Bond Fund Transfer from Family Estate

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
FogCity
Posts: 3
Joined: Fri Aug 18, 2017 1:34 pm
Location: SF Bay Area

Bond Fund Transfer from Family Estate

Post by FogCity » Tue Oct 03, 2017 5:21 pm

I am looking for advice and perspectives from Bogleheads regarding the feasibility and prudence of transferring three bond funds that are currently held by my late mother's estate. Based on what I have read from Jack Bogle and others, with regards to tax liability, it is not recommended to hold corporate bond funds in a taxable account. So here is my situation... the executor of our family estate, my sister, has offered to transfer some or all of these bond funds to me. Alternatively, she can have her husband (my late mother's broker) sell the funds, and distribute the proceeds to the estate holders. My first inclination was to agree to the sale of the bonds, and receive my share of the earnings through an estate distribution. However, my interest was piqued after I saw that the bond coupons are at 5.375%, 7.25%, and 7.5%. Other than my desire to make money off these bonds, I would like to know if the tax liability, the prerequisite paperwork, and any other downfalls should preclude me from "adopting" these funds ( or some of the shares) from our family estate?

Here's the statement from May of this year:

30,000 CNA Financial Corp.
Debentures
Non Call Life
Coupon 7.25% Due 11/15/23
DTD 11/15/93 FC 05/15/94 Marginable

15,000 Union Carbide Corp.
Debentures
Coupon 7.5% Due 6/01/25
DTD 6/1/95 FC 12/01/95 Marginable

7,000 Wells Fargo & Co.
Notes
Coupon 5.375% Due 2/07/35
DTD 2/07/05 FC 8/07/05

My details:
51 yo, work full time, Plan to retire in 10-12 years, California resident. State tax rate 9.3%. Federal tax bracket 28%
Max out my IRA, 401K (TSP), and catch up contributions every year
Max out backdoor Roth every year.
So I can't see how I could put these bonds in a non-taxable account.

Any helpful advice, warnings, etc... are appreciated. Thanks in advance for your assistance.

User avatar
grabiner
Advisory Board
Posts: 20677
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Bond Fund Transfer from Family Estate

Post by grabiner » Tue Oct 03, 2017 8:28 pm

Welcome to the forum!

Since you have a good relationship with a broker, it makes sense to sell the bonds; the broker should help you get a good price

If bonds like these are appropriate for you, then you can buy bond funds (preferably in your IRA) which hold these and other similar bonds. This will give you a more diversified portfolio.

In addition, the coupon is the wrong number to consider. Those 7.5% bonds were issued in 1995, when rates were much higher; in addition, they were long-term bonds then, and are now mostly intermediate-term bonds, with less interest-rate risk and thus lower yields than long-term bonds from the same corporations. They are now worth much more than their par value, and will not return 7.5% if held to maturity. A fund holding similar bonds is Vanguard Intermediate-Term Corporate Bond Index (ETF share class VCIT), with a 3.11% yield, and an average maturity of 7.5 years; I get an average of 8 years for your three bonds. (And that isn't a bad bond fund, although I would normally prefer Vanguard Total Bond Market Index in an IRA, with a lower yield but less risk because most of the bonds are guaranteed by the US Government.)

Finally, since these bonds were inherited, the basis is the price on the date of death, not the purchase price, so you won't owe capital-gains tax on the increase in the bond price from before they were inherited.

(edited to correct ticker)
Last edited by grabiner on Wed Oct 04, 2017 8:43 pm, edited 1 time in total.
David Grabiner

not4me
Posts: 148
Joined: Thu May 25, 2017 3:08 pm

Re: Bond Fund Transfer from Family Estate

Post by not4me » Wed Oct 04, 2017 10:28 am

I would suggest that if you decide to sell the bonds that you should consider the timing of that (depending upon how much latitude the executor has). Grabiner pointed out that the cost basis is the price as of date of death, but I didn't know when that was. It might have been May since that was the date for your info. It may not be significant, but undoubtedly there is either a capital gain or loss. I believe if the bonds are transferred to you AND THEN you sell, your personal income taxes will have a long term cap gain/loss. If the bonds are sold and then you get the proceeds, the estate will be responsible for gain/loss. The estate will also be responsible for tax on the interest received from date of death until the bonds are sold or transferred. So, even if you get the bonds transferred to you, the timing in relation to the coupon payments may have some small impact. The tax rate for the estate may be more/less than yours. So, this decision could affect others as I understand it.

poiuytr4
Posts: 1
Joined: Tue Apr 18, 2017 10:37 am

Re: Bond Fund Transfer from Family Estate

Post by poiuytr4 » Wed Oct 04, 2017 12:47 pm

As Grabiner mentioned, the coupon on the bonds doesn't tell the whole story as all of bonds are all trading well above par.
The yield to maturity of the bonds is less than 4% as the bonds are trading 20% higher than their face value.

My opinion is that the estate should liquidate the bonds and then distribute the proceeds. The tax implications of inheriting the bonds or the cash should be the same. And unless the estate is large enough ($5.45M) to trigger the Federal Estate Tax, there should be no tax implications unless your mother lived in one of the few states that have an inheritance tax.

If you chose to "adopt" these funds, the market value of the bonds and not the face value is going to be used to offset your share of the estate. Also it will slightly complicate your tax situation as you will have also to report the annual interest income (coupon interest less the bond premium amortization) on your taxes every year and also keep track of the cost basis (stepped up basis less the amortization) of the bonds in case you choose to sell them before maturity.

FogCity
Posts: 3
Joined: Fri Aug 18, 2017 1:34 pm
Location: SF Bay Area

Re: Bond Fund Transfer from Family Estate

Post by FogCity » Thu Oct 05, 2017 10:37 am

Thanks to Grabiner, not4me, and poiuytr4 for your generous feedback. I appreciate the education regarding these long term bonds! Our estate is not subject to federal estate tax, and I believe our broker will be able to sell these bonds for a good price. I would rather not deal with the paperwork involved with owning these bonds myself, so liquidating them within the estate will be the best outcome.

Post Reply