HIDDEN GOLD GIFT PLANNING WITH

SAVINGS BONDS By Marc Carmichael

Winkelman, Arizona, had suffered its second "100-year flood" in

just five years, and an elderly couple, both retired schoolteachers,

were chatting with John Ferree, President of Scottsdale Memorial

Health Foundation, about the flood-and a possible planned gift.

"You know, we have some old savings bonds in a tin box out

there in the shed," the husband remarked. "They might make a

good gift to the hospital. I think there may be a dozen or so,

maybe $100 denominations. Let's take a look."

The three of them made their way to the mud-soaked shed and

retrieved a stack of still-damp savings bonds from a small lock

box. They carefully peeled off not 12 but 53 Series E savings

bonds, discolored from the floods but still legible. And the

denominations were all $1,000, not $ 1 0 0 . . . worth nearly

$150,000 all told. Many of the bonds dated back to 1953.

The Winkelman couple have now both passed away, bequeathing

all of their estate to charity; along with a memorable story about

U.S. savings bonds and the role they can play in philanthropy.

THE UBIQUITOUS SAVINGS BOND

Treasury figures indicate that more than 55 million Americans

own U.S. savings bonds. The Treasury estimates that approxi-

mately one-third of all American families own at least one savings

bond, and the total value of bonds being held currently exceeds

$198 billion. Older individuals always seem to have some, tucked

away in a bureau drawer or safe deposit box. More than 58

million bonds were sold in a recent year, and the dollar amounts

accumulated by some savers can be astonishing.

A faculty member at the 1998 Ohio CLE Institute observed

during dinner that the father of one of his clients died owning at

least $1 million in savings bonds. The next week he sent the

following update:

"Since you were interested in the topic of savings bonds in estates,

I did some factual research. The living trust of which my client is

a beneficiary owned Series E and Series HH U.S. savings bonds

valued at time of death at $3,047,366."

The author now regularly poses the question at meetings of estate

planners: "Has anyone ever worked with a client whose estate

contained large numbers of U.S. savings bonds?" Invariably

advisers report clients who own bonds totaling in the six figures.

The numbers of bond owners and the value of the bonds they

hold have made U.S. savings bonds the nation's most widely held

appreciated security.

BOND BASICS

Three general types of bonds are currently sold by the Savings

Bond Division of the Department of Treasury: Series EE, Series I

and Series HH bonds. 1 Bonds traditionally have been purchased

through financial institutions and employer-sponsored payroll

savings plans and redeemed through financial institutions. The

Treasury is currently in the process of expanding the purchase and

redemption of savings bonds into the Internet world through a

program called TreasuryDirect, which allows buyers the

convenience of a book-entry (electronic) bond account linked to a

designated savings or checking account for ease of purchase and

redemption.

Series EE savings bonds are bought at a discount (a $100 bond

costs $50 initially) and they are guaranteed to double in value

upon reaching "original maturity"-20 years after the issue date. If

insufficient interest has accumulated, the Treasury will make up

the difference, in effect guaranteeing a minimum interest rate of

3.6 percent for bonds held 20 years. EE bonds are always free of

state and local income taxes and the interest (2.66 percent

through October 2003) accumulates free of federal income tax, as

well, for cash-basis taxpayers who do not elect to report their

bond interest annually as it accrues. Interest is credited monthly

and is compounded semiannually. The bonds continue to earn

interest until "find maturity"-30 years from the date of issue.

, / aea~ O" THE JOURNAL OF GIFT PLANNING

Taxation generally occurs only when the bonds are cashed,

reissued to another person or reach final maturity. But owners

have the option to report interest as it accrues annually. 2 Owners

also have the option of exchanging EE bonds for HH bonds at

final maturity and deferring reporting the accrued interest for up

to 20 more years. Series E bonds, the predecessor to EEs, were

issued until 1980 and are widely held, although many have

stopped earning interest.

Series I bonds are the newest variety and are purchased at face

value (a $1,000 bond costs $1,000), earning interest at a rate that

is indexed for inflation (4.66 percent through October 2003).

