanation of how to pick the best one for your situation is too complicated to go into here, but a complete discussion is in my book.
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Tom Adams
My Father died 4 years ago and my Mother died last year. We found several bonds in their names. How can we redeem them,or what are our options.
Gloria – if your Mother’s estate is being probated, you should turn the bonds over to the Executor of her estate. If not, this form is typically what you’d need to deal with the bonds.
Tom Adams
The same question as above, except that there is a trust. How does the trustee go about cashing in the bonds. The bonds are in the names of the deceased.
Tom – If the bonds are in the names of the deceased, then they aren’t in the Trust and the Trust isn’t relevant. You’d handle them like any other Savings Bond.
On the other hand, if you really mean that the bonds are in the name of the Trust and the deceased are the named trustees, then the Trust paperwork should name a new trustee and he or she could redeem the bonds by submitting paperwork showing his or her status as the Trust’s trustee.
Tom Adams
Is there a Macintosh version of the savings bond wizard?
June – see this post.
Tom Adams
I am the personal representative of my mother’s estate. Her ee bonds amount to over $100,000. The plan is to have the bonds reissued to the 3 brothers who can cash the bonds in during the the remaining years of their lives. I suspect the income tax is not due until the year they are redeemed and what US Bond form do I use to accomplish this?
Hi Chuck – You are basically correct. The tax doesn’t have to be paid now. The tax is due when the bonds are cashed or when the bonds stop earning interest. Depending on when the EE bonds were purchased, this might be sooner than you think. You should double check that.
There are a variety of different forms for this transaction depending on how the estate was handled legally. My book, Savings Bond Advisor has complete details and also answers a bunch of other questions you and your brothers haven’t thought of yet.
Tom Adams
My grandmother and my brother are listed on EE series US savings bonds my grandmother passed away in 1995 leaving the bonds with my brother my brother passed away in 1999 he lived with my mother has never been married nor had any children so my mother was named executor and heir. How and where can she cash in these bonds ? We have both death certificates for my grandmother and my brother ?
Rachel – see this post.
Tom Adams
My Aunt passed away 2 months ago and I just opened a metal box of hers and found 2 savings bond given to her by another Aunt who predeceased her. Their both names are on the bonds and she did not leave a will but the Aunt who died earlier did what do the remaining niece and nephew have to due to cash these bonds? They are series E
Laraine – In this case this form and the death certificates of both aunts are what you need.
Tom Adams
Late Aunt converted all her HH bonds to E bonds and had put in my childrens names (several $10,000). She has died, bond for each has been cashed and now learning we have to pay taxes on interest. Anyway to avoid this? Once child a college student with no income, other a teacher making around $43 k. Her estate has not been closed but my mother the exector says the accountant says she has no authority to have estate pay the taxes since it is not specified in the will. We suspect quite a bit of $$. HELP!
Nancy – there’s no way to avoid the tax on the interest. Money should have been held back when cashing the bonds to pay it.
For those with little other income, most of the tax will be at a 10% rate (see this post), but the IRS expects payment.
Tom Adams
The bank account that the interest for HHH series bonds was being paid to was inadvertently closed. What happens to the interest? Can a new account be assigned? Can the social security number be changed to the beneficiarie’s number since the joint owner has passed away?
Pat – see this and this.
Tom Adams
Once the heirs submit all series E bonds to the bank with all required forms; howe long does it take for the treasury dept to remit payment on the bonds?
CJ – assuming the submitted forms were the correct forms and were filled out correctly with all required signatures and supporting documentation (death certificates, probate court documents, etc.) then it takes about three weeks.
Often there are problems with the submission, however, and in those cases it will take longer. How much longer depends primarily on how fast the submitting party responds to the Treasury’s requests for corrected information.
Tom Adams
Tom, My mother has $850,000 of hh bonds. Will her estate need to pay estate taxeson these if her total estate is over the exemption? Will they get a step up in basis? If not can I avoid the income tax at her death by puting them in my name? At death? or now?
Tim – you have two issues, estate tax and income tax. And you have those issues on the federal and state level.
On estate taxes, typically state-level taxes are a bigger deal than federal taxes, but your mother’s estate is approaching the size where federal tax could also be owed.
On income taxes, Savings Bonds are free of state income tax if you fill out the state tax forms correctly. But the federal tax will be significant. Stepped-up basis applies to things that have capital gains. Savings Bonds don’t have capital gains – just interest earned – so there’s no stepped-up basis.
There’s no way to get out of paying the federal income tax, but there are ways to minimize it. It would pay you to spend a weekend reading my book; the issues are too complicated to explain here.
Tom Adams