Transfer paper savings bonds to spouse: tax and mechanics?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Seasonal
Posts: 510
Joined: Sun May 21, 2017 1:49 pm

Transfer paper savings bonds to spouse: tax and mechanics?

Post by Seasonal » Fri Nov 08, 2019 2:54 pm

A married couple owns a fairly large amount of paper I Bonds. Each spouse owns half, with the other spouse listed on the bond. They want one spouse to be the sole owner of all of the bonds (this is for estate planning and related purposes).

If I understand correctly, they would have to fill out FS Form 4000, to either transfer ownership or eliminate a co-owner and the bonds would be re-issued to a Treasury Direct account. https://www.treasurydirect.gov/forms/sav4000.pdf

The form includes "TAX LIABILITY: If the name of a living owner or principal coowner of the bonds is eliminated from the registration, the owner or principal coowner must include the interest earned and previously unreported on the bonds to the date of the transaction on his or her Federal income tax return for the year of the reissue."

1) Is there any way around this? As a general matter, spouses are able to transfer assets to their spouses tax-free and there is a lot of accrued interest.

2) The form requires a Medallion Guarantee. One of the spouses is in a nursing home and travel to a bank would be extremely difficult, at best. Can the form be signed by a power of attorney?

If not, perhaps they could convert the bonds to electronic Treasury Direct form, then transfer online, to avoid the Medallion Guarantee?

Just cashing the bonds would raise the tax problem, plus they are at a good interest rate and the owners would not like to give that up.

fabdog
Posts: 769
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: Transfer paper savings bonds to spouse: tax and mechanics?

Post by fabdog » Fri Nov 08, 2019 3:11 pm

1) Is there any way around this? As a general matter, spouses are able to transfer assets to their spouses tax-free and there is a lot of accrued interest.No. Their rules are really clear. You are transferring ownership, and deferred interest will be due. From the form
THE OBLIGATION TO REPORT THE INTEREST CANNOT BE TRANSFERRED TO SOMEONE ELSE THROUGH A REISSUE TRANSACTION. If you have questions concerning the tax consequences, consult the IRS, or write to the Commissioner of Internal Revenue, Washington, DC 20224. Unless we are otherwise informed, the first-named coowner will be considered the principal coowner for the purpose of this transaction.

2) The form requires a Medallion Guarantee. One of the spouses is in a nursing home and travel to a bank would be extremely difficult, at best. Can the form be signed by a power of attorney? It requires a medallion or a bank signature guarantee. Some banks insist on Medallion, some will do a signature guarantee. You may be able to get an authorized person from the bank to visit at the nursing home, depending on how much business these folks do with them. I do not see a way for a POA to sign the form, I suppose you could ask if a bank would guarantee a POA signature

If not, perhaps they could convert the bonds to electronic Treasury Direct form, then transfer online, to avoid the Medallion Guarantee?
Same thing whether paper or online, still transferring ownership

Mike

chemocean
Posts: 108
Joined: Mon Dec 19, 2016 9:45 pm

Re: Transfer paper savings bonds to spouse: tax and mechanics?

Post by chemocean » Fri Nov 08, 2019 4:24 pm

Note the note at the top of this page that Treasury do not reissue paper bonds, the new bonds with the change in the title can only be issued as an electronic bond in the owner's online Treasury Direct account

Since you have to set up an online account anyway, why not set up the Online account first and then create Manifests to convert the paper bonds to electronic bonds with the same registration (titling) as the paper bonds. Submission of the Manifest only requires a signature of the owner (or perhaps the co-owner). A Manifest does not require a Medallion Signature, but the signatures might need to be witnessed (I can't remember). Make sure to send paper bonds with Manifest by certified mail. Then within the Online account, it is easy for the owner to change registration (remove co-owner) and add new owner. This process would solve problem #2. I Do not have any experience removing a living co-owner as far as issue #1 goes.

I don't recall if the owner in the assisted living facility can officially provide power of attorney so another person, who can login into their special account that allows them to make transactions on behalf of the owner.

Topic Author
Seasonal
Posts: 510
Joined: Sun May 21, 2017 1:49 pm

Re: Transfer paper savings bonds to spouse: tax and mechanics?

Post by Seasonal » Fri Nov 08, 2019 7:13 pm

@fabdog The disclosure is very clear. I was hoping someone knew of an exception for transfers between spouses or some work-around. This is the only case I know of in which a transfer from one spouse to another would be a taxable event.

@chemocean That does seem to be an easier mechanic. A durable power of attorney is in place for both spouses and that person is an authorized power of attorney for the couple's bank accounts. Financial institutions usually require their own forms (I know Vanguard does) to give someone power over an account, so it's good this was already set up. It's obviously easier to get a signature witnessed than Medallion guaranteed.

Post Reply