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It sounds like if she leaves our names off the bonds, the executor will be forced to cash all the bonds and split the proceeds. On the other hand, if she does put our names (I have 5 siblings) on the bonds, the bonds can be passed without cashing them in. Is this a correct assumption? In this scenario, will each of us kids be responsible for the full brunt of the taxes (from the purchase date) or are we only responsible for the taxes accrued since the time of death?

It's up to the executor of your mother's estate to decide whether to report the accrued interest on those bonds up to the date of your mother's death (assuming the bonds don't mature before she passes), on her final tax return or whether to pass the taxes on to the heirs (this assumes the bonds or the cash is distributed to the 5 of you and your siblings).

If your mother assigns names to each of the bonds, my concern was whether she realizes that they all have different values. There may be some bonds no longer accruing interest when she passes and others that are still increasing in value.

When doing tax planning with bonds, I usually take into account the intent of the heirs. The executor is the ultimate decision maker. He/she may find it simpler to just cash everything in and make even distributions of the cash and let each heir be responsible for his/her share of the tax on the interest. But that's not necessarily the best tax plan.

For example, if one of the 5 heirs predeceases your mother, I'll assume the grandchildren will become the beneficiaries. If so, they will probably be in lower tax brackets. So the matter of the bonds is harder to make preplanning decisions on than other type of assets.

If your mother is aware of the differing values of the bonds and is able to make a fairly even distribution of the bonds by assigning a name with certain specific bonds, she is free to do that. Is it the intent of your mother that her assets be evenly distributed between the 5 of you? If so, the executor is under no obligation if the bonds are already predesignated to each of you, to distribute her other assets in a way to even out any inequities in value of the bonds. To be sure it will expedite the distribution of the bonds if your names are already on them. Otherwise it means additional paperwork for the executor to get the bonds assigned rather than cashing them in after her passing. But not having the bonds preassigned will give the executor the flexibility of distributing the bonds to the sibling in the lowest tax bracket.

So again there's two things to consider, hassle and logic.

The attitude of the executor will determine how to best approach this.
If you mother is willing to make known the current value of the bonds and her personal tax situation, you could do a dry run and determine the value of her bonds today and how much tax would be paid on her final return at today's rates. Then you could divide that interest figure up and see whether the cashing in of the bonds would be a tax burden beyond tolerance for you heirs if the tax were passed on to you. This will at least give you a measure to make a logical choice.

If the heirs think that they will sell their share of the bonds and either spend or reinvest in something that has the potential of earning more, then why go through this hassle?

It might just be more prudent for your mother to start cashing in some of those bonds now and paying the 15% (if that's her tax bracket) and putting that money in CD's at a credit union or brokerage money market account(at least they are paying more interest than the bonds??). Of course you lose the earning power of the 15% you pay in taxes now. And you heirs could decide when you wanted to cash the bonds - all at once or over a period of years perhaps to keep yourself in a lower tax bracket.

I'm not sure of your mother's other assets, but planning for Medicare might be a consideration. If she ends up in a nursing home, Medicare makes you spend down. She can still keep a home, a car, personal household goods and $2000 in cash and investments under current rules.
Medicare won't kick in until she has spent down all her assets. If the bonds were to be changed to joint ownership instead of POD, Medicare can't make you cash in jointly owned properties, but when she dies, the state can make you pay her share of the assets when they are sold. Each state is different. So if this is a consideration, then you should check with an attorney in your state to explain the spend down requirement in regards to jointly held property.

I bet you didn't realize your simple question would require so much thought. They don't use the word "tax simplification" in Washington any more!
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