CD Beneficiary Rules

A certificate of deposit (CD) is a type of fixed-income investment that pays you interest after you leave your deposit in an account for a set period, or term. CD terms can range from one month to five years or longer, with longer terms typically offering higher returns. But what if something happens to you before the CD’s maturity date?

That’s why it’s important to name a beneficiary on your CD, similarly to how you would do so for a checking or savings account. Naming a beneficiary makes the inheritance process a lot easier, because the CD often won’t have to go through probate.

Here’s a closer look at the common CD beneficiary rules, including how to name a beneficiary and what the beneficiary must do to inherit the CD.

How To Name a Beneficiary for Your CD

To name a beneficiary for your CD, get in touch with your CD issuer to find out how the process works. Often, you can add beneficiaries through your institution’s online banking portal. However, some issuers will require you to complete a written request and might even require notarization.

Beneficiary Requirements

When making the request, you’ll typically need to provide the beneficiary’s first and last name, birthdate, Social Security number, country of citizenship, and address. You can also name a business or trust as a beneficiary, in which case you would need to provide the name, address, phone number, and employer identification number (when applicable).

Multiple Beneficiaries

In many cases, you can choose to add more than one beneficiary, each of whom will receive an equal share of the assets. Some issuers have maximum limits on the number of beneficiaries you can add. For example, Capital One allows up to 10 individual beneficiaries.

What Should Beneficiaries Do After a CD’s Owner Dies?

Once a CD account owner dies, the beneficiary can request to transfer the account to their own name. To do so, they’ll usually need to show a valid government identification and proof of the owner’s death, which is often the death certificate.

Beneficiary Notification

If you’re not sure if you’re a beneficiary on someone’s CD, you can often find out by checking the account’s monthly or quarterly statements. If those aren’t available, you can contact the CD issuer to ask. In addition, if the CD issuer is notified of the account owner’s death, it will typically reach out to the beneficiaries directly.

“Dormant accounts often occur when the account owner/insured dies and the beneficiaries either don’t know they are named beneficiaries, and therefore never claim the account, or the beneficiaries predecease the account owner,” said Julie A. Paquette, PLC, probate and estate planning attorney, in an email to The Balance. “We handle these cases routinely.”

CD Options After Inheritance

Once a beneficiary receives the CD, they can manage it as they please, choosing to keep the CD until the maturity date or withdraw the funds early. In some cases, early withdrawal penalties are waived when the owner passes away—but not always.

CD Inheritance Taxes

As for tax implications, they can vary by state. However, in most cases, beneficiaries won’t owe federal income taxes on the CD deposit amount or the interest earned up to the date of the previous owner’s death. Interest earned after that date would be taxable interest income.

Mistakes To Avoid When Naming Beneficiaries or Inheriting CDs

When naming a beneficiary for your CD or inheriting a CD, things can go awry. Here are a few mistakes to avoid.

Mistakes in Naming CD Beneficiaries

As the CD owner, it’s important to inform your beneficiary about their inheritance. Let them know where the account is held and how to contact the CD issuer. This preparation can help ensure your beneficiary can access their inheritance as quickly and easily as possible. Also, make sure that all your beneficiary’s information is correct—including their name and Social Security number—to avoid potential difficulties in claiming the CD.

“It’s often a much better idea to have an attorney create a trust, and then name the trust as the beneficiary of your accounts,” said Paquette. “Then, each account flows into the trust at death. The trust will say who the assets should be paid to and in what proportions. That way, it doesn’t matter if one account in particular increases or decreases significantly before death. There is no need for trying to rebalance all the accounts so each person gets a relatively equal share.”

Mistakes in Receiving CD Inheritances

As the beneficiary of a CD, it’s important to understand the particulars, including:

• Remaining term
• Potential earnings
• Any applicable early withdrawal penalties
• Renewal options

Before withdrawing the money, consider how much time is left in the term and how much more interest you could earn. You may want to keep the money in the CD until it matures to maximize your earnings.

If you do want to withdraw the money early, ask about any penalties you may face. While penalties may be waived when an owner passes away, that’s not guaranteed. If your CD issuer charges you a penalty, it could take away more from your inheritance than you’d like.

The CD may also be set up to auto-renew, committing you to another term. If you don’t want to keep the money in that CD, cancel any auto-renew agreement to avoid potential penalties in the future.

Frequently Asked Questions (FAQs)