Interest is credited monthly and compounded semiannually, but

tax is generally deferred until redemption, in the same manner as

Series EE bonds. Series I bonds earn interest until they reach final

maturity at 30 years from the issue date. They cannot be

exchanged for HH bonds.

Series HH bonds are current income securities that pay interest

semiannually by direct deposit for a maximum of 20 years

(current interest rate of 1.5 percent). Sale of Series HH bonds is

scheduled to be discontinued in mid-2004. Series H bonds were

issued prior to 1980 and generally had 30-year maturities.

Interest on "college education" savings bonds can be tax free if

certain requirements are met.

Extensive consumer information about savings bonds is available

at www.savingsbonds.gov (including a link to a kids' website on

bonds!), and legal aspects of bonds are discussed in a publication

of the Bureau of Public Debt, Legal Aspects of United States Savings Bonds, found at ftp://ftp.publicdebt.treas.gov/savlegal.pdf.

Bonds may be subject to heavy federal income taxes and state

and federal "death taxes" in a person's estate. For example, heirs

who receive $100,000 in savings bonds from a decedent's estate

will one day have to pay income tax on as much as $50,000 or

more of built-up interest. Furthermore, the full $100,000 could

be subject to federal estate tax, leaving only a fraction of the

bonds' value.

SAVINGS BONDS IN LIFETIME GIVING

Bonds are often "hidden assets for giving" that people have

simply forgotten about and likely would not miss if they gave

them to charity. Owners are often surprised to discover that

some of their savings bonds have stopped earning interest, and

they may be interested in bringing new life to those bonds as

planned gifts.

Many donors would prefer to make gifts of bonds, whether they

have stopped earning interest or not. But Treasury regulations

rigidly restrict the lifetime reissue of bonds, limiting transfer to

family members and "personal estate trusts," such as revocable

living trusts)

A curious 1980 private letter ruling (the only known ruling on

lifetime transfers of savings bonds) involved a donor who

proposed to convert Series E bonds to Series H bonds, which

would be then be issued in the name of a charitable organization.

The donor had never elected to treat the annual increment in

value (interest) as income under I.R.C. ~454. Normally, a

"rollover" of E/EE bonds into H/HH bonds continues deferral of

interest on the bonds until maturity. But if reissue of bonds in the

name of another is also involved, "taxes happen." Citing Rev. Rul.

55-278 (1955-1 C.B. 41), the IRS ruled that the donor would

have to report all the buildup of interest in the E bonds when

they were exchanged for H bonds issued in the name of charity.

On the bright side, the IRS ruled that the amount of the contri-

bution would be the fair market value of the Series H bonds on

the date of the contribution. 4

It is doubtful that the Treasury would ever have reissued E/EE

bonds as H/HH bonds in the name of charity, based on the

regulation cited above. However, donors can contribute the cash

proceeds from matured bonds and reduce their taxes, too-if they

"itemize" their tax deductions. The tax results of cashing and con-

tributing bonds would be exactly the same as the result in the

1980 ruling. Donors would report income but receive contribu-

tion deductions that, theoretically, would reduce the donor's taxes,

or at least keep the gift from increasing the donor's tax. The

danger is that donors who give bond proceeds and customarily

use the standard deduction will report interest income but be

unable to use the charitable deduction. Consider the 2003

standard deductions:

5uppose a widow age 65 cashes an EE bond worth $1,000 for

which she paid $500, and contributes the proceeds to charity. She

would report $500 in interest but be entitled to a $1,000 contri-

bution deduction. The deduction would doher no good,

however, if her total itemized deductions added up to only

$4,000. Her taxes actually go up as a result of a charitable gift,

which is not the way planned giving is supposed to work. Such a

THE J O U R N A L OF GIFT P L A N N I N G ~ 0 "~

donor should hold back some bond proceeds

sufficient to pay the taxes, perhaps $125 in a

25 percent tax bracket, and give charity the

difference ($875). Of course, a donor who

gives bonds worth $50,000 will thereby have

itemized deductions well above the threshold

for itemizing. But gift planners must also

weigh the effect of the contribution deduction

ceilings (50 percent of adjusted gross income

for gifts of cash) and the deduction cutbacks

for high-income taxpayers to determine

whether the donor will be harmed.

