iBonds from parents estate

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hammer64
Posts: 3
Joined: Tue Jun 15, 2021 9:07 am

iBonds from parents estate

Post by hammer64 »

My parents had around 20 $10K iBonds which they purchased in the 2003 to 2008 time frame. Most have a base interest rate of 1%, and with the current inflation rate of 3.54, are earning 4.54%. The second parent has recently passed away, and we are managing the estate. We are going to pay the accrued taxes on the interest on the bonds via my parent's final tax return. These bonds look attractive and seem worth replacing some of my 'safe money' with. Currently have 7.5% cash, 28% BND, and the rest primarily in VTI (45%) and VXUS (22%) with no debt. My wife and I are 57 and we just have enough assets to retire early if we are conservative in spending.

This looks like a 'no brainer' to me, but the iBonds are new to me and I just moved over to the Booglehead method back in Oct '20... wanted to see if I was missing anything. My thought would be to invest a bit more of the cash into the market over the next 6-8 months, replacing part of the cash reserve with the iBonds (while still leaving a 6+ month emergency fund in cash).

Thoughts? Any downsides to iBonds that I may not be aware of?
ivgrivchuck
Posts: 1672
Joined: Sun Sep 27, 2020 6:20 pm

Re: iBonds from parents estate

Post by ivgrivchuck »

hammer64 wrote: Tue Jun 15, 2021 9:31 am My parents had around 20 $10K iBonds which they purchased in the 2003 to 2008 time frame. Most have a base interest rate of 1%, and with the current inflation rate of 3.54, are earning 4.54%. The second parent has recently passed away, and we are managing the estate. We are going to pay the accrued taxes on the interest on the bonds via my parent's final tax return. These bonds look attractive and seem worth replacing some of my 'safe money' with. Currently have 7.5% cash, 28% BND, and the rest primarily in VTI (45%) and VXUS (22%) with no debt. My wife and I are 57 and we just have enough assets to retire early if we are conservative in spending.

This looks like a 'no brainer' to me, but the iBonds are new to me and I just moved over to the Booglehead method back in Oct '20... wanted to see if I was missing anything. My thought would be to invest a bit more of the cash into the market over the next 6-8 months, replacing part of the cash reserve with the iBonds (while still leaving a 6+ month emergency fund in cash).

Thoughts? Any downsides to iBonds that I may not be aware of?
It is a no-brainer as you said. Especially old I-bonds with a higher interest rates are great.

Just keep good records of the taxes already paid, so that you don't end up accidentally paying taxes twice on the bonds.

Many bogleheads (including me) actually prefer i/ee-bonds in their portfolio over BND. So there is nothing wrong with them..
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
exodusNH
Posts: 10347
Joined: Wed Jan 06, 2021 7:21 pm

Re: iBonds from parents estate

Post by exodusNH »

hammer64 wrote: Tue Jun 15, 2021 9:31 am My parents had around 20 $10K iBonds which they purchased in the 2003 to 2008 time frame. Most have a base interest rate of 1%, and with the current inflation rate of 3.54, are earning 4.54%. The second parent has recently passed away, and we are managing the estate. We are going to pay the accrued taxes on the interest on the bonds via my parent's final tax return. These bonds look attractive and seem worth replacing some of my 'safe money' with. Currently have 7.5% cash, 28% BND, and the rest primarily in VTI (45%) and VXUS (22%) with no debt. My wife and I are 57 and we just have enough assets to retire early if we are conservative in spending.

This looks like a 'no brainer' to me, but the iBonds are new to me and I just moved over to the Booglehead method back in Oct '20... wanted to see if I was missing anything. My thought would be to invest a bit more of the cash into the market over the next 6-8 months, replacing part of the cash reserve with the iBonds (while still leaving a 6+ month emergency fund in cash).

Thoughts? Any downsides to iBonds that I may not be aware of?
I'm not sure if you pay the accrued taxes now if you'll need to continue doing so every year until you cash them in, or if you should just set aside money to cover them when they mature. Someone more knowledgeable will need to answer that.

