What Is a Flower Bond?
- Flower bonds, which were issued by the U.S. Treasury until April 1971, matured at par value to pay the bondholder's estate taxes upon their death.
- As part of an estate planning strategy, flower bonds helped provide beneficiaries with more of the deceased's wealth.
- Flower bonds did not have to be held for a certain amount of time to reach maturity and could, in fact, be purchased on the very day of the bondholder’s death and still be considered part of the estate.
- Unused flower bonds could have been sold on the open market, but at market prices, and not necessarily at par value, if the market price was the lower of the two.
- Flower bonds fell out of favor once more effective methods of managing estate taxes emerged.
Understanding a Flower Bond
Flower bonds, also known as estate tax anticipation bonds, were a type of U.S. government bond. They got their name because they were considered to suddenly “flower” into maturity at the time of the bondholder’s death.
These bonds provided a method for the bondholder to arrange for the payment of their federal estate taxes that would be due upon their death and remove that obligation from falling onto their beneficiaries.
Flower bonds were unique among bonds because they could not be redeemed before maturity unless the principal amount was to be used to pay the bondholder's estate taxes after they perished. Additionally, flower bonds did not have to be held for a certain amount of time to reach maturity and could, in fact, be purchased on the very day of the bondholder’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 could have been sold on the open market, but at market prices, and not necessarily at par value if the market price was the lower of the two.
For example, a person may have purchased five flower bonds over time because they had accumulated wealth and anticipated leaving it to their 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 could 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.
The End of Flower Bonds
As flower bonds were meant to be an aid in ensuring beneficiaries received the most money possible and were looked after once an individual in the family had passed away, flower bonds were considered part of an estate planning strategy.
By utilizing flower bonds, an individual could pay off estate taxes, allowing their family to inherit more wealth. Many critics, however, argued that flower bonds did little in alleviating taxes and were not the most useful tool in estate planning.
Eventually, different methods of handling estate taxes emerged, making use of new tax laws and regulations. These were seen as more effective than flower bonds, and so flower bonds fell out of favor and stopped being issued in 1971.
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 bond market. The capital gains tax, however, significantly lowered the popularity of these 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.