Donors who plan to cash and contribute

savings bonds need planning assistance,

especially if they plan to keep some bonds but

give others. They should retain bonds that are

paying the highest rates of interest and cash

those with low yields. Donors also need to

make certain that they redeem bonds at the

proper time. In many cases, bond interest is

credited at six-month intervals (interest is

credited monthly for bonds purchased after

May 1, 1997, and for certain other issues.)

Cashing a bond just before interest is credited

could cost the donor and charity up to six

months' interest. Series I bonds and EE bonds

cashed before five years will result in a three-

month interest penalty.

Figuring the interest rates on particular bonds and determining

the best time to redeem bonds can be daunting and beyond the

ken of most people (including many bank personnel who work

with bonds). One source of help is the website mentioned

earlier (www.savingsbonds.gov), which provides bond earnings

reports, calculations of current redemption value, an online

savings bond redemption calculator and a program called

"Savings Bond Wizard."

Another resource is the acknowledged guru of U.S. savings bonds,

Daniel J. Pederson, author of Savings Boneh: When to Hold, When

to Fold and Everything in Between, an overview of the do's and

don'ts of savings bonds, from tiffing to the merits of I-Bonds

versus EEs. He has also written U.S. Savings Bonds: The Definitive

Guide for FinancialProfessionals. Pederson's book has a discussion

on tracking the value of bonds. His company (The Savings Bond

Informer, Inc.) also provides written reports for bondholders and

their advisers, including specific values, interest rates, timing issues,

maturity dates and extended maturity dates for each bond a person owns.5

Once donors know which bonds to cash and when to cash them,

they can be redeemed at an authorized financial institution

(40,000 paying agents are approved by the Treasury Department)

upon furnishing proper identification. Unlimited amounts of E,

EE or I bonds can be redeemed at an institution where the owner

has had an account for more than six months or is well known to

staff. HH bonds must be sent to a Federal Reserve Bank for

redemption, with assistance from the owner's financial institution.

Bonds purchased after January 2003 cannot be redeemed until 12

months after issue. Donors can authorize charities to be attorneys-

in-fact to redeem bonds on their behalf, so long as the power of

attorney complies with state law. 6

Another redemption option, employed by one organization when

bonds are used to fund gift annuities, is the use of Form PD F

1522E, "Special Form of Request for Payment of U.S. Savings

Continued on page 26

)7 THE JOURNAL OF GIFT PLANNING

Carmichael, continued from page 7

and Retirement Securities Where Use of a Detached Request Is

Authorized." The form can be downloaded at

www.publicdebt.treas.gov/bpd/bpdforms.htm and enables the

donor to send bonds to the charity by Registered Mail. The

donor lists the bonds to be redeemed on the form and sends it

separately to the organization, listing the bond owner as payee.

The form must have been signed and certified by an officer of the

donor's financial institution. Under Treasury regulations, the

organization would need a limited power of attorney to complete

the redemption process.

CONVERTING BONDS TO "LIFE INCOME" GIFTS

One way to offset tax liability when owners cash savings bonds is

to create a gift annuity or other "life income" gift arrangement that

will provide future support for an organization, lifetime income to

the donor or another person, and a charitable deduction that may

eliminate all taxes caused from cashing the bonds. Pooled income

funds and charitable remainder trusts-and especially charitable gift

annuities-can offer significant benefits, including larger payments

than the interest available from HH bonds.

A man we'll call Herbert calls and tells us the following: "I

recently ran across a packet of U.S. savings bonds that I had been

accumulating since World War II. It was quite a stack, too-war

bonds, Series E and EE bonds. Some were so old I think they had

stopped earning interest. I showed the bonds to my sister, Helen,

and we agreed that something should be done with them. I

checked with the bank and here's the situation: The bonds are

worth $25,000, and if I cash them in I will be taxed on about

$14,000 of interest. Is there some way I can give these bonds to

charity, avoid any tax, get a deduction and obtain income, too?"

