What is a Flower Bond
Flower bonds were a type of bond issued by the U.S government. These bonds were also known as estate tax anticipation bonds. The bonds provide a method for the bondholder to pre-pay federal estate taxes which would be due upon their death. In this way, the bondholder could prevent their beneficiaries from paying estate taxes themselves.
Flower bonds, last issued in 1971, and the last ones matured in the 1990s. The bonds got their name because they were considered to suddenly “flower” into maturity at the time of the bondholder’s death.
BREAKING DOWN Flower Bond
Flower bonds were unique among bonds because they could not be redeemed before maturity. They also did not need to be held for a certain amount of time to reach maturity. In fact, they could be purchased on the very day of the holder’s death and still be considered part of the estate. In the event of the bondholder’s death, the bond would be instantly redeemable for par, or face value, along with all accrued interest. Unused flower bonds can sell in the open market.
For example, a person may have purchased five flower bonds over time, because they had accumulated wealth and anticipated leaving it to heirs. However, if toward the end of their life they became ill and spent the majority of their wealth paying for in-home care, the estate taxes due after their death would have lessened significantly. In this case, perhaps two of their flower bonds would cover all of their estate taxes, leaving three unredeemed. These remaining bonds can sell at the fair value price, in the open market. They would then flower into maturity upon the death of the new holder, and be available to pay off that person’s estate taxes.
Flower Bonds After 1971
In 1976, tax laws changed regarding flower bonds. The new regulations required payment of a capital gains tax on the difference between the bond’s cost basis and par. Though the bonds were no longer available directly from the U.S. government, they were still available on the secondary bonds market. The capital gains tax, however, significantly lowered interest in these unique bonds.
However, in 1980, the law changed again. The Windfall Profits Act did away with the capital gains tax on flower bonds. This revived interest in flower bonds, as they were an easy and accessible way to avoid federal estate taxes.