Case
Bill Bonds is a retired construction worker.
While still an avid home improvement enthusiast,
Bill hung up his hard hat after 40 years in the
business. During his working years, Bill
invested in several different places, such as an
IRA and a deferred commercial annuity. Bill also
purchased U.S. savings bonds.
Specifically, Bill bought U.S. Series EE savings
bonds 20 years ago for $50,000. The face value
of the bonds was $100,000. Bill's bonds have
reached the original maturity date - 20 years
from the bonds' issue date. He knows he has
several options with respect to the savings
bonds. However, Bill does not know what he
should do next. For instance, he can redeem the
savings bonds, continue to hold them or convert
them. Bill also wants to discuss the charitable
giving options, if any, with respect to the
savings bonds.
Question
Bill is a longtime supporter of his local
university. Therefore, he decides he wants to
make a gift to the university upon his death. He
also wants to provide for his only son, Jack.
Therefore, he wonders if it is possible to
benefit both the university and Jack with his
$100,000 of savings bonds. If possible, what are
the tax consequences of such a plan?
Solution
"Option #7 - Transfer of Savings Bonds to CRT."
An excellent planning strategy is for Bill to
transfer his savings bonds to a testamentary
charitable remainder trust (CRT) for Jack. The
benefits of this strategy are similar in nature
to a bequest of savings bonds. Specifically,
Bill's will or trust will transfer the savings
bonds to the one-life CRT. Similar to a charity,
a CRT is exempt from income taxes. Therefore,
the CRT will not have to pay income tax on the
accumulated interest income when it redeems the
savings bonds.
Under the four-tier accounting structure, the
accumulated interest income will be assigned to
tier one. Thus Jack, the CRT income beneficiary,
will likely realize this tier-one ordinary
income during his life.
A transfer of savings bonds to a testamentary
CRT also produces a charitable estate tax
deduction equal to the present value of the
remainder interest. In large estates, this
deduction may save significant estate tax. Thus,
Bill's savings bonds to testamentary CRT
strategy can greatly reduce income and estate
taxes!
This double benefit greatly pleases Bill. As a
result, Bill contacts his attorney and suggests
that the savings bonds pass to a CRT upon his
death. Consequently, Bill's attorney will make
the appropriate adjustments to Bill's will. In
the end, Bill accomplishes his two goals:
providing for his son and his favorite charity.