We get back to Herbert with the following answers: U.S. savings

bonds can be transferred during life only to family members, not

to a qualified charity. So to use them in a gift arrangement,

Herbert would have to cash the bonds and give charity the

proceeds. That means he would have to report all the built-up

interest on his next tax return. However

We can't prevent Herbert from having to report the interest for

tax purposes. But we can cover the taxes if he transfers the

$25,000 cash proceeds in exchange for a charitable gift annuity.

Herbert is 75, and if he receives a 7.1 percent annuity ($1,775 a

year), he will be entitled to a charitable deduction of about

$9,759 (4 percent A.ER.)-which offsets a substantial part of the

$14,000 of built-up interest. The $14,000 interest is not subject

to state and local tax. His first $1,775 in annual payments will

provide the cash flow to pay any remaining tax. The charitable

deduction means that Herbert actually has more money left

from the bonds to produce income than if he had cashed them

and reinvested the proceeds. True, he could exchange some

Series EE bonds for Series H H bonds and receive (a princely)

1.5 percent semiannual payment from the Treasury. But no

charitable gift occurs, and Herbert (or his heirs) eventually

would be taxed on the buildup of interest on the H H bonds.

And his 7.1 percent annuity payments will be about two-thirds

tax free during his life expectancy.

If the charitable deduction is insufficient to cover the donor's tax

liability; the donor might consider accepting a lower gift annuity

payout. If Herbert takes a 5 percent annual payout, his charitable

deduction increases to $14,579. Alternatively, donors might defer

the first payment for a few years (which increases their

deductions) or hold back part of the proceeds to pay any tax.

Pooled funds offer many of the same advantages as charitable

gift annuities for donors who wish to cash bonds, give the

proceeds and retain lifetime income. Gifts can be large or small

(most organizations have gift minimums as low as $5,000), and

charitable deductions may be larger than those for gift annuities,

in the current low-interest-rate environment. Pooled income

funds cannot offer payments that are partially tax free, but

payouts from some funds indude dividend income, which is

currently taxed at a maximum 15 percent rate.7

Annuity trusts and unitrusts offer flexibility to donors who own

savings bonds in substantial quantities. Donors can select

payouts and trust terms that leverage the charitable deduction so

as to offset the interest reported from cashing bonds.

SAVINGS BONDS: THE BEST BEQUEST?

Retirement accounts receive most of the attention when gift

planners discuss charitable bequests of "IRD" (income in respect

of a decedent). But retirement accounts are not the only source

of IRD. Many older Americans own significant amounts of

Series E, EE, H, H H and I savings bonds, which are IRD assets

that should be used for charitable bequests.

