Drawback to Owning Bearer Bonds
QUESTION: The unregistered municipal bonds that I own recently came due and I cashed them in at my bank, only to have them returned and the interest that I received deducted from my account. I was told that the bond was called in for early redemption and should have been returned months before. I’ve been running in circles trying to resolve this, but to no avail. Do I have any recourse?--S. R.
ANSWER: None whatsoever. You have come face to face with the disadvantage of owning unregistered municipal bonds--one that Congress moved to correct three years ago by banning these so-called bearer bonds. But for those investors like you who find out well after the fact that their unregistered bonds were called--that is, the issuer demanded the bond’s return before its stated maturity--the only consolation is that you have lots of company.
Thousands of bondholders face this problem right now, says Andrew Geller, a senior vice president of Municicorp of California, because early bond calls by states and municipalities are on the rise. That is customary during periods of declining interest rates, when issuers with call provisions in their bonds scramble to ditch their high-interest bonds and issue new, lower-cost debt.
Bondholders who expected to collect interest payments on their bonds for as long as 30 years suddenly find the life of their investments cut short--through no fault of their own. And those who miss the call find themselves out at least one interest payment and as much as a full year’s worth of interest.
Why aren’t issuers of municipal bonds required to notify everyone in the event of an early call? They don’t know who to notify. Unregistered bonds, just as their name suggests, aren’t registered in any individual’s name. So, when the issuer calls a bond, neither the issuer nor the transfer agents who made the sale have any way of notifying the bondholders.
Only if those bondholders happen across the legal notice that issuers are required to publish, subscribe to a bond newsletter that lists called issues or otherwise hear about the call will they know to respond.
Bonds issued by state and local governments from 1983 on must be in registered form, with the owner’s name on record. If they aren’t, they lose their tax-exempt status.
If you want to avoid being caught off guard again, dig out your official bond statements and reread the fine print. If the bonds can be redeemed ahead of schedule and they were issued during a period of high interest rates, it is time to check in with the municipality or the agent where you bought the bond.
Keep a lookout, too, if you hold single-family mortgage bonds. When interest rates fall, home buyers find it cheaper to go to more conventional lenders than to bond-issuing housing agencies. So housing bond issuers tend to start redeeming bonds with money that they otherwise would have used to make mortgages.
Another option is to write for a copy of the free newsletter that Municicorp publishes on matters of interest to municipal bondholders, including a list of called issues. To receive the publication, write Andrew Geller at Municicorp, 1888 Century Park East, Los Angeles, Calif. 90067, and ask to be put on the mailing list.
Q: When someone lives in a community property state and receives a gift, is it considered community property in the event of a divorce or death?--A. M. S.
A: Generally speaking, gifts are excluded from community property unless the donor specifies otherwise. Of course, the recipient may choose to classify the gift as community property.
And, if the gift is used in any way for community property purposes--say, income from the gift is used to make payments on a house owned jointly by both spouses--then the gift takes on a mixed character, says Orville McCarroll, a Los Angeles attorney who specializes in estate and family financial planning matters. Part of it would be classified as community property and part as separately owned property.
You can see how such matters can become messy. That is why, in the event of a feud, courts have taken to classifying the whole lot as community property if adequate records aren’t kept to show when the gift took on a different nature.
Q: I recently won $100 in a Safeway bingo game. The store put the free bingo ticket in the bag with my groceries. I neither asked nor paid to play. Do I have to report this to the government as taxable income?--L. P.
A: You may not have asked to play, but you did play and you did collect your winnings. So, yes, the prize must be reported as taxable income.
Only prizes awarded in recognition of past accomplishments--in religious, charitable, scientific, artistic, educational, literary or civic fields--are excluded from taxation. Even then, the recipients lose the tax exemption if they are expected to perform some future service in exchange for the prize.
