MilesBuzz! - Buying Bonds for Minor Child

Hi,

I have a question about buying bonds for minor child.

Since there is yearly 30000 $ limit for an individual, once I exhaust that limit for me and my wife, I can not buy any more.

So if I buy another 30000 $ for my minor child and me as co-owner , when I cash the bonds after 6 months, I am liable for the
tax as I paid for the bonds. That means effectively I am buying 60000 $ of EE bonds on myself ( is that true ?. ) Am I allowed do it ?.

Thanks.

Each taxpayer can buy $30,000 face amount per year in U.S. Savings Bonds. If you buy for your child in his/her own name, using his/her SSN, you have no problem. Listing yourself as co-owner is not an impediment.

Bruce

Remember the limit is not $30,000. This is the maximum for Series I Bonds. You may also purchase another $15,000 in Series E Patriot Bonds.

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by kdoshi1:
I have a question about buying bonds for minor child.
</font>

This is probably a function of an over-expensive education, but I am struggling to understand why it would be different for a minor child or a major child. I speak as Christep Major, my younger brother having been Christep Minor. http://www.flyertalk.com/forum/smile.gif

As an aside, does anyone else who had a similarly spoilt upbringing remember how one deals with three siblings concurrently? This is really niggling me...

Christep Subminor?

I have bought bonds for my daughter using her SS# as co-owner with me, and visa versa. Have not cashed any in, but I don't see a problem with the age of the child. I believe the tax would be paid for by either your child (still minor, or now major) or you. No different when you get a gift bond that has the givers ss# - they wouldn't pay the tax, you would. Certainly a minor child's tax burden is probably less therefore less tax. I started doing this, thinking of it in case my daughter's college doesn't take credit cards, and if they do, I'll have it for retirement. So, unless the rates go up (some I bought were much higher than now), I won't cash them in for awhile.

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Ms.DtG

dgordon,

Not so loud! Once you buy bonds in your child's name, they belong to your child. You cannot use them for your retirement. One day your child could sue you for that money. In any case, you are calling into question the validity of the gift -- and therefore, the income!

Bruce

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by kdoshi1:
So if I buy another 30000 $ for my minor child and me as co-owner , when I cash the bonds after 6 months, I am liable for the
tax as I paid for the bonds. That means effectively I am buying 60000 $ of EE bonds on myself ( is that true ?. ) Am I allowed do it ?.</font>
I do it that way. I have checked it out with the experts on the fairmark.com board. As I understand it, it is a gift when you cash it if and only if you deposit in the child's account. With you as co-owner, the purchase does not create a gift, since you control it. As a practical matter, if you pay taxes on it I can't imagine the authorities would get upset.

Wow, my 500th post!

That's not correct. If you use the child's name and SSN when you buy the bonds, then they belong to the child, and you made a gift (unless you used the child's funds to buy the bonds). Listing yourself as co-owner (or survivor) is irrelevant. When you cash the bonds, you better deposit the money in the child's account, or you're effectively stealing!

If you claim to be merely using the child's name and SSN to evade the $30,000 limit on bond purchases, well that speaks for itself, doesn't it?

Bruce

You seem to miss the point of co-ownership. The social security number does not limit ownership. There would be no category of co-ownership if it belonged to the owner of the ss#. They would then only allow singler ownership with a beneficiary. I am not worried. The one who sells the bonds - can be either one (I trust my daugher), and then pays the tax on the bonds, will then own the bonds. I don't think that the govt will be tracking how the funds got there 5, 10, or 15 years from now. They also need to be listed as co-owner if there is any chance that it would be used for educational expenses.

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Ms.DtG

In fact, when I bought bonds the first year and didn't realize there were limits, the govt called me and told me I bought too many in my nmae - and THEY suggested that they be redone with my daughter's SS# and were re-issued with the orginal re-issue date. If the bond was then perceived as her, I think the govt would have warned me about that. On their web-site, they clearly state that in co-ownership either party can cash in the bonds, not exclusively the owner of the SS#. It is no different then a joint checking account. It doesn't matter where the money is coming from - either party can use it.

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Ms.DtG

So, dgordon, I have a question for you.

Since that always unsettling call from the Feds, you obviously have continued to by bonds with you and your daughter as co-owners. Have you limited those purchases to the annual gift limits set by the IRS ($11,000 in 2002), or set by the treasury for EE & I bonds? Also, have you claimed either as a "gift" on your federal taxes, or is that not a taxable event until those bonds are redeemed?


Pate

That's a ridiculous theory. If you buy bonds in your daughter's name, they are hers -- period. You made a gift at the time of purchase, not when the bonds are cashed.