Where possible, donors should bequeath to charity property that

would cause tax problems for other beneficiaries. This generally

means IRD: items of income earned by a decedent before death

but paid to his or her estate or heirs after death. Unlike capital

gain property, IRD assets receive no step-up in basis to fair

market value at death. IRD income is indudable both in the

taxpayer's gross estate 8 and in the estate's income.9 Heirs who

inherit IRD assets generally will owe income tax when they

receive IRD income. 1° Congress has provided an IRD income

tax deduction to alleviate the "double tax" presented by having

IRD subject to both federal estate tax and income tax. 11 The

deduction equals the amount of estate tax attributable to the

IRD received by the heir and is an itemized deduction that is

not subject to the 2 percent floor on miscellaneous deductions. 12

Charities usually do not pay income taxes and therefore keep

every dollar of such tax-burdened bequests. Furthermore, a

bequest of lRD can create both an estate tax charitable

deduction and income tax savings for the estate. 13 It's

important, from a tax standpoint, for a donor's will or trust to

make specific bequests of items of IRD to charity, or pass IRD

assets to charity as a residuary bequest or under other bequest

language that ensures favorable tax treatment. With retirement

accounts, a donor can change the death beneficiary to a

qualified charity; beneficiary designations also are possible with

revocable living trusts that contain IRD. Satisfying pecuniary

bequests to charity out of IRD assets will generate an estate tax

charitable deduction but the estate will have to include the IRD

in its income. 14

257 THE JOURNAL OF GIFT PLANNING

S a v i n g s b o n d s

t h a t a r e

s p e c i f i c a l l y

b e q u e a t h e d t o a

t a x - e x e m p t

o r g a n i z a t i o n (or

d i s t r i b u t e d f r o m a

r e v o c a b l e l i v i n g

t rus t ) wi l l a v o i d

i n c o m e t a x e s

a n d a l s o q u a l i f y

f o r a n e s t a t e t a x

c h a r i t a b l e

d e d u c t i o n .

BEQUESTS OF SAVINGS BONDS BY

W I L L O R L I V I N G TRUST

Bonds may be transferred to charity at death in

only two ways: under the terms of the donor's

will or as a distribution from a revocable living

trust. Why can't charity be listed as a co-owner

or death beneficiai'y on the bond itself?.

"The issue or reissue of a bond in the name of

an organization (charitable and others) as a co-

owner or beneficiary is not permitted; such

forms of registration are limited to natural

persons. Reissue of a bond in the name of an

organization to designate another organization

as owner is not permitted, but a bond that an

organization receives as a distributee of a

decedent's estate may be reissued in its name."

(Legal Aspects of U.S. Savings Bonds) 15

Treasury regulations do permit one particular

"charity" to be named co-owner or beneficiary:

The U.S. Treasury; 16 and gifts do occur. Last

year Americans donated $744,675 to be used

to reduce the public debt, which was down

from the $1,645,082 given in 2001 (apparently

even the government has trouble fund raising

during a bad economy). However, patriotic

donors are not permitted to change their

minds: "Restrictions on reissue. . . (b) United

States Treasury. Reissue may not be made to

eliminate the United States Treasury as co-

owner or beneficiary. ''17

Series E, EE, H, H H and I bonds may be

issued or reissued in the name of a trustee of a

revocable trust, if the donor is the lifetime

(income) beneficiary and is considered the

owner of the trust under the grantor trust rules.

For example, an H H bond could be registered

to: "ABC Church, trustee under agreement

with Mary Jones, dated 12/1/95, 12-3456789."

Mary's tax situation would be the same as if the

trust never existed. But her house of worship or

other charity could be the remainder

beneficiary of the trust and thus receive the

bonds at her death.

Bonds can be left to charity in a will or through

a revocable living trust only if the bonds do not

have a surviving co-owner or death beneficiary.

Savings bonds registered in either co-ownership

or beneficiary form become the sole property of

the survivor, irrespective of the terms of any

will. Gift planners must work with donors to

have bonds reissued without inclusion of any

death beneficiary or co-owner. Donors can be

assured that removing death beneficiaries or co-

owners who did not furnish funds for the

bonds' purchase will not be a taxable event.

Savings bonds that are specifically bequeathed

to a tax-exempt organization (or distributed

from a revocable living trust) will avoid income

taxes and also qualify for an estate tax

charitable deduction. Several bequest options

should work:

1. "I bequeath the following U.S. savings bonds

to XYZ Charity" (followed by bond descrip-

tions, including denominations and serial

numbers).

2. The will or trust states that 'TKLL my U.S.

savings bonds are to pass to charity."

3. The bonds are part of the residue of the

estate and pass to charity as sole residuary

beneficiary.

