A certificate of deposit is a special form of bank account that lets you lock in high interest rates for a certain period of time, usually with penalties for early withdrawals. You can often name one or more beneficiaries on a CD account who will inherit the money in the account when you die. You do this by arrangement with your bank, and the beneficiaries can often inherit the money regardless of what you may write in a will.
As the beneficiary of a CD, you gain the right to access to all funds and investments stored within the CD account. However, there is a possibility that you, the beneficiary, will be liable for taxes on the account when it comes into your possession.
Certificates of Deposit
A CD account is similar to a savings account, except that it has a fixed term during which you agree to keep the funds in the bank, usually facing a penalty if you withdraw them early. Generally, you can't add additional money to the CD either, though exact terms can vary depending on the bank and the account. When a CD's term is up, the CD is said to mature, and you usually have a limited period of time to withdraw the funds or they will automatically be rolled into another CD with the same maturity time.
Choosing a Beneficiary
When you open a CD account, you may be asked to name a beneficiary who will inherit the money if you die. You can usually choose more than one beneficiary and, in some states and at some banks, even what percentage of the funds will be allocated to each person. Some states and banks also allow you to name an organization like a charity as beneficiary, though some only allow you to name a person.
You can usually add, remove or change beneficiaries as you wish. Sometimes you can do this through online banking, though you may have to do it in person, depending on the bank's policies. If you have multiple beneficiaries, and one dies before you, usually the remaining ones would be set to inherit the account, unless you add another beneficiary.
Inheriting a CD
Often beneficiaries on CDs and other types of accounts accounts can inherit without going through a formal probate process, and beneficiary statements on accounts can even take precedence over a person's will. For that reason, if you want to change who inherits your money, it's a good idea to remember to update any accounts with beneficiaries as well as making out a new will.
If a deceased person leaves behind an estate that owes creditors money, including federal or state tax authorities, the credits may still be able to assert a claim on the money in the CD. Depending on state laws and other circumstances, the deceased person's spouse or underage children may also have a claim to the money if they are not named as beneficiaries.
Many banks will waive early withdrawal and other penalties if a CD accountholder dies and his or her beneficiaries want to close the account. If you inherit a CD account, as with any inheritance, you can be subject to federal and state estate taxes. This only generally applies to estates worth at least $11,180,000 in 2018 and beyond, an increase from a $5,490,000 exemption in 2017.
- Nolo: Payable-on-Death Accounts -- The Basics
- The Wall Street Journal: What Is a Certificate of Deposit?
- Kiplinger: Death and Taxes
- Nolo: How Beneficiaries Can Claim Payable-on-Death Assets
- GoBankingRates: How to Choose a Beneficiary for a Certificate of Deposit
- Nolo: Choosing Beneficiaries
- Money-Rates: Will I Owe Taxes on an Inherited Certificate of Deposit?
- Federal Deposit Insurance Corporation. "Your Insured Deposits." Accessed Sept. 28, 2020.
- Securities and Exchange Commission. "Transfer on Death (TOD) Registration." Accessed Sept. 28, 2020.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.