Other than that, they're a great product! When you first buy them, they cannot be cashed in for 1 year. And if you cash them in before 5 years, you pay a 3 month interest penalty. Since they're held at Treasury Direct, you cannot use them directly for rebalancing, but it seems like that isn't an issue for you.

Most people don't think about them until it's too late to accumulate a large holding. I've only made my first purchase this year, but selling some bond funds I wanted to get rid of anyway. I plan to use them to cover my property taxes and insurance in retirement. Since they cannot ever lose value, unlike TIPS, which can have a negative inflation adjustment (deflation), they're handy if you don't need a larger-than-inflation return.

They're also an excellent supplement to an emergency fund. You can partially cash them in ($25 increments, I think.)
BrokerageZelda
Posts: 463
Joined: Sat Apr 10, 2021 10:39 am

Re: iBonds from parents estate

Post by BrokerageZelda »

Treasury no longer reissues paper bonds, so if you want to get the bonds reissued in the name(s) of the estate's beneficiaries, each beneficiary will need to open a TreasuryDirect account and send the paper bonds in to Treasury's SmartExchange service with the proper inheritance documentation.

https://www.treasurydirect.gov/indiv/re ... edeath.htm

Doing this will allow you to select new beneficiaries for the bonds online, and will also allow you to do partial redemptions straight to your bank account (minimum $25), so that you can take out only the money you need, while letting the rest of the bond continue to grow. Paper bonds must be redeemed in full, and if you have $10k face value bonds earning above 0.00% fixed rate, this can be a pain.
Topic Author
hammer64
Posts: 3
Joined: Tue Jun 15, 2021 9:07 am

Re: iBonds from parents estate

Post by hammer64 »

Really appreciate the responses all - good to have the confirmation as I do not have experience with them. Thank each of you for your response!
fabdog
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Re: iBonds from parents estate

Post by fabdog »

Once you elect to pay the accrued interest, you have to stick with that plan. YOu can request to change back by requesting permission from the IRS to change. IRS publication 550 has the details

https://www.irs.gov/pub/irs-pdf/p550.pdf

Search for method 1/method 2

Also be aware that when you eventually cash the bonds/they mature, you'll get a 1099-INT for the dull amount, as Treasury direct does not know that you've already reported the interest. You'll need to adjust for any interest you already paid

Mike
AlwaysLearningMore
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Joined: Sun Jul 26, 2020 2:29 pm

Re: iBonds from parents estate

Post by AlwaysLearningMore »

hammer64 wrote: Tue Jun 15, 2021 9:31 am My parents had around 20 $10K iBonds which they purchased in the 2003 to 2008 time frame. Most have a base interest rate of 1%, and with the current inflation rate of 3.54, are earning 4.54%. The second parent has recently passed away, and we are managing the estate. We are going to pay the accrued taxes on the interest on the bonds via my parent's final tax return. These bonds look attractive and seem worth replacing some of my 'safe money' with. Currently have 7.5% cash, 28% BND, and the rest primarily in VTI (45%) and VXUS (22%) with no debt. My wife and I are 57 and we just have enough assets to retire early if we are conservative in spending.

This looks like a 'no brainer' to me, but the iBonds are new to me and I just moved over to the Booglehead method back in Oct '20... wanted to see if I was missing anything. My thought would be to invest a bit more of the cash into the market over the next 6-8 months, replacing part of the cash reserve with the iBonds (while still leaving a 6+ month emergency fund in cash).