Let me give you an analogy that might help make this clear: If you buy 1000 shares of Microsoft in your daughter's name, have you made a gift? Do you have to wait until she sells those shares (which may NEVER happen, by the way) before you "made a gift"?

If you are co-owner of the bonds, the BEST argument that you can make is that you gave her HALF the value, but even that is weak if her SSN is used. Keep in mind that you CANNOT buy the bonds yourself because you reached the $30,000 limit. Only your daughter can buy the bonds. So she bought them, but they are really still yours? Come on!

The law in this area is clear as day. Anyone who wants to pretend otherwise is welcome to do so, however.

Bruce

I hope this helps. This is directly from the savingsbond website.

Purchase Limitation. You can purchase no more than $30,000 (face amount) in bonds in your name during any calendar year. Because we sell Series EE bonds for one-half their face value, this means you can spend no more than $15,000 on Series EE bonds registered in your name during any calendar year. The limit applies separately for bonds that you purchase in an individual capacity and for those you purchase in a fiduciary capacity. If you purchase bonds in coownership form, you can apply the purchase toward your limitation amount or that of that other coowner, or divide it between the two of you. The limitation doesn¡¯t apply to bonds on which you name yourself as a beneficiary, as opposed to those on which you name yourself as an owner or coowner.

Buying bonds that are co-owned, are co-owned. They do not belong to either one exclusively. Ane when cashed in they do NOT belong to the SS# listed. When people give gifts, they can use their own SS#. Are THEY then liable for the tax? NO! When a parent sets up a college fund for a child, is that money considered a gift? When they pay $40K a year for college, is that subject to gift taxes? Or is that support? Why would bonds NEED to be listed as co-owned in order for them to be tax exempt if used for your child's education.

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Ms.DtG

Savings bonds have a special rule when the gift-giver does not know the SSN of the recipient. They permit the use of the giver's SSN, but that does not mean the bonds belong to the giver. It's just a special rule; don't try to make too much of it. When you cash savings bonds, the bank will ask for the SSN of the owner, so that they can issue a Form 1099 the next January. When they ask, you are expected to give them the correct SSN of the real owner. Actually, you can give them any SSN at all, but that doesn't make your representation the truth!

Similarly, the gift and estate tax laws have a special rule that applies to paying another person's (ANY other person's) educational expenses. Without this special rule, the payment of educational expenses exceeding $11,000 in 2002 would, in fact, be a potentially taxable gift (except for a spouse -- another special rule). Again, you are protected by a special rule applicable only to educational expenses; don't try to apply it generally.

The law governing gifts -- when a gift is made, how to value the gift (particularly difficult when applied to future or contingent interests) and various tax considerations -- is crystal clear to anybody who has worked in this area. This area of the law is not new and not murky. If you continue to be confused, see a professional. But don't speculate wildly that the law is what you would LIKE it to be.

Bruce

And you are presuming that the REAL owner is the owner of the SS#. Don't you think the web-page would have a warning that the money will belong to the person's whose SS# is used if that were the liability. It would be listed as co-owner if that were the case. It does not say that half the money needed to come from each person listed on the bond. I would like to see in writing what you are implying because at this point it seems much ado about nothing. I think the govt has bigger fish to fry than this. Do you think they monitor every joint checking account to see who put the money in and who spent the money, and who really used that deodorant you bought and ate that pizza? So I would like to see something from the govt specifically stating that the co-owner who has bought bonds (used their money) but under the SS of another person, when cashing them in and then using their own SS# has done anything illegal.

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Ms.DtG

No, Ms. DtG, I don't believe anything of the kind. As a former Federal employee, I recognize better than most people the difference between what the law requires and what the government is able to enforce as a practical matter. Is speeding against the law? Of course. Do people speed anyway? Of course. This is the same thing.

You can buy bonds in any names and SSNs that you like. When you cash them, you can report the income any way you want. Will the government come after you? Very likely not.

On the other hand, are you perhaps wondering what the rules really are? Well, I described them above in some detail. If you believe that I got them wrong, then see your own lawyer for advice. If you intend to ignore the law and do whatever you like, then don't inquire as to what the law says. You merely weaken your own case if the government does come after you someday, as unlikely as that may be. You will be unable to plead ignorance of the rules!

The bottom line here is that you simply cannot use your daughter's APPARENT ownership (or co-ownership, if you want to split hairs) as a front to evade the $30,000 statutory annual limit on bond purchases, then simultaneously claim that the bonds don't really belong to your daughter. Can't you see that? If they don't really belong to your daughter -- that is, if they REALLY belong to you -- then you broke the law buying them! If this is still unclear, then I'm wasting my time trying to explain it.

