What Happens to a CD at Death?
When someone passes away, their assets, including Certificates of Deposit (CDs), need to be handled according to their estate plan or state laws. The fate of a CD depends on how the account was set up: whether it was held jointly, had a payable-on-death (POD) beneficiary, or was held solely in the deceased’s name. If the CD has a beneficiary, the funds typically bypass probate and go directly to the named individual upon presentation of a death certificate and proof of identity. If the CD is held jointly, the surviving owner automatically assumes full ownership. However, if the CD is solely owned and lacks a beneficiary designation, it becomes part of the deceased’s estate and is subject to probate.
Understanding CD Ownership and Beneficiaries
Joint Ownership
A jointly owned CD offers the simplest transfer upon death. With rights of survivorship, the surviving owner automatically inherits the CD. This transfer is immediate, avoiding the often lengthy probate process. The surviving owner simply needs to provide the financial institution with a death certificate to claim full ownership and access the funds.
Payable-on-Death (POD) Beneficiary
Naming a POD beneficiary is another straightforward way to ensure a smooth transfer of a CD’s assets after death. The beneficiary has no rights to the CD while the owner is alive but gains full access upon the owner’s passing. To claim the funds, the beneficiary must present a death certificate and proof of identification to the bank or credit union holding the CD. The funds are then transferred directly to the beneficiary, bypassing probate.
CDs and Probate
If a CD is held solely in the deceased’s name without a POD beneficiary or joint owner, it becomes part of the probate estate. Probate is the legal process of validating a will (if one exists), identifying and valuing the deceased’s assets, paying off debts and taxes, and distributing the remaining assets to the heirs. This process can be time-consuming and costly, potentially delaying access to the CD funds for beneficiaries.
Taxes and Inherited CDs
Estate Taxes
Federal estate taxes may apply if the total value of the deceased’s estate exceeds a certain threshold (which is quite high and subject to change). The value of the CD is included in the estate’s total value for tax purposes. However, the beneficiary typically does not pay estate tax directly, as it is paid from the estate itself.
Income Taxes
The inheritance of the CD principal is generally not considered taxable income to the beneficiary under federal law. However, any interest earned on the CD up to the date of death is considered part of the estate and may be subject to estate taxes. Furthermore, any interest earned after the date of death is taxable income to the beneficiary and must be reported on their individual income tax return.
Tax Reporting
Financial institutions report interest earned on CDs to the IRS using Form 1099-INT. After death, the bank will issue this form either under the deceased’s name (if the interest was earned before death) or under the beneficiary’s name (if earned after death). It’s crucial for beneficiaries to keep accurate records of interest earned to ensure accurate tax reporting.
What to Do When a CD Owner Dies
- Notify the Financial Institution: As soon as possible, inform the bank or credit union holding the CD of the owner’s death.
- Provide Documentation: Provide a certified copy of the death certificate and your identification as a beneficiary or joint owner.
- Understand Your Options: Discuss the available options with the bank, such as cashing out the CD, transferring it to a new account, or continuing the CD until maturity.
- Seek Professional Advice: Consult with an attorney or financial advisor to understand the tax implications and estate planning considerations.
- Act Promptly: Avoid delays in claiming the funds, as the bank may eventually consider the account dormant and turn the funds over to the state.
Frequently Asked Questions (FAQs)
1. What documentation is needed to claim a CD as a beneficiary?
You typically need a certified copy of the death certificate and a government-issued photo ID. Some banks may also require additional forms specific to their institution.
2. Can a CD be cashed out early after the owner’s death without penalty?
Some CDs have a death-put feature allowing the estate to redeem the CD at face value without penalty. If not, the bank’s standard early withdrawal penalties may apply.
3. Does the beneficiary of a CD have to pay inheritance tax?
Generally, inheritances are not considered taxable income under federal law. However, the estate may be subject to estate taxes if its total value exceeds the federal threshold.
4. What happens if the beneficiary of a CD dies before claiming the funds?
If the beneficiary dies before claiming the funds, the funds become part of the beneficiary’s estate and are distributed according to their will or state law.
5. Can a CD be held in a trust?
Yes, a CD can be held in a trust. This can be beneficial for estate planning purposes, providing greater control over the distribution of assets.
6. What happens to a CD if the owner dies intestate (without a will)?
If the owner dies intestate, the CD becomes part of the estate and is distributed according to state intestacy laws. This usually involves a court-appointed administrator overseeing the distribution.
7. How long does it take to access funds from a CD after the owner’s death?
The timeline varies depending on the financial institution and the complexity of the estate. If a POD beneficiary is named, access can often be granted within a few weeks. Probate can take much longer, potentially several months or even years.
8. Are all CDs payable on death?
No, not all CDs are automatically payable on death. You must specifically designate a beneficiary with the financial institution.
9. Can I add a beneficiary to an existing CD?
Yes, you can typically add a POD beneficiary to an existing CD by contacting the bank or credit union and completing the necessary paperwork.
10. What if there are multiple beneficiaries named on a CD?
If there are multiple beneficiaries, the funds are typically divided equally among them, unless otherwise specified in the account paperwork.
11. What is a death-put feature on a CD?
A death-put feature allows the CD to be redeemed at face value, without penalty, upon the death of the owner, even if it’s before the maturity date.
12. Do banks automatically know when someone dies?
No, banks do not automatically know when someone dies. You must notify the bank with a copy of the death certificate.
13. What should I NOT do immediately after someone dies regarding their bank accounts?
Avoid immediately closing accounts, giving away assets, or making large withdrawals before consulting with an attorney or financial advisor. It is best to notify the bank.
14. What happens to a CD if it’s not claimed after a certain period?
Eventually, the account may become dormant, and the funds might be turned over to the state’s unclaimed property division.
15. How does inflation affect CDs?
CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation. At GamesLearningSociety.org, we can look at ways to think about investing for your financial future.
Understanding the intricacies of CD ownership and inheritance is crucial for effective estate planning. By properly designating beneficiaries, utilizing trusts, and staying informed about tax implications, you can ensure a smooth and efficient transfer of assets to your loved ones.