4. The bonds pass under a general instruction

that charitable bequests will be satisfied with

assets deemed to be income in respect of a

decedent. Christopher R. Hoyt, Professor of

Law at the University of Missouri (Kansas

City), has suggested the following phrase:

"I instruct that all of my charitable bequests

and gifts shall be made, to the extent possible,

from property that constitutes 'income in

respect of a decedent'as that term is defined in

The Internal Revenue Code. ''18

Where a decedent directed that a specific dollar

amount pass from her revocable living trust to

charity and the trustees proposed to satisfy the

bequest by distributing Series E and Series H

bonds with unreported increments in value,

the IRS ruled that the distribution of the

savings bonds would be considered a distribu-

tion of cash to charity and a purchase of

bonds, with the increase in value included in

the gross income of the trust. 19 In another

ruling, the IRS said the trust must recognize

THE JOURNAL OF GIFT PLANNING ~ 2 0 °

the unreported increment as IRD to the extent the bonds

are used to satisfy a specific dollar bequest if the bonds are

not directed to be paid to charity.20 But where the entire

residuary estate passed to four named charities in varying

amounts and savings bonds with unreported interest were

included in the residue, the estate was not taxed on the

IRD when the executor transferred the bonds to one of

the charities. Both the will and state law allowed the

executor to make non-pro rata distributions of capital

assets, so the transfer was not a disposition by the estate

followed by an exchange between beneficiaries. 21

The IRS confirmed the tax wisdom of leaving U.S. savings

bonds to charity in a private ruling where the donor left

the residue of his estate to five charities. Included in the

residue were Series E and HH savings bonds with large

amounts of unreported interest. The executor wished to

distribute thebonds directly to the charities and asked the

IRS about the tax consequences. The Service replied that

transfer of the bonds to charity would not result in IRD.

The interest would be included in the gross income of the

charities in the year they dispose of the bonds, but of

course the charities are exempt from tax. 22

Private foundations are subject to a two percent excise

tax on net investment income. 23 In Rev. Rul. 80-118

the IRS ruled that where a decedent's estate distributed

Series E U.S. savings bonds to a private foundation,

the increase in value of the bonds was gross investment

income to the foundation when the bonds were

redeemed.

BEQUESTS OF BONDS TO CHARITABLE

R E M A I N D E R TRUSTS

Occasionally one hears of a gift situation that compels

the listener to declare: "This is what planned giving is all

about!" Here are the facts: A 77-year-old woman, who

has always lived frugally, amassed the startling sum of

just over $620,000 in U.S. savings bonds (Series E and

EE). Her estate, including the bonds, totals approxi-

mately $1,300,000. She's unmarried, but has several

brothers and sisters she wants to benefit, as well as a

Catholic college and her parish.

The gift planning officer didn't know the exact amount

of unreported interest tied up in the savings bonds, but

it undoubtedly exceeded $300,000. The bonds will be

treated as IRD in the woman's estate or in the hands of

family members who receive the bonds-meaning they

will be subject to income tax on all accumulated interest.

2~0 THE JOURNAL OF GIFT PLANNING

Part of the bonds' value also would be subject to federal estate

tax, since her total estate exceeds the $1,000,000 currently

sheltered by the unified estate tax credit.

Solution? The gift planner suggested the donor establish a

unitrust in her will and specify that the trust will be funded with

the savings bonds. The trust would last for 20 years and make

payments to her brothers and sisters (or to the chil&en of any

brother or sister who died prior to termination of the trust).

While there are no cases or rulings invoMng transfer of savings

bonds to unitrusts, such a plan should eliminate income taxes

on the savings bonds when they are redeemed by the trustee of

the unitrust, which is tax exempt. The interest on the bonds

likely will be passed through to the trust beneficiaries as part of

their annual unitrust payments, under the four-tier system, and

taxed as ordinary income. But there would be no depletion of

the trust corpus from tax. Furthermore, the donor's estate is

entitled to an estate tax charitable deduction. If the trust has a

six percent payout, roughly 30 percent of the bonds' value will

be a deductible bequest ($180,000). That deduction, plus

reasonable estate settlement costs, will reduce her taxable estate

below the $1,000,000 tax-sheltered level.

