What Are Flower Bonds? Explained with Examples, Tax Implications, and More

Flower bonds, also known as estate tax anticipation bonds, held a unique position among U.S. government bonds. This distinctive nomenclature stemmed from the idea that these bonds would metaphorically “flower” into maturity precisely at the time of the bondholder’s demise.

Unlike traditional bonds, flower bonds held a specific condition for redemption—they could only be redeemed at maturity if the principal amount was intended for paying the bondholder’s estate taxes after their death. One noteworthy feature was their flexibility; flower bonds could be purchased on the very day of the bondholder’s death and still be considered part of the estate. Upon the bondholder’s demise, the bond became instantly redeemable for its face value along with all accrued interest. Additionally, unused flower bonds had the option of being sold on the open market, albeit at market prices, and not necessarily at par value if the market price was lower.

Consider a scenario where an individual accumulated five flower bonds over time, envisioning leaving wealth to their heirs. If, towards the end of their life, they spent the majority of their wealth on in-home care, leaving three unredeemed flower bonds, these could be sold at fair market value. The unredeemed bonds would then mature upon the death of the new holder, available to pay off their estate taxes.

Flower bonds were introduced as part of an estate planning strategy, aiming to ensure beneficiaries received the maximum inheritance after an individual’s passing. These bonds, issued by the U.S. Treasury until April 1971, played a crucial role in this process. However, as we delve into the historical context, it becomes evident that flower bonds fell out of favor post-1971.

The decline in the popularity of flower bonds can be attributed to the emergence of more effective methods for managing estate taxes. Critics argued that these bonds, while a strategic tool in their own right, were not the most efficient in alleviating tax burdens. Consequently, flower bonds ceased issuance in 1971, marking the end of their era as a prominent instrument in estate planning.

Post-1971, changes in tax laws impacted the landscape for flower bonds. In 1976, new regulations introduced a capital gains tax on the difference between the bond’s cost basis and par. Although no longer directly available from the U.S. government, flower bonds remained accessible on the secondary market. The introduction of the capital gains tax, however, significantly diminished the appeal of these bonds.

Despite the challenges faced by flower bonds, a turning point came in 1980 with the Crude Oil Windfall Profit Tax Act. This legislative change eliminated the capital gains tax on flower bonds, sparking a brief revival in interest. The newfound accessibility of flower bonds without the burden of capital gains tax reignited interest among investors looking for an easy and accessible way to avoid federal estate taxes.

No, flower bonds ceased issuance in 1971, and they are not available for purchase from the U.S. government. However, they might still be found on the secondary bond market.

Yes, flower bonds provided a strategic tool for estate tax planning. They allowed for the immediate redemption of the bond at face value upon the bondholder’s death, offering a unique benefit for estate planning purposes.

Flower bonds declined in popularity due to the emergence of more effective methods for managing estate taxes. Critics argued that they were not the most useful tool in estate planning, leading to their cessation in 1971.

The 1980 legislative change eliminated the capital gains tax on flower bonds, briefly reviving interest in these bonds as an accessible means to avoid federal estate taxes.

Yes, in 1980, the Crude Oil Windfall Profit Tax Act brought a significant change by eliminating the capital gains tax on flower bonds. This legislative adjustment briefly revived interest in flower bonds as an accessible means to avoid federal estate taxes.

Yes, flower bonds can be inherited like other assets. In the event of the bondholder’s death, the bonds become part of the estate and can be passed on to beneficiaries according to the estate plan or legal inheritance procedures.

Flower bonds played a crucial role in estate planning by providing a method for bondholders to arrange for the payment of federal estate taxes upon their death. This helped ensure that beneficiaries received the maximum inheritance after an individual’s passing.

After the decline of flower bonds, various alternatives emerged for managing estate taxes, making use of new tax laws and regulations. These alternatives were perceived as more effective in comparison to flower bonds, contributing to their diminished popularity.