Inherited Savings Bonds

I am being appointed executor of my sister's estate. It consists of Series E and EE bonds. Some quit drawing interest ranging from 1996 to the present. Others will expire in 2005 and later. The estate is to be split 50/50 between my brother and me. We are both retired and in the 15% tax bracket. An accountant has recommended dividing the bonds and cashing a few at a time over future years. I would appreciate your suggestions.

Tom's response

The bonds that have stopped earning interest might pose some problems for you. You won't be able to update the registration on those. In addition, your sister owed income tax on those in the year they stopped paying interest.

I think you should look at cashing those bonds now. You can actually split the resulting interest income three ways - you and your brother can each declare some and you can put some on your sister's final tax return.

This will allow you to reinvest this money and start earning interest on it again. Although everyone hates to pay taxes, losing the interest is actually even more costly, since you're going to have to pay the tax someday no matter what you do, but there's no way to go back in time and collect back interest you've missed.

As for the bonds that are still earning interest, I agree with your accountant. Redeem them in amounts that will keep you in the 15% bracket and that won't make your social security income taxable.