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Author: jagusta Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121572  
Subject: Converting EE Bonds to HH Bonds Date: 11/17/1998 8:43 PM
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My mother has some old EE bonds earning minimum interest and wants a way transferring them to my son tax free and avoiding capital gain taxes. If she were to simply cash in the EE Bond she would have a $6000 gain.

A broker told her that she could convert the EE Bonds to HH Bonds and list my son as a co-owner of the bond under his SS number. He also said that after 6 months,
my son could cash in the bond free of any capital gain taxes. I'm aware of the 10K gifting strategy but this broker led my mom to believe that she could also avoid capital gains by this conversion/transfer. My mom asked
her attorney but he admittingly was clueless.

Does anyone know the whether this scheme is valid? Or can someone refer me to some on-line publication that might validate this scheme?
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6360 of 121572
Subject: Re: Converting EE Bonds to HH Bonds Date: 11/18/1998 11:03 AM
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[[My mother has some old EE bonds earning minimum interest and wants a way transferring them to
my son tax free and avoiding capital gain taxes. If she were to simply cash in the EE Bond she
would have a $6000 gain.]]

OK...so far...so good.

[[ A broker told her that she could convert the EE Bonds to HH Bonds and list my son as a co-owner
of the bond under his SS number. He also said that after 6 months,
my son could cash in the bond free of any capital gain taxes. I'm aware of the 10K gifting strategy
but this broker led my mom to believe that she could also avoid capital gains by this
conversion/transfer. My mom asked
her attorney but he admittingly was clueless.]]

I don't think so.

RevRul 55-278 says that if the taxpayer transfers ownership of Series E or EE bonds (or, by virtue of a tax free exchange into HH bonds) to a co-owner or beneficiary (by having the bond reissued in the name of the co-owner or beneficiary), the taxpayer must report all the previously unreported interest in the year of transfer (reissue). The taxpayer is also considered to have made a gift to this other person.

[[Does anyone know the whether this scheme is valid? Or can someone refer me to some on-line
publication that might validate this scheme?]]

I took a brief look and couldn't find any information that would confirm that this could be done and avoid all current income and future estate taxes. I would love to see the tax information that your broker would have that claims this is a valid technique. So if you happen to get a code section and/or revenue ruling and/or procedure from the broker, please let me know and I'll be happy to try and research it in a bit more detail.

TMF Taxes
Roy

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Author: jagusta Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6373 of 121572
Subject: Re: Converting EE Bonds to HH Bonds Date: 11/18/1998 8:15 PM
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Thanks for the well-reasoned response.

By the way, do the transfer of EE Bonds upon death
behave analogously to the transfer of stocks in that the transferee receives a step-up cost basis on the EE Bond?

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6386 of 121572
Subject: Re: Converting EE Bonds to HH Bonds Date: 11/19/1998 6:54 PM
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[[By the way, do the transfer of EE Bonds upon death
behave analogously to the transfer of stocks in that the transferee receives a step-up cost basis on
the EE Bond?]]

Nope. Nothing like that at all.

If you die with unreported income with your EE bonds, the full value of the bonds will be included in your estate.

Your executor will have the option of including the previous unreported interest income on your final tax return.

If that is not elected, then the recipient will be required to report the previously unreported income.

EE bond income is considered Income with Respect to a Decedent, and will be taxed both at the estate level and also at the beneficiary level.

TMF Taxes
Roy

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