Q. Both of my parents passed away last year and I am successor trustee. They did a great job putting everything in order but it has still been a lot of work for me. I can see the light at the end of the tunnel but I’m completely baffled with one asset they left to us. There are four of us sharing equally and I divided and disbursed everything except for a stack of government savings bonds. Neither I nor my siblings are familiar with these types of bonds. The oldest bond is a double E and has an issue date of May of 1986. The other ones are I bonds and they have issue dates between August 2001 and December 2005. Some bonds are listed with either mom or dad’s name “or” ours and others are only listed in either mom or dad’s trust. They all have an issue price of $10,000 except for the double E which has an issue price of $5,000. My parents bought four bonds each whenever they made a purchase so I could give everyone an equal amount and let them decide how to handle it. But I would feel kind of negligent in my trustee duties if I did so, especially since two of my siblings wouldn’t have a clue as to what to do with them. Someone mentioned that the easiest thing to do is to just redeem them but to be aware of taxes that may be owed. I could pay the taxes from the trust and then distribute the net cash proceeds. Is this the best thing to do with these bonds?
A. You should probably not simply redeem the bonds but you should meet with a tax or financial professional to make sure what action makes sense for you to take in your family situation. If you redeem them you will owe taxes unless your parents paid tax on the interest earned each year which is unlikely. Even if they did and you would not owe taxes on past interest earned, these bonds are a very good, extremely safe investment and would be very difficult if not impossible to replicate. EE and I savings bonds are backed by the federal government and interest is exempt from state and local income tax. The Treasury Direct website has a wealth of information including a bond calculator, instructions on how to distribute bonds of a deceased bond holder and how to set up a Treasury Direct account. You could redeem the bonds and distribute the after tax proceeds but if instead you and your siblings open Treasury Direct accounts and do a bit of paperwork I think you will be better off. Hopefully, you will agree after you read the following:
The EE bonds will stop earning interest this month when they mature. They were purchased in 1986 and earn interest for thirty years. The interest rate on these bonds has been 4 percent. If the purchase price in 1986 was $5,000 the bond has earned $17,612 in interest and will have a redemption value of $22,612. Taxes will be owed on the interest earned when the bond is redeemed. You could hold the paper bond and redeem in a future year if you anticipate being in a lower tax bracket but then you forfeit the use of the after tax money and you are holding a matured bond earning no interest.
The I bonds also earn interest for 30 years so your oldest bonds will earn interest until 2031 and your newest until 2035. The current annualized interest on bonds issued in 2001 is 4.56 percent and 2.55 percent for bonds issued in 2005. The earnings rate is a combination of two separate rates: a fixed rate of return and a variable semiannual inflation rate. The fixed rate is announced by the Treasury Department every May and November. This rate remains the same for the life of the bond. The semiannual inflation rate is also announced each May and November by the Treasury Department. This rate is based on the Consumer Price Index reported by the Bureau of Labor Statistics. The semi annual inflation rate is combined with the fixed rate to determine the I Bond’s earnings rate for the next six months. Interest grows tax deferred and, as mentioned above, is not subject to state income tax when redeemed. This beats any other guaranteed rate of return of which I am aware.
The logistics of reissuing and distributing these bonds can be confusing and will be covered in next week’s column.
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