What to do with those old savings bonds

Posted: Thursday, February 22, 2001

DENVER (AP) -- Traditional U.S. savings bonds have fallen out of favor in recent years as investors have put their money into the stock market.

The market decline may or may not bring the bonds back into favor, but one thing is certain. Investors, particularly older investors, are sitting on top of nearly $6 billion of savings bonds that are no longer earning interest for their owners.

''Savings bonds cease paying interest at maturity,'' says Gregg Parish, an academic associate at the College for Financial Planning. ''People tuck them away in safe-deposit boxes or desk drawers and forget about them. For example, a wife may not know that her now-deceased husband bought EE savings bonds 45 years ago. Some people have been holding bonds for 30 or 40 years. They'll get their principal back, and accumulated interest in the case of some types of bonds, but the bonds are no longer making any money.''

Parish explains that traditional savings bonds come in two main flavors: the H and HH series and the E and EE series. The federal government has discontinued the H and E bonds, and recently started an I series, which are savings bonds that adjust for inflation. HH bonds, and the discontinued H bonds, pay interest semi-annually, and owners report the interest as income for the year they receive it. E and EE bonds are bought at a discount and kick off no current interest. For example, you might buy an EE bond for $25 and redeem it at maturity for $50. Owners don't pay income tax on the earnings until they redeem the bond.

''Because H and HH bonds pay current income, owners usually are aware that the bonds have matured because the owner stops receiving interest payments,'' says Parish. ''On the other hand, people are more likely to forget about E and EE bonds because there are no payments to stop. Nothing seems amiss. The government doesn't issue notices at maturity.''

The first thing to do, says Parish, is to dig out those old bonds. Any bond that is at least 40 years old has matured, and those 20 or 30 years old also may have matured. One way to check on their exact status, and their current worth, is by going to the Web site www.publicdebt.treas.gov/sav/sav.htm and download a program called Savings Bond Wizard. By keying in the serial number and date of issue, they can see the bond's current value, interest earned, maturity date and so on.

Assuming the bond has matured, or will mature soon, what do you do with it? That depends on your overall financial situation and your needs, says Parish. For example, one option is to exchange E or EE bonds for new HH bonds. That postpones recognizing the interest earned from the E or EE bonds. Of course, the HH bonds will pay out current taxable income, but at a more measured rate.

Bondholders who own a substantial amount of bonds may want to stretch out their redemptions over more than one year to avoid being bumped up into a higher income-tax bracket.

Bondholders who face potential estate taxes may want to think about moving the bonds out of their estate. Transferring bonds is complicated in part because of how bonds are registered, or titled, which is equal to ownership, says Parish.

There are three basic ways to register a bond. One is in a sole name. You also can do a sole name with a named beneficiary. A third way is to register in two names, such as ''Bert Jones or Mary Smith.'' This is similar but not exactly equivalent to joint tenancy with rights of survivorship. With either form of sole-name registration, the bonds are included in the owner's estate. It gets more complicated with dual ownership.

Say you want to remove the bonds from your estate by giving them to a grandchild. If you own the bond in your name and give the bond to the grandchild, be sure to have the bond reregistered in the grandchild's name. Otherwise, the bond will be included in your estate. This transfer and reregistration will be deemed an immediate gift, but unless you gift more than $10,000 to a single person in one year ($20,000 if jointly giving with a spouse), there's no gift tax.

Parish says if you add the grandchild's name to the bond along with yours and reregister it in both names, there is no gift tax until the grandchild redeems the bond. But if you die before the grandchild redeems the bond, 100 percent of the bond will be included in your estate. For bonds registered in both your name and another person's name, such as your spouse, you could replace one of the names with the grandchild's name, with the same gift and estate tax consequences.

''However, since reregistration can trigger recognition of income, you should consult an expert before taking any action,'' Parish says.

End advance for Thursday, Feb. 22

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