Q. I have Treasury bonds that have earned a pretty decent interest and are now worth slightly less than $7,000 each. Im thinking of gifting these to my three adult grandchildren for their birthdays this year. When I purchased them I put my name and one of their names on three bonds for a total of nine bonds. I know one of them needs the money and will probably cash all three of the bonds as soon as he receives them, but the other grandchildren will probably keep at least one and maybe two of them until they stop earning interest, which will be long after my life span. By gifting now rather than waiting until I die, I figure they can use the money now and I can avoid any tax to my estate.
Can I just give them to the grands and be done with it, or do I need to have them reissued in their names alone? Will I be able to deduct the entire value of the bonds or just what I paid for them on my taxes for 2014?
A. Thats very generous of you! You probably will not like my responses, but dont kill the messenger.
First of all, there is no tax deduction allowed for a gift to an individual; only gifts that are made as deductible charitable contributions (see IRS Publication 950 for more information on allowable deductions).
The second difficulty you may have is the value of the bonds. You are allowed to gift up to $14,000 a year to an individual without being required to file a gift tax return (IRS form 709). If you are married, you and your spouse are allowed to gift up to $28,000 to an individual. If the gift of more than $14,000 comes from only one spouse, you must both consent to what the IRS refers to as gift splitting. Because the amount of your gift is $21,000, even if you are married, you will both need to file a gift tax return to show that you and your spouse agree to use gift splitting. It will be less complicated if you gift two of your bonds in 2014 and the third one in 2015. This way your annual gift to each grandchild will be $14,000 or less and no gift tax return is necessary.
The third issue with your plan is the taxation of the interest earned on the bond since you purchased it until the day you gift the bond and when it is redeemed. If the bond was purchased with your money and you have a grandchild (or anyone) named as co-owner, you are responsible for the tax on the interest earned when the bond is redeemed. If you had purchased the bonds in each of your grandchildrens name only, they, as the only owners, would be responsible for the tax on the interest. If you and your grandchildren had purchased the bonds together as co-owners with money from each of you, the taxes owed would be proportionate based on the amount each of you contributed to the purchase price. If you have the bonds reissued in their name only, you will be responsible for taxes on any interest earned from purchase date to date of reissue. The new owner of the bond will be responsible for tax on any interest earned from the date of reissue until redemption. If you gift the bonds and no-one redeems them until your death, the survivor becomes the new owner and is responsible for all the tax owed upon redemption.
Summary: It is a nice gift, but if you gift all three bonds to each grand you will need to file a gift tax return, the gift will not result in a tax deduction, and if any of the bonds are redeemed or reissued prior to your death you will have some tax liability.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624