What Are the Rules for CD Beneficiaries?

Certificate of deposit accounts allow savers to set aside money for a set time period and earn some interest in the process. When someone opens a CD account, they can name someone else as a beneficiary of that account. A CD beneficiary has the right to inherit the money in the account when the original owner passes away but there are certain rules that apply.

Key Takeaways

  • Certificate of deposit accounts are time deposit accounts that allow savers to earn interest over a set period of time.
  • A CD beneficiary is someone who's named to inherit funds in a CD account if the account owner passes away.
  • A beneficiary will only receive what remains in a CD minus any debts the deceased owed.
  • Interest earned on a CD prior to the account owner's death isn't taxable to a CD beneficiary, but interest earned afterward usually is.
  • If you're listed as a CD beneficiary, it's important to know how to claim those funds if the account owner passes away.

CD Accounts and CD Beneficiaries

A certificate of deposit (CD) account is a time deposit account. You can find CDs offered at brick-and-mortar banks, credit unions, and online banks. When you open a CD, it's with the agreement that you'll deposit money in the account and leave it there for a set time period. This is called a maturity term and your money earns interest during this period. Once the CD matures, you can withdraw your original deposit and the interest or roll the entire amount into a new CD.

When opening a CD account, there are a few things to decide, such as what CD term is right for you and how much you want to deposit. You can also decide whether you want to name a beneficiary for your CD account. A beneficiary to a CD is someone you'd like to inherit the money in the account if you pass away.

You may choose one or multiple beneficiaries. Your bank may require the beneficiary or beneficiaries you name to provide their Social Security number. While you're living, the beneficiary would have no claim on your CD account. But after your death, they'd be able to withdraw money from the account, including your original deposit and the interest earned.

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 who will manage those assets on their behalf until they reach adulthood.

Rights of CD Beneficiaries

CD account beneficiaries have the right to inherit CD funds if the original account owner passes away. Again, they wouldn't be able to touch this money during your lifetime. And if the CD reaches maturity before you pass away, they would have no further rights to the money unless you were to roll it into a new CD and name them as the beneficiary.

If the owner of a CD account passes away, the CD beneficiary would then be able to make a claim to that account. 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.

What happens to those CDs next can depend on the bank and its policies. Generally, there are two ways banks can handle CDs belonging to a deceased account owner:

  • Close the CD and payout the balance to the beneficiary
  • Transfer or convert ownership of the CD to the beneficiary

In the first instance, the bank may or may not waive any early withdrawal penalties that might apply. CD early withdrawal penalties can be assessed when someone takes money from a CD before it reaches maturity. These penalties can be a flat fee or a percentage of the interest earned.

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. Be aware that the beneficiary may not get the entire amount of the CD, but rater the amount minus any fees and outstanding debt that the deceased owed.

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 then name one or more beneficiaries of your own. 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.

Note

If the bank requires you to close an inherited CD, ask if you can wait until it matures to do so in order to maximize the interest earnings.

Tax Rules for CD Beneficiaries

Interest earned on CD accounts is taxable, but who pays when the account owner passes away? Generally, interest earned prior to the account owner's death is not taxable to the beneficiary, nor is the original amount that was deposited. But any interest earned after the account owner's death would be taxable for beneficiaries.

How much of an impact this has on your tax situation can depend on how much interest the CD earns. If the account balance is relatively small, the interest may be negligible. But if you're inheriting CDs with five- or six-figure balances it's possible that you could be looking at a larger tax bill for the earnings.

If you're listed as the beneficiary of one or more CD accounts, it may be helpful to talk to a tax professional. 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're inheriting an individual retirement account (IRA) CD, which is a CD that is subject to traditional or Roth IRA tax treatment.

Frequently Asked Questions

Can You Change Beneficiaries on a CD?

Whether you can change beneficiaries to a CD account 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), for example, you may have to close the account completely and reopen a new CD to change the beneficiary.

How Many Beneficiaries Can You Have on a CD?

The number of beneficiaries allowed for a CD account can be determined by your bank, though it's possible to have more than one. For instance, you could name three people to inherit a CD, with each one inheriting a 33% share of the balance.

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 for each designated beneficiary.

The Bottom Line

Adding a beneficiary to a CD account can offer some peace of mind if you're worried about your savings getting lost in limbo should something happen to you. When naming a beneficiary, it's important to think about who you'd like to inherit those funds. And if you're the beneficiary of a CD, it's also helpful to understand what rights and responsibilities you have.

Article Sources
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  2. Office of the Comptroller of the Currency. "Can a Bank Require a Beneficiary to Provide a Social Security Number?"

  3. Consumers Credit Union. "5 Things to Know About Inheriting Money."

  4. Office of the Comptroller of the Currency. "What Are the Penalties for Withdrawing Money Early From a Certificate of Deposit (CD)?"

  5. Internal Revenue Service. "Traditional and Roth IRAs."

  6. Synchrony. "IRA Certificate of Deposit."