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If you're a CD beneficiary, you must typically provide a death certificate and proof of identity to claim the CD's funds. You may be able to choose between leaving the funds in the CD or withdrawing the money to use as you choose, which could include opening a new CD. You will also be responsible for paying taxes on any interest the CD earns after the deceased owner's passing. Learn more about CD rules for beneficiaries.
Key Takeaways
- You can name one or more people as beneficiaries for a CD
- If you're listed as a CD beneficiary, it's important to know how to claim funds if the account owner passes away.
- Interest earned after the original account holder's death is the CD beneficiary's responsibility.
- Depending on the bank, beneficiaries may qualify for a waiver of the usual early withdrawal penalties that apply to CDs.
CD Accounts and CD Beneficiaries
Banks, credit unions, and online banks offer certificate of deposit (CD) accounts where consumers deposit money for a set time period (such as 3 or 12 months) to earn interest. After the CD matures, the original deposit and the interest can be withdrawn or rolled into a new CD. Taking money out before the term ends (reaches maturity) could lead to a penalty, typically a few months of interest.
When opening a CD account, you decide whether you want to name a beneficiary for your CD account. A beneficiary is someone you name to inherit the account if or when the original CD owner dies.
You may choose one beneficiary for the whole CD amount or multiple beneficiaries and determine percentages. For instance, you could name three people to inherit a CD, each inheriting a 33% share of the balance.
You may also be able to name contingent (or backup) beneficiaries if the first beneficiary passes away. With a payable on death (POD) bank account, the people you name will receive your CD funds, as you explain, even if you don't have a will or your will's statements conflict with your named beneficiaries.
Beneficiaries can be family members or even organizations you want to support. You can change beneficiaries whenever you want and name new beneficiaries. Often, you can do this within your financial institution's online account management.
If you don't name a beneficiary, your CD may need to go through probate, a time-intensive court process that decides where the money goes.
Important
If you want to name a minor child as a beneficiary to a CD account or other financial accounts, you may also need to name a custodian to manage assets on their behalf until adulthood.
What You Need to Name a CD Beneficiary
The bank may ask you to provide the beneficiary's:
- Full legal name
- Relationship to you
- Social Security number or other tax identification number
- Date of birth
- Address
- Phone number
Rights of CD Beneficiaries
While you're living, the beneficiary has no claim on your CD account. But after your death, the CD beneficiary can inherit CD funds and withdraw money from the account, including your original deposit and the interest earned.
This typically means contacting the financial institution where the CDs are held and offering proof of identity. The bank may also need to see a copy of the account owner's death certificate.
The bank may ask you to complete a notarized document called a beneficiary letter of instruction. This document outlines where you want the funds sent or transferred.
What happens next depends on the bank and its policies. Generally, banks can handle CDs belonging to a deceased account owner in two ways: Close the CD and pay out the balance to the beneficiary, or transfer or convert ownership of the CD to the beneficiary.
Closing the CD
Federal regulations allow an exception to early withdrawal penalties upon the death of an account holder, even if the CD hasn't yet reached maturity. However, the exception isn't a requirement, so the penalty may still be charged.
To qualify for the withdrawal penalty waiver, you will likely need to present the death certificate of the original CD account holder.
If you inherit a CD as a beneficiary and the bank closes the account, you can decide whether to open a new CD with the proceeds or use the money for something else. You may be able to find better CD rates elsewhere or use the money to pay off debt or make home repairs.
Remember that you may not get the entire amount of the CD but rather the amount minus any fees and outstanding debt the deceased owed.
Transferring a CD to a Beneficiary
Transferring ownership of inherited CDs means you don't have to move the money anywhere else. Once the account has been transferred to you, you could name one or more beneficiaries. You might consider a transfer of ownership if it would allow you to avoid an early withdrawal penalty or if you don't have a pressing need to use the money.
Transferring the CD can also make sense if the CD has locked in a higher long-term guaranteed interest rate than what you could find by shopping around.
Note
If the bank requires you to close an inherited CD, ask if you can wait until it matures to maximize the interest earnings.
Tax Rules for CD Beneficiaries
Interest earned on CD accounts is taxable, but who pays when the account owner dies? Generally, interest earned before the account owner's death is not taxable to the beneficiary or the original amount deposited. But any interest earned after the account owner's death would be taxable for beneficiaries.
How much this impacts your tax situation can depend on the CD's interest earnings. If the account balance is relatively small, the interest may be negligible. But if you're inheriting jumbo CDs with a six-figure balance, you could be looking at a larger tax bill for the earnings.
Talking to a tax professional may be helpful if you're listed as the beneficiary of one or more CD accounts. They can give you insight into how your tax liability may be affected if you inherit CDs and suggest strategies for minimizing those taxes.
Note
Different tax rules may apply if you inherit an individual retirement account (IRA) CD, which is subject to traditional or Roth IRA tax treatment.
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Investopedia / Jessica Olah
Frequently Asked Questions (FAQs)
Can You Change Beneficiaries on a CD?
The ease of changing CD beneficiaries can depend on the bank's policy and how the beneficiary agreement is structured. If you set up a CD account as payable on death (POD), some banks may require you to close the account completely and reopen a new CD to change the beneficiary. Other banks may allow you to change the POD beneficiary through the bank's online portal.
How Many Beneficiaries Can You Have on a CD?
Your bank can determine the number of beneficiaries allowed for a CD account, though it's possible to have more than one. Some banks allow up to 10 beneficiaries per account.
How Do You Name a Beneficiary on a CD?
When you open a new CD account, your bank may ask if you'd like to name one or more beneficiaries. You can then provide the name or names of the person(s) you'd like to select. Your bank may also require a Social Security number or additional information for each designated beneficiary.
The Bottom Line
Adding a beneficiary to a CD account can offer peace of mind if you're worried about your savings should something happen to you. When naming a beneficiary, consider who you'd like to inherit your CD funds. And if you're the beneficiary of a CD, it's helpful to understand your rights and responsibilities.