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A certificate of deposit (CD) is a type of savings account that requires you to leave your deposit for a set time period, which can range from three months to five years or longer. When that time is up, you can withdraw the money along with your interest earnings. However, if the owner of a CD passes away before the CD matures, it can bring up a lot of questions. Learn what happens when a CD owner dies and what you can expect as a co-owner, beneficiary, or heir.
If one owner of a joint CD account dies, what happens next depends on if the account has the “right of survivorship.” If it does, the deceased owner’s share will pass to the surviving owner without needing to go through probate.
“That does not mean the CD gets liquidated and the surviving joint owner becomes the owner of a new CD,” Jeffrey A. Asher, Esq., estate planning attorney at the Law Offices of Jeffrey A. Asher, P.C. told The Balance via email. “Some banks may require the surviving joint owner to wait until the term of the CD expires before re-titling the CD in the name of the surviving joint owner.”
If an account does not have the right of survivorship, the deceased owner’s share would belong to their estate and would typically be reviewed as part of probate, which is a court proceeding that determines the value of a decedent’s property.
If a CD owner officially records you as their designated beneficiary before their death, you’ll be entitled to the full amount in the CD, including the deposit and interest accrued. As a beneficiary, you won’t have to go through probate to claim the CD. Instead, you’ll typically just need to provide the CD issuer with a copy of the account holder’s death certificate, your valid photo ID, and a letter of instruction that states all pertinent account holder and beneficiary payment information. Once you gain access to the CD, you can transfer the account into your name, cash it out, or reinvest it into a new CD account.
Many financial institutions waive early withdrawal penalties if a beneficiary withdraws the CD money after the account holder’s death but before the maturity date.
If a CD account doesn’t have a beneficiary, the funds will go to the deceased person’s estate. When the estate amount exceeds the limit set by the state, the heirs will have to go through probate. A probate case can take anytime from nine months to a year and a half or more.
“The concern here is if the CD's term is set to renew automatically when it expires. If the CD term has been renewed by the time the family is ready to deal with it, they may have to wait additional time to liquidate it without a penalty,” said Asher.
During probate, the executor of the will or a court-appointed administrator will collect the assets, pay any expenses, and distribute the remainder of the estate. “If there is no will or trust, the laws of intestacy (which vary by state) govern who receives the proceeds of the CD,” Gina M. Spada, estate planning attorney at the Law Office of Gina M. Spada, P.C., told The Balance via email.
If there is no beneficiary and a CD has to go through probate, Asher advises you look into the term of the CD, check the early withdrawal penalties, and turn off any auto-renew agreement.
Deposit accounts, including CDs, are considered abandoned or unclaimed if there is no customer-initiated activity or contact for a specified period of time. This dormancy period may range from three to five years, and is based on the escheatment laws of each state.
Once an account is deemed abandoned, states usually require banks to try to contact the customer. That could involve steps such as publishing the name of an account holder in the local newspaper and sending a letter to their last known address.
If the bank doesn’t receive a response after making the required attempts, it turns the money over to the state’s unclaimed property program.
The value of a CD, including the deposit and the interest accrued, is not subject to federal income tax when passed to a beneficiary. However, any interest earned after the death of the original owner will count as taxable income.
As for state inheritance laws, Asher said, “each state has its own estate or inheritance tax rules, which determine whether or not the CD beneficiary (or the beneficiary of the CD owner's estate) pays estate or inheritance taxes. Depending on the state, the CD beneficiary could pay income tax on the inheritance of the CD.”
To add a beneficiary to your CD, contact your CD issuer and make the request. You’ll typically need to provide the beneficiary’s first and last name, home address, phone number, birth date, country of citizenship, and Social Security number. You may be able to do it online or might need to complete a form and have it notarized, depending on the CD issuer.
If the original owner of a CD dies and a named beneficiary isn’t alive to claim the CD, it would go to the estate and would be distributed through probate as if there was no beneficiary.
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