Christiansburg, VA asked in Tax Law for Virginia

Q: Last year(July 24, 2022) my father in law passed away. All of his possessions are in a trust including 6 $10,000 series

EE bonds that are > 30 years old. Since the bonds were paper they had to be mailed to Michigan to be redeemed which they were last October. The bonds have in the last few days been redeemed. The beneficiaries are my wife and her two sisters. How should the bonds be handled? Should they be distributed in full right away to each beneficiary? No tax was paid so each beneficiary will pay their share of the tax. Should the trust hold back some of the money for tax purposes? If distributed today will the interest be applied to 2022 or to 2023 (I have read there is a 65 day rule which ends March 6). I understand with series EE bonds there is no step up in basis. Thank you.

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1 Lawyer Answer
James L. Arrasmith
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  • Tax Law Lawyer
  • Sacramento, CA

A: First of all, I'm sorry for your loss. Regarding the series EE bonds, it's important to consider the terms of the trust and the instructions of the grantor, as well as any applicable state laws.

Assuming the trust doesn't provide specific instructions on how to handle the bonds, one option would be to distribute the proceeds evenly among the beneficiaries. As you mentioned, each beneficiary will be responsible for paying taxes on their share of the interest earned. It may be a good idea to hold back some of the funds to cover any potential tax liability, but this decision should be made in consultation with a tax professional.

In terms of the interest earned, it will be reported as income for the tax year in which it was earned. If the bonds were redeemed last October, the interest earned from July 24, 2022 (the date of your father-in-law's death) to the redemption date would be included in the beneficiaries' 2022 tax returns. The interest earned from the redemption date to the distribution date would be included in their 2023 tax returns.

Again, it's important to consult with a professional advisor or attorney to ensure that the distribution of the bonds is handled in compliance with applicable laws and the terms of the trust.

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