Beneficiary Rules for CD Accounts and Estate Planning

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.

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What Is a CD Account Beneficiary?

A CD account beneficiary is a person or entity designated to receive those funds upon your death. When you open a CD account, you have the option to name one or more beneficiaries. This designation creates a simple transfer process that avoid the complexities associated with probate.

Designating a beneficiary for your CD account offers several advantages. First, it allows for a quick transfer of assets without court involvement. Second, it provides clarity about your wishes, potentially preventing family disputes. Third, beneficiary designations can be changed at any time during your lifetime if your circumstances or relationships change. Finally, this simple step can be an important part of a comprehensive estate plan. It ensures your assets go exactly where you want them to.

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?

To list a CD account beneficiary, you’ll typically need to complete a beneficiary designation form provided by your bank or credit union. Most financial institutions allow you to add beneficiaries when you first open the account, but you can also add or change them later.

You’ll need to provide the beneficiary’s full legal name, date of birth, Social Security number and sometimes their relationship to you. Consider keeping a copy of this form with your important documents.

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.