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Monday, May 13, 2024
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Case Studies |
The CRT Solution for Savings Bonds
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Case:
Jackie Marshall, a widow age 82, owns a portfolio of Series EE savings bonds which she purchased back in the 1980's and 1990's for $75,000. The bonds are now worth $275,000 and are nearing final maturity which means interest will soon no longer accumulate on the bonds. However, Jackie realizes that if she redeems the bonds, or they mature, she will be required to report the accrued interest, i.e., $200,000 as interest income on her tax return.
Jackie is like many Americans of the "World War II generation" who hold savings bonds. It is estimated that Americans hold over $205 billion in these kinds of securities. Many of these bondholders may not realize that when bonds reach maturity they no longer accrue interest. Typically, after 30-40 years, savings bonds stop producing interest. Therefore, owners should redeem these bonds which have matured and reinvest the proceeds – although they will owe tax on the accrued interest.
Jackie has been informed by her attorney that should she bequest these bonds to her children upon her passing, then the children would be required to report for tax purposes the accrued interest of $200,000 on the bonds when the bonds are redeemed. The interest on the bonds is deemed as "income in respect of a decedent (IRD)" and therefore, must be reported by those persons (the children) who acquire the bonds from the decedent.
Question:
Jackie is a philanthropist and is interested in using her Series EE bonds to make a charitable gift to her favorite charity. However, she also desires that her children receive income from the bonds for a period of time. She is quite ill at this time and needs to make a decision regarding the disposition of the bonds in the very near future. What is the best strategy to fulfill her objectives?
Solution:
In meeting with her attorney, Jackie learns she can change the language in her will to state that the savings bonds will become the property of a testamentary charitable remainder trust when she passes away. She is told that by transferring the bonds to a charitable trust upon her death, the trust will report the interest income when it redeems the bonds. Since charitable trusts are tax-exempt, no tax will be due when the bonds are redeemed. In order to make this strategy work, the attorney explains that it is imperative that the bonds list only her as the owner (no co-ownership or beneficiary may be designated on the bonds) and that the bonds be transferred directly to the charitable trust upon her death. If her estate receives the bonds, for example, redeems them and then funds the charitable trust, the estate will be required to report the accrued interest income.
Jackie is pleased that she can fund the charitable trust with the bonds and instructs her attorney to draft the appropriate provisions in her will. She chooses to fund a 5% testamentary charitable remainder trust with the Series EE bonds which will pay income to her children for a period of 15 years. After 15 years, the trust will terminate and the assets will be distributed to her favorite charity. Based upon an assumed return of 6.5% on the trust assets, her charity will receive approximately $337,000 upon the termination of the trust in 15 years. Also, with this investment assumption, the children will receive in excess of $275,000 in trust distributions over the 15-year period. These results are very appealing to Jackie as she is able to "turn" her $75,000 investment in savings bonds into a benefit of nearly $612,000 to family and to charity.
Keep in mind that for large estates, the funding of a charitable trust upon death would allow the donor's estate to take a charitable estate tax deduction in conjunction with the gift.
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