Tax Implications on the Inheritance of Government Bonds

When someone inherits property, such as government bonds, the estate may have to pay tax on the transaction in the tax year it is made, and the recipient of the bonds must calculate her tax basis for when she sells the bond in the future. Consult with a certified public accountant (CPA) during the bequeathing process, as she can give you advice based on your personal circumstances and ensure compliance with all tax laws. Every effort has been made to ensure this article's accuracy, but it is not intended to be legal advice.

Estate Taxes in General

When a person dies, the federal government applies a levy on the deceased's property through the estate tax. The tax represents a fee charged on the estate's right to transfer the assets to the decedent's beneficiaries, so the estate's representative pays the tax using the decedent's assets. The gross estate is the fair market value (FMV) of all of the property the decedent owned at death. To determine how much of the estate is taxable, you deduct a variety of amounts from the gross estate. The first $5 million of estate value is immediately subtracted from the gross estate. Also, the value of all property left to the decedent's spouse or to a charity should be deducted from the gross estate. What remains is the taxable estate.

Valuing Government Bonds for Estate Tax

Like most assets, government bonds are valued for estate tax purposes at their FMV at the time of the decedent's death. The value for bonds is the average of the closing price of the bond type the day before the decedent's death and the closing price of the bond on the day of the decedent's death.

Filing Estate Taxes

As of 2010, only administrators of estates with assets in excess of $5 million need to file an estate tax return. If filing a return is required, the estate's representative must file a Form 706. The decedent's bonds are reported on Schedule B of the estate return, unless jointly owned. Then the bonds that the decedent jointly owned with another are reported on Schedule E.

Basis to Recipient

When a person receives any property from a decedent through a bequest, he must establish his tax basis in the property. Basis is a calculation of after-tax investment you make in the property, and is important when calculating taxable gains when you sell the asset in the future. A recipient's basis in property he received from an estate is the FMV of the property as of the date of the decedent's death. Another important consideration is the recipient's "holding period" of the bequeathed asset, which is an important consideration when determining how to treat the disposition of capital assets for tax purposes. All property received by the recipient is considered to have been held for longer than a year regardless of when the recipient has disposed of the property. This makes all bequeathed assets long-term capital assets.

References

• Internal Revenue Service; Estate Tax; 2011
• Code of Federal Regulations; 26 C.F.R. Section 20.2031-2: Valuation of Stocks and Bonds; law.justicia.com
• Law.cornell.edu: Section 1014 -- Basis of Property Acquired from a Decedent: Legal Information Institute
• Law.cornell.edu: Section 1223 -- Holding Period of Property: Legal Information Institute
• IRS.gov; What's New -- Estate and Gift Tax; 2011
• IRS.gov; Form 706 -- United States Estate (and Generation-Skipping Transfer) Tax Return; 2009.