Thoughts? Any downsides to iBonds that I may not be aware of?
First, sorry for your loss.
As a practical matter, suggest that you scan the I Bonds into PDF form and store them both in a local file and with a cloud-based applications (if you don't currently use such a product, there are free basic account e.g., Dropbox https://tinyurl.com/yazeukgk )
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
ivgrivchuck
Posts: 1672
Joined: Sun Sep 27, 2020 6:20 pm

Re: iBonds from parents estate

Post by ivgrivchuck »

fabdog wrote: Tue Jun 15, 2021 4:48 pm Once you elect to pay the accrued interest, you have to stick with that plan. YOu can request to change back by requesting permission from the IRS to change. IRS publication 550 has the details

https://www.irs.gov/pub/irs-pdf/p550.pdf

Search for method 1/method 2

Also be aware that when you eventually cash the bonds/they mature, you'll get a 1099-INT for the dull amount, as Treasury direct does not know that you've already reported the interest. You'll need to adjust for any interest you already paid

Mike
There is now some confusion here.

Each individual chooses whether to pay taxes on the interest annually or at maturity. OP may and probably should choose to pay the taxes at maturity.

When transferring bonds from estate to OP, estate can elect to pay tax on the interest accrued up to transfer.

When bonds finally mature, OP needs to be careful not to pay taxes on the interest that was already paid by the estate.

This is all very clear in the IRS pub 550, there are even examples on very similar situations...
Last edited by ivgrivchuck on Tue Jun 15, 2021 6:10 pm, edited 1 time in total.
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
Gill
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Re: iBonds from parents estate

Post by Gill »

ivgrivchuck wrote: Tue Jun 15, 2021 5:20 pm
When transferring bonds from estate to OP, estate needs to pay tax on the interest accrued up to transfer.
Can you please review this statement. I don’t believe it is correct. The estate can elect to report the interest but is not obligated to.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
ivgrivchuck
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Re: iBonds from parents estate

Post by ivgrivchuck »

Gill wrote: Tue Jun 15, 2021 5:51 pm
ivgrivchuck wrote: Tue Jun 15, 2021 5:20 pm
When transferring bonds from estate to OP, estate needs to pay tax on the interest accrued up to transfer.
Can you please review this statement. I don’t believe it is correct. The estate can elect to report the interest but is not obligated to.
Gill
Good catch! Changed "needs" to "can elect"
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
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HueyLD
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Re: iBonds from parents estate

Post by HueyLD »

Per IRS Pub 559:

“ U.S. savings bonds acquired from dece- dent.

If series EE or series I U.S. savings bonds, owned by a cash method taxpayer who reported the interest each year, or by an accrual method taxpayer, are transferred because of death, the increase in value of the bonds (inter- est earned) in the year of death up to the date of death must be reported on the decedent's final return. The transferee (estate or beneficiary) re- ports on its return only the interest earned after the date of death.
….
If the bonds transferred because of death were owned by a cash method taxpayer who chose not to report the interest each year and had purchased the bonds entirely with personal funds, interest earned before death must be re- ported in one of the following ways.

1. The person (executor, administrator, etc.) who is required to file the decedent's final income tax return can elect to include all of the interest earned on the bonds before the decedent's death on the return. The transferee (estate or beneficiary) then in- cludes only the interest earned after the date of death on its return.

2. If the election in (1), above, wasn't made, the interest earned to the date of death is income in respect of the decedent and isn't included on the decedent's final re- turn. In this case, all of the interest earned before and after the decedent's death is income to the transferee (estate or benefi- ciary). A transferee who uses the cash method of accounting and who has chosen not to report the interest annually may defer reporting any of it as income un- til the bonds are either cashed or reach the date of maturity, whichever is earlier. In the year the interest is reported, the transferee may claim a deduction for any federal estate tax paid that arose because of the part of interest (if any) included in the decedent's estate.”
Gill
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Re: iBonds from parents estate

Post by Gill »

ivgrivchuck wrote: Tue Jun 15, 2021 6:11 pm
Gill wrote: Tue Jun 15, 2021 5:51 pm
ivgrivchuck wrote: Tue Jun 15, 2021 5:20 pm
When transferring bonds from estate to OP, estate needs to pay tax on the interest accrued up to transfer.
Can you please review this statement. I don’t believe it is correct. The estate can elect to report the interest but is not obligated to.
Gill
Good catch! Changed "needs" to "can elect"
Huge difference!
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
chemocean
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Re: iBonds from parents estate

Post by chemocean »

I am confused about what you are going to do with the bonds as far as probate process.
It seems that the 20 10K bonds are paper bonds with the two parents named as owners on the bonds. Therefore, there are no beneficiaries for the bonds, which mean that all the bonds are part of the estate.

