Reissue Savings Bonds in Charity's Name
Treasury regulations greatly restrict the lifetime reissue of savings bonds. 31 C.F.R. 315.6. Therefore, it is generally not recommended for a donor to attempt to reissue savings bonds in a charity's name. Even if a donor may reissue savings bonds in a charity's name, the accumulated interest income is still immediately taxable to the donor at the time of reissue. See PLR 8010082.
There are two limited exceptions to the general rule, which include certain transfers to family members and revocable living trusts. Rev. Rul. 58-2. Unfortunately, neither lifetime reissue exception includes charity.
Lifetime Gifts of U.S. Savings Bonds
Planned gifts in many instances allow donors to bypass capital gains tax. However, with savings bonds, this benefit is generally not available. In general, any attempt to make a charitable transfer of savings bonds during life will result in instant tax realization of the accumulated interest income to the donor. See Reg. 1.454-1(c)(1) and Rev. Rul. 55-278. This rule applies regardless of whether the donor is contemplating an outright gift, a CRT or a CGA.
Since savings bonds are usually held long-term, the accumulated taxable interest income may be quite substantial. However, a donor's charitable income tax deduction in many cases will offset some or all of the taxable interest income the donor realizes. Two examples of this situation are below.
Example 4.11.2A
Samantha Saver wants to give her favorite charity $10,000. Samantha remembers that she purchased a U.S. Series EE savings bond 20 years ago for $5,000. The face value of the bond is $10,000. Unfortunately, Samantha cannot transfer the savings bond to charity and avoid the accumulated interest income. Therefore, she decides to cash in the savings bond at her local bank.
After redemption Samantha will have $5,000 of taxable interest income. However, she will also receive a $10,000 charitable income tax deduction for her cash gift to charity. Thus, if she can deduct at least $5,000 of her $10,000 deduction this year on her Form 1040, then Samantha will owe no tax with respect to the savings bonds.
Example 4.11.2B
Brian Bondsman wants a $10,000 gift annuity. Brian owns a $10,000 Series E savings bond that he purchased for $5,000 many years ago. Unfortunately, all the accumulated interest will be taxable even if Brian transfers the savings bond to charity in exchange for a gift annuity. Therefore, he decides to cash in the savings bond at his local bank. Brian will report $5,000 of taxable income on his income tax return.
After redemption and reporting his taxable interest income, Brian will fund a gift annuity with $10,000 cash. He will also receive a $6,000 charitable income tax deduction. Thus, if he can deduct at least $5,000 of his $6,000 deduction this year on his Form 1040, Brian will owe no tax with respect to the savings bonds.