Note: If the donor's estate is subject to federal estate taxes, bene-

ficiaries apparently will not be able to take advantage of a tax

break usually available to recipients of lRD assets. The IRS has

ruled unfavorably in a case involving retirement accounts where

the account passes at death to a charitable remainder trust. Heirs

normally receive an income tax deduction for estate taxes that

were owed on an IRA or other retirement account. 24 Now, says

the IRS, if the IRA passes to a CRT, the deduction will belong

to the trust, not passed through to the income beneficiaries. The

result is to convert part of the trust's income (IRD) to tax-free

corpus, which the income beneficiaries may be unlikely ever to

access, under the "worst-in, first-out" four-tier system of CRT

taxation. 25 The same reasoning would also seem to apply to

savings bonds bequeathed to a CRT.

TESTAMENTARY POOLED INCOME FUNDS AND

GIFT ANNUITIES

It is questionable whether testamentary transfers of savings

bonds to pooled income funds would result in the same IRD

tax avoidance as is available with charitable remainder trusts.

Pooled income funds are not tax-exempt trusts and redemption

of savings bonds by a fund would produce taxable income.

Bequests of bonds to charities in exchange for gift annuities also

raise sticky questions, although there is a favorable private letter

ruling on leaving an IRA to charity for a testamentary gift

annuity. 26 In the IRA-to-gift-annuity ruling, the IRS said that

the donor's estate would receive an estate tax charitable

deduction for the value of the IRA, less the value of the

beneficiary's annuity. The charity would not have unrelated

business taxable income and the IRA would not be taxable

income (IRD) to the estate if charity had been named IRA

death beneficiary. The IRS &dined to rule on how the annuity

payments would be taxed. If the IRS applies its IRA reasoning

to bequests of savings bonds for gift annuities, the tax and

financial results should be attractive. But private letter rulings

do not represent binding precedent. Seemingly, the taxation of

payments from testamentary gift annuities funded with savings

bonds should be favorable, since bonds, unlike most IRAs,

always have a cost basis. A reasonable approach would be to

pro-rate any unreported interest (IRD) between the charitable

bequest portion of this transaction and the present value of the

annuity provided to the decedent's beneficiary. Thus, part of the

IRD would escape tax and the rest would be reported by the

beneficiary; ideally over his or her life expectancy. Under this

theory, the beneficiary might have some tax-flee return of

principal during his or her life expectancy. An IRD deduction

against income taxes should be available to the beneficiary if the

IRD reported from the bonds gave rise to federal estate tax.

PROCEDURE W H E N CHARITIES RECEIVE

BEQUEATHED BONDS

Paying agents are authorized to pay bonds upon the request of

legal representatives of decedents' estates. Charities that receive

bonds from an estate may request payment or reissue in the

charity's name upon showing a certified copy of the executors

court-approved final report, the decree of distribution or other

pertinent court records. The charity's representative must furnish

proof that he or she is an authorized agent of the organization. 27

MARKETING IDEAS

What should charities be saying to donors about savings bonds?

Here are some ideas:

Curses! Savings bonds are "tax-cursed" assets that should be

left to our organization through your will or living trust. Bonds

that pass to family members will be subject to "death taxes"

based on the date of death value and to income taxes on the

buildup of interest. Our organization, however, can put every

dollar to use in our programs, free of all taxes.

Sharing Bequests. If surviving family members will need

savings bonds for their financial security, donors should

consider leaving the bonds to a trust that will provide them

THE J O U R N A L OF GIFT P L A N N I N G ~ o°C "

income for life or a term of years, avoid immediate income

taxes and reduce death taxes, as well. When the trust ends,

everything passes to our organization.

What Unde Sam Won't Tell You. Some of your bonds (an

estimated $8 billion nationwide) may have become "dead

investments" because they have reached final maturity (30 or

40 years old). These bonds should be cashed and the proceeds

reinvested. An "investment" in our organization could be most

satisfying, indeed-providing deductions that potentially offset

all taxes from cashing the bonds. You should cash in bonds

that no longer earn interest and reinvest the proceeds. Taxes

generally will be due, but you might consider using the

proceeds to fund a gift annuity with our organization. We may

be able to plan your life income gift so that the charitable

deduction erases your tax liability from cashing the bonds.

