Death and EE/ HH bonds

[Kram BergGold]

Client has $130k face value US EE and HH bonds at the time of her death.. I read in a book that if they go to a person on death that person can either report the interest or continue to defer. If the owner transfers the bonds to a irrevocable trust the interest to date of transfer is taxable to the grantor. If the bonds are transfered after death to a family trust (irrevocable) how does one tax the interest?

[Gene V]

Client has $130k face value US EE and HH bonds at the time of her death.. I read in a book that if they go to a person on death that person can either report the interest or continue to defer. If the owner transfers the bonds to a irrevocable trust the interest to date of transfer is taxable to the grantor. If the bonds are transfered after death to a family trust (irrevocable) how does one tax the interest?

Not sure of the answer, however, see Pub. 559 page 10, U.S.savings bonds acquired
from decedent. See if that helps.

[Burke]

Client has $130k face value US EE and HH bonds at the time of her death.. I read in a book that if they go to a person on death that person can either report the interest or continue to defer. If the owner transfers the bonds to a irrevocable trust the interest to date of transfer is taxable to the grantor. If the bonds are transfered after death to a family trust (irrevocable) how does one tax the interest?

In the first case the bonds are transferred at death. In the second case, the bonds are transferred to another owner while the grantor is living (which is gifting). That rule would seem to block transfers to a person or entity which might be in a lower tax bracket to effect a sale and reduction in taxes, other than a charity. What was their source? IRC section or Rev/Rul quoted? In your hypothetical scenario, were the bonds in the joint name of the deceased and trust? Or were they transferred to the trust by the terms of the will? Pub 559 does not distinguish between a living person and a trust. It simply refers to a beneficiary, even one who receives such bonds by means of a distribution made in the will. A beneficiary would report only interest received after death and up to the time of any surrender, because all prior interest would have been reported by the decedent or estate. No step-up basis is allowed.

[New York Enrolled Agent]

, A beneficiary would report only interest received after death and up to the time of any surrender, because all prior interest would have been reported by the decedent or estate.

Your statement is not always true. An executor or administrator MAY ELECT to report all the accrued interest on the decedent's final tax return. See Rev Ruling 68-145. If the executor does not make this election, then all interest earned before and after death is reported by the estate or other beneficiary receiving the bonds.

Kram
Rev Ruling 58-2 states that transfer to a revocable trust does not require reporting of accrued interest. My OPINION would be that transfer to an irrevocable trust would create an event requiring the reporting of the interest by the transferor.

[Burke]

Your statement is not always true. An executor or administrator MAY ELECT to report all the accrued interest on the decedent's final tax return. See Rev Ruling 68-145. If the executor does not make this election, then all interest earned before and after death is reported by the estate or other beneficiary receiving the bonds..

You are correct. I meant to say reported either on the decedent's return or the estate's.

[Burke]

Client has $130k face value US EE and HH bonds at the time of her death.. I read in a book that if they go to a person on death that person can either report the interest or continue to defer. If the owner transfers the bonds to a irrevocable trust the interest to date of transfer is taxable to the grantor. If the bonds are transfered after death to a family trust (irrevocable) how does one tax the interest?

See form PD F 1851 from US Treasury (page 2) regarding the transfer of bonds to a trust. Sections 4 and 5 cover the tax liability situations involved, and you must certify which applies when the bonds are transferred. Hope this makes things clearer. You can download from www.treasurydirect.gov.