From Treasury Direct "https://www.treasurydirect.gov/indiv/re ... .htm#court"
"If a court or state law is involved

Note: If an estate contains Treasury securities (including savings bonds) that total more than $100,000 in redemption value as of the date of death, the estate must be administered by a court.

If a court is involved, you might have one of these situations:

the estate is being settled under special provisions of state law
a court-appointed representative is in charge of distributing the estate
a court-appointed representative was in charge but has been discharged before the bonds are distributed

For details on handling bonds in these situations, see "Court-Appointed Representatives."


If you hold them until maturity, its seems that you are keeping the estate open until 2038, when the last bond matures.

I think there is a way to transfer ownership of the bonds through the estate, and have them retitled electronically to the beneficiaries named in the Will of the last living parent by filling out certain documents and sending the bonds to the Treasury using a manifest. Contact Treasury Direct.

The advantage of converting the bonds electronically is that the beneficiaries now become the sole owners and can retitle to add a co-owner or beneficiary.
Duckinator
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Re: iBonds from parents estate

Post by Duckinator »

I would keep the bonds too.

OP, it would be interesting to know how they had the bonds titled and what gyrations you have to go through to get them into your own TD account.

Dad was 93 when he misplaced a bunch of paper I and EE bonds - we had some high hoops to jump thru to get them replaced in electronic form, then was able to add mom as POD just a few months before he passed away. Made it relatively easy to move them into mom's name and then split the POD between her two children. (its not quite even but sis and I get along fine and will handle it). We did not elect to have dad's estate pay the taxes to that point as we already had our hands full with a myriad of account issues. We may elect to do that on mom's estate.
Topic Author
hammer64
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Joined: Tue Jun 15, 2021 9:07 am

Re: iBonds from parents estate

Post by hammer64 »

The bonds were titled in both my parents names. We called Treasury Direct to validate what we need to do (BTW... the people we spoke to at TD were very nice, intelligent, and professional). Here is what we are going to do:

Complete Form 1455 (https://treasurydirect.gov/forms/sav1455.pdf) titled "Request by Fiduciary for Distribution of
United States Treasury Securities". This form only has space for 4 securities to be listed, so we will use the continuation sheet (FS Form 3500 - https://www.treasurydirect.gov/forms/sav3500.pdf) to list all of them.

With this form, we have to include the following:
Death certificates for both parents since they are titled in their names
Letter of appointment as executor

One sibling and I were going to keep bonds, so each of us need to fill out FS Form 4000 "Request To Reissue United States Savings Bonds" https://www.treasurydirect.gov/forms/sav4000.pdf

Our other siblings were going to cash out the extra bonds - they are taking the majority of the cash in the estate from the sale of the home and did not want any of the bonds. They will each need to fill out FS Form 1522 (https://www.treasurydirect.gov/forms/sav1522.pdf) "Special Form of Request for Payment of United States Savings and Retirement Securities Where Use of a Detached Request Is Authorized" for the few bonds they were going to cash out

We are going to take the forms from all the siblings, the 1455 form, the letter of appointment, the death certificates, and all the paper bonds and mail them as a packet. Hopefully this is correct!

Also, we have to setup Treasury Direct accounts as they no longer issue paper bonds.
Duckinator
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Re: iBonds from parents estate

Post by Duckinator »

excellent summary. I also found the TD people to be as you stated.

We got by with a bank officer's stamp on one document (standard notary was not acceptable), but a medallion was required on another. Our situation was different though.

A cover letter explaining what you are wanting to do is helpful.
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