What Are Flower Bonds and How Do They Work?

Flower bonds were a type of U.S. government bond that allowed holders to use them at par value for estate tax payments upon the owner’s death. They were particularly attractive for estate planning, offering a way to reduce tax liabilities while holding a secure investment. However, these bonds are no longer issued, making them relevant mainly for historical reference or for those dealing with older estates where such bonds may still be in circulation.

Structure and Features

Unlike traditional Treasury securities, flower bonds could be redeemed at face value for estate tax payments, regardless of market price. This made them valuable for estate liquidity planning, as executors could use them to settle tax obligations without concern for market fluctuations.

These bonds carried fixed interest rates, typically lower than standard Treasury bonds, reflecting their specialized purpose. Investors accepted this trade-off for the tax benefit. Interest payments were made semiannually, providing a predictable income stream. Their market value fluctuated based on interest rates and demand, meaning they could trade at a discount or premium before redemption.

They were also transferable, allowing investors to buy and sell them in the secondary market. However, their highest value was realized when used for estate tax payments. This created a niche market where pricing was influenced by both general bond market conditions and estate planning demand. Investors who did not need them for tax purposes often sold them at a discount to those who did.

Issuance Requirements

The U.S. Treasury issued flower bonds as a specialized debt instrument for estate tax planning. Unlike standard Treasury bonds sold through public auctions, these were offered through specific channels.

To purchase them, investors had to buy directly from the Treasury or authorized financial institutions. They were issued in denominations suited for estate planning, allowing buyers to acquire amounts that could be effectively used for future tax liabilities. The government also imposed limits on purchases to prevent excessive accumulation.

Interest rates were set at issuance and were generally lower than comparable Treasury securities, reflecting their tax-related benefits. Maturity periods varied to accommodate long-term estate planning.

Redemption Conditions

Flower bonds could only be redeemed at face value for federal estate tax payments. The estate’s executor or legal representative had to initiate the process, providing documentation such as a death certificate and estate tax return.

To qualify, the bonds had to be part of the decedent’s estate at the time of death. If they had been transferred or gifted beforehand, they lost their special redemption status and could only be sold at market value. This ensured the tax benefit remained tied to the original owner rather than being exploited for last-minute tax reduction.

Redemption was coordinated with the IRS and the Bureau of the Fiscal Service. If the estate’s tax liability exceeded the bonds’ value, the remaining balance had to be paid through other means. If the bonds’ value exceeded the tax due, the excess amount could not be refunded at face value and was instead treated as a regular asset, subject to market pricing.

Tax Considerations

Flower bonds allowed estates to settle federal estate tax liabilities at par value. As U.S. Treasury securities, their interest income was exempt from state and local taxes but remained subject to federal income tax. Bondholders had to report interest earnings annually under Internal Revenue Code Section 61(a)(4), which classifies interest as taxable income.

For estate tax purposes, flower bonds were included in the decedent’s gross estate at their fair market value at the time of death, not their face value, unless used for tax payments. If the bonds were trading below par, the estate could report a lower taxable value than their redemption amount, potentially reducing the estate tax burden. If sold in the secondary market instead of being used for tax payments, any gains realized could be subject to capital gains tax under Internal Revenue Code Section 1001.

Regulatory Oversight

The Department of the Treasury managed issuance, interest payments, and administration, while the Bureau of the Fiscal Service processed redemptions. The IRS ensured compliance with tax regulations, requiring executors to submit documentation proving eligibility for redemption.

Any discrepancies, such as improper valuation or unauthorized transfers before death, could result in penalties or additional tax liabilities. These oversight measures ensured flower bonds served their intended function without creating tax loopholes.

Transfer Provisions

Although designed for estate tax purposes, flower bonds could be traded in the secondary market. Their market value was influenced by both standard bond market conditions and their estate tax redemption advantage. Investors who did not need them for tax purposes often sold them at a discount, while buyers seeking to use them for estate tax payments factored in their redemption benefit when determining price.

Ownership transfers had to be properly recorded to maintain eligibility for estate tax redemption. If bonds were gifted or sold too close to the owner’s death, they could lose their special status, as the IRS required them to be part of the decedent’s estate at the time of passing.

The secondary market for flower bonds reflected their unique role in estate planning, making them distinct from traditional Treasury securities.