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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Series E Bonds Tax Avoidance Strategy Date: 6/23/2003 5:04 PM
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I hope someone can give me some insight into the best way to proceed in the matter I am about to describe, since it is a matter of some gravity to me. Any and all responses are greatly appreciated.

Situation:

Mother-in-Law (widow), age 83, sound in mind, less so in body. Will is in place which calls for an equal division of assets among one natural daughter (my wife, the executor) and three half-siblings. A quantity of Series E savings bonds were purchased with her husband in the 1970's which have since appreciated considerably. All expire in the next few years, upon which time they will no longer earn interest. The bonds can be re-issued as Series H but will only earn interest at the rate of 1.5%.

When her husband died in 1983, the bonds were re-issued as jointly owned with her natural daughter (my wife). It is her desire that upon death, the bonds pass entirely to her natural daughter.


Goal:

Achieve transfer of the value of the bonds to my wife with as little friction as possible, as little taxation as possible and with no realistic possibility of successful contest by the half-siblings.

My own research indicates that upon death, the capital gains taxes on the bonds can be paid as part of the final tax filing of her Mother-in-Law's estate. My concern is that the proceeds would at that time become part of her estate and subject to the provisions of the will. An additional concern is that by continuing to hold the bonds past expiration, they will earn little (if reissued as Series H) or no interest (if allowed to expire). An additional concern is that if the bonds are redeemed by my wife (as a joint owner) they would be subject to capital gains taxation at the 20% rate.


The Idea

Since my Mother-in-Law will be in the 15% tax bracket for the foreseeable future, have her cash the bonds as they expire and in amounts less than $10K/annum and gift the proceeds to my wife. In this manner, under recent tax changes, the capitals gains will be taxed at her rate of 5% and the redemption proceeds gifted to my wife without incurring federal gift taxes. It is my hope that in this manner, the proceeds can be put to more productive use, will not be involved in the estate settlement at all and will be very lightly taxed.

Is this a good strategy? Are there easier ways to accomplish the same ends? Thanks in advance to all responders.

(Cross-posted to the “Investing for Income” Board)

Regards,
FMO
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