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Certificate of deposit (CD) accounts offer a secure way to save money with fixed interest rates. However, many people overlook the importance of properly designating beneficiaries for these financial instruments. If you want an estate plan to avoid the risk of probate, take the time to understand CD beneficiary rules. Unlike wills, which must go through probate, properly designated beneficiaries on CDs receive assets directly and typically with minimal paperwork.
Do you have questions about estate planning? Speak with a financial advisor today.
What Is a CD Account Beneficiary?
A certificate of deposit beneficiary is a person or, depending on the financial institution’s rules, an entity designated to receive the funds in a CD after the account owner dies. Naming a beneficiary can make transferring the account simpler and may allow the money to pass outside of probate. Until the owner’s death, the beneficiary generally has no ownership rights or control over the CD.
Banks and credit unions commonly allow CD owners to add beneficiaries through a payable-on-death (POD) designation. When the owner dies, the named beneficiary can typically claim the funds by providing the financial institution with required documentation, such as identification and a certified copy of the death certificate. This process can be faster and less expensive than transferring assets through probate.
Depending on the institution, a CD owner may be able to designate more than one beneficiary and specify how the account should be divided among them. For example, an owner could leave equal shares to two children or assign different percentages to several beneficiaries. Reviewing the institution’s beneficiary rules is important because available options and procedures can vary.
CD beneficiary designations should be coordinated with the rest of an estate plan. Because a valid POD designation generally controls who receives the account, instructions in a will may not override a conflicting beneficiary designation. Reviewing beneficiaries after major life events, such as marriage, divorce, a birth or a death in the family, can help ensure the CD passes according to the account owner’s current wishes.
What Are the Rules for CD Account Beneficiaries?
The rules for CD account beneficiaries are relatively straightforward but important to understand. Beneficiary designations supersede instructions in your will, making them powerful estate planning tools. Financial institutions will distribute the CD funds directly to your named beneficiaries upon receiving proof of your death.
You can establish different levels of beneficiaries for your CD accounts. Primary beneficiaries are first in line to receive the assets upon your death. Contingent beneficiaries only receive the funds if all primary beneficiaries have predeceased you. When designating multiple beneficiaries at either level, you can specify the percentage each person should receive.
Life changes such as marriage, divorce, births or deaths may necessitate updates to your beneficiary designations. Most banks allow you to change beneficiaries at any time during the CD term without penalty. Regularly review and update your beneficiaries to ensure your assets transfer according to your current wishes.
If you don’t name beneficiaries for your CD accounts, the funds will become part of your estate upon your death. This means the money will be distributed according to your will or, if you don’t have one, according to your state’s intestacy laws.
How Do You List a CD Account Beneficiary?
The process for naming a CD beneficiary can vary by bank or credit union, so start by checking your financial institution’s requirements. You may be able to add a beneficiary when opening the CD or update an existing account online, by phone or at a branch. Some institutions require a specific payable-on-death beneficiary form.
You’ll typically need to provide identifying information for each beneficiary you name. This may include the beneficiary’s legal name, date of birth, address and Social Security number or other tax identification number. Providing complete and accurate information can help the financial institution identify the beneficiary and process the transfer after your death.
If your financial institution allows multiple beneficiaries, you may need to specify what percentage of the CD each person should receive. For example, you could divide the account equally among three beneficiaries or assign different percentages. Make sure the allocations total 100% and reflect your broader estate planning goals.
After submitting your beneficiary information, ask the bank or credit union to confirm that the designation has been recorded correctly. Keeping a copy of the beneficiary form or account confirmation with your estate planning records can make it easier for your executor and family to identify your accounts later.
Tax Rules for Inherited CDs
When you inherit a certificate of deposit, you’re stepping into a financial situation with specific tax implications. The tax rules for inherited CDs differ from those that apply to CDs you might purchase yourself. If you want to avoid unexpected tax bills, you need to understand how the IRS treats these accounts.
Interest earned on an inherited CD is taxable as income in the year you receive it. This means any interest that accrues after you take ownership will appear on your tax return. However, the IRS considers interest that accumulated before the original owner’s death as part of the estate. This may be subject to different tax treatment. Keep all statements and documentation to accurately report this income when filing your taxes.
Larger estates may be subject to federal estate tax, which could affect the overall value of your inheritance. The CD’s value on the date of the original owner’s death is included in their estate for tax purposes. Most estates fall below the federal estate tax exemption threshold, but it’s worth confirming with a tax professional if you’re inheriting from a substantial estate.
State tax rules for inherited CDs vary significantly across the country. Some states impose their own inheritance or estate taxes that could affect your CD, while others follow federal guidelines. Check with your state’s tax authority or consult with a financial advisor familiar with your state’s specific inheritance tax laws to understand your local obligations.
Bottom Line
Understanding beneficiary rules for CD accounts is a crucial component of effective estate planning. By designating beneficiaries on your certificates of deposit, you create a direct transfer mechanism that allows these assets to bypass probate, potentially saving your loved ones time, money and stress during an already difficult period. Remember that beneficiary designations generally supersede instructions in your will, making it essential to keep these designations updated after major life events like marriage, divorce or the birth of children.
Tips for Estate Planning
- A financial advisor can help protect your assets and help you plan for the future. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A common issue in estate planning is finding ways to transfer assets tax-free. Consider our guide on transferring your property tax-free to a family member to help you get started.
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