Furthermore, you'll receive guaranteed payments for life that

are partly tax free during your life expectancy.

C O N C L U S I O N

U.S. savings bonds are an excellent, if not quite perfect, asset

for lifetime charitable giving. At death they are, next to IRAs

and other retirement accounts, the hands-down best choice for

tax-wise charitable bequests. Planning challenges may arise

where bonds already have co-owner or beneficiary designations,

which must be deleted if the bonds are to be left to charity by

will or living trust. Unfortunately, organizations (other than

the U.S. Treasury) cannot be designated as death beneficiaries.

Lifetime gifts of bonds are inhibited by Treasury policy

restricting bond transfers to close relatives, which requires

donors to cash bonds and give the proceeds-and report all

accrued interest.

Despite any disadvantages, savings bonds may be the best (or

only) gift asset available to clients and prospects. Bonds are

highly disposable for some donors, who may have forgotten

that they own them! Donors who itemize deductions generally

avoid income tax when they cash bonds for gift purposes.

Finally, life income gifts offer the opportunity to "unlock"

savings bonds for additional income.

The time to encourage gifts via savings bonds is now. Bonds

are commonplace among the "World War II generation,"

which started out buying war bonds and continued purchasing

bonds in the 1940s, '50s and '60s through payroll deductions

and'individual purchases. Most of these bonds have stopped

earning interest, and owners should be encouraged to redeem

them and "do something" with the proceeds. For many older

persons, charitable giving may be a satisfying "something" that

also gets rid of any taxes. But the window of opportunity for

contacting this important group-perhaps 10 years or less-is

rapidly dosing.

Endnotes 1 The Savings Boneh Manual, www.savingsbonds.gov/mar/marsbomtoc.htm. 2 Internal Revenue Code ~454. 3 31 Code of Federal Regulations 315.4. 4 Private Letter Ruling 8010082. 5 The Savings Bond Informer, Inc., P.O. Box 9249, Detroit, MI 48209, (800)927-1901. 6 See LegalAspects of United States Savings BonA, found at ftp://ftp.publicdebt.treas.gov/savlegal.pdf, page 17. 7 Effective January 1, 2003, through December 31, 2008. 8 I.R.C. %2001,2031. 9 I.R.C. 8691. 10 I.R.C. ~691(a)(1). 11 I.R.C. ~691(c)(1). 12 I.R.C. 8691 (c)(2). 13 I .R .C , ~691 (c)(1). 14 See Treas. Reg. ~l.691(a)-4(a). 15 See 31 CFR ~315. 16 31 CFR 315.7(g). 17 31 CFR 315.48. 18 Author, "Cutting Edge Legal Developments: Charitable Transfers of Retirement Plan and IRA Assets," Proceedings of the 12th National Conference on Planned Giving. Indianapolis: National Committee on Planned Giving, 1999. Vol. 1, page 312. 19 PLR 9315016. 20 PLR 9507008. See, generally, Treas. Reg. ~ 1.69 l(a)-4(a). 21 PLR 9537011. 22 PLR 9845026. 23 I.R.C. ~4940(a). 24 I.R.C. ~691(c) (1) (A). 25 PLR 9901023. 26 PLR 200230018. 27 Legal Aspects of United States Savings Bon& page 8.

Marc Carmichael is president of R&R Newkirk Company, which provides planned gift training and promotional literature for hundreds of organiza- tions. R&R Newkirk also publishes Charitable Giving Tax Service, a four-volume reference library on planned giving and charitable estate planning. Mr. Carmichael was the 1998 president of the National Committee on Planned Giving and has served on the board of directors of the Chicago Planned Giving Council He was chair of the 1996 National Conference on Planned Giving in Chicago and served for four years as chair of the NCPG Editorial Advisory Committee, which oversees publication of The Journal of Gift Planning. Mr. Carmichael is a graduate of the Indiana University School of Law and is a member of the Indiana State Bar Association.

o~ / THE IOURNAL OF GIFT PLANNING