Bruce

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by bdschobel:
That's a ridiculous theory. If you buy bonds in your daughter's name, they are hers -- period. You made a gift at the time of purchase, not when the bonds are cashed.
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When a person buys a US Savings Bond naming himself and another as coowners, there is no gift completed so long as that person has the ability to regain control of the money. No gift means no gift tax. For details see regulation 26CFR25.2511-1 in the Code of Federal Regulations, which says in part:

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">
If A creates a joint bank account for himself and B (or a similar type of ownership by which A can regain the entire fund without B's consent), there is a gift to B when B draws upon the account for his own benefit, to the extent of the amount drawn without any obligation to account for a part of the proceeds to A. Similarly, if A purchases a United States savings bond registered as payable to ``A or B,'' there is a gift to B when B surrenders the bond for cash without any obligation to account for a part of the proceeds to A.
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When applying the $30,000 annual limitation, do not include bonds for which you are coowner but which bear the SSN of the other coowner. See regulation 31CFR360.11:

<font face="Verdana, Arial, Helvetica, sans-serif" size="2">
In computing the purchases for each person, the following outstanding bonds are included:
(1) All bonds registered in the name and bearing the taxpayer identifying number of that person alone;
(2) All bonds registered in the name of the representative of the estate of that person and bearing that person's taxpayer identifying number; and
(3) All bonds registered in the name of that person as coowner that also bear that person's taxpayer identifying number.
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Do keep in mind that listing a coowner on a US Savings Bond has real legal consequences. Although you may plan to regain sole control of the money at some future date, circumstances could very well prevent that from happening.


--ss

Back when bank deposits were insured only to $40,000, banks would explain to customers how they could insure several times this amount by using joint accounts and beneficiary accounts with spouse and children. I don't recall even one suggestion that this was illegal unless there was a real transfer of ownership (a gift). It seems to me that, like the savings bond law quoted above, this is one of those relatively rare cases in which the law is not internally consistent. If speed laws were like this, you could choose your own speed limit by installing multiple speedometers and dividing the total speed among them.

Thank you ss for coming up with the documentation I wanted to see, and verification that I am not doing anything illegal.(me and millions of other people out there who have been doing this since the creation of the savings bond program). This dilemma did NOT come from people wanting miles, but wanting a safe investment. I am not worried about what my daughter would do with these bonds - I trust her, and whether they are used for her college, or for my retirement, whatever isn't spent will be hers anyway!

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Ms.DtG

I stand by what I said. The law provides a $30,000 annual purchase limitation (face amount). You can't simply "borrow" other people's SSNs to avoid that limitation and claim that the bonds are "really" yours. (Why limit this to your daughter? Why not borrow my SSN?) That is simply a sham transaction.

I suggest you check this out with your own attorney if you have any real concerns about what you are doing. At the same time, we all realize that the government has better things to do than hunt down people who are buying too many savings bonds.

Bruce

Bruce - I am not surprised by your reaction.
"don't confuse me with facts, I stand by what I believe." I have no intention of wasting my time and money consulting with a lawyer since there is nothing I am worried about. I also doubt that if YOU consulted with a lawyer and discovered you were wrong that you would come back here and say so. You have not come up with any documention that worries me - only your belief about what it should be. If this were illegal, I am certain the web-page would have a clear WARNING to that effect.

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Ms.DtG

If you really believe that putting assets in other people's names is something that can be done without legal consequences, be my guest. Put some assets in my name! Add your daughter's name to the deed to your house and see if you have made a gift.

End of discussion for me.

Bruce

Just spoke to the IRS Savings Bond Dept. referred me to Publication 550

http://www.irs.gov/pub/irs-pdf/p550.pdf

go to the bottom of page 7 and beginning of page 8.

She told me that if I purchase a bond with my son and I listed as co-owners and MY funds are used to pay for it then I am viewed by the IRS as the owner and tax implications go to me.

Thought this might help clear things up! I can see why bdschobel would see it the way he does though. When you speak to the IRS they have different departments. One for Savings bonds and one for gift taxes. If you speak to the gift tax dept. they will keep reiterating that anything over $11k is considered a gift. Savings bond dept. says that the IRS VIEWS the one who pays for the bond is the owner. I think it's pretty clear in publication 550.

Hope this helps! JT

You can usually figure out the IRS position on any gray area by computing which ruling generates more tax revenue. It would not surprise me if they have one opinion for income tax purposes and another for gift tax purposes.