A CD beneficiary can inherit money in a CD account when the original CD owner dies, but specific rules apply. For example, you will be responsible for paying taxes on any interest earned in the CD after the deceased owner's passing. You'll also need to provide a death certificate and proof of identity to claim the CD's funds.

CD Accounts and CD Beneficiaries

You'll find certificate of deposit (CD) accounts offered at banks, credit unions, and online banks. You'll deposit money in the CD account and leave it there for a set time period (such as 3 or 12 months), during which your account earns interest.

Once the CD matures, you can withdraw your original deposit and the interest or roll the entire amount into a new CD. Taking money out before the term ends (reaches maturity) could lead to a penalty, typically a few months of interest. Federal regulations require banks charge early withdrawal penalties for any time deposit account such as a CD.

When opening a CD account, you decide whether you want to name a beneficiary for your CD account. A beneficiary is someone you'd like to inherit the money in the account if you pass away. If you don't name a beneficiary, your CD may need to go through probate, which is a time-intensive court process.

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 has no claim on your CD account. But after your death, the CD beneficiary can withdraw money from the account, including your original deposit and the interest earned.

Rights of CD Beneficiaries

CD account beneficiaries can inherit CD funds if the original CD account owner passes away.

If the owner of a CD account passes away, the CD beneficiary can claim 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. The bank may ask you to complete a notarized bank document called a beneficiary letter of instruction, which outlines where you want the funds sent or transferred.

What happens next can depend on the bank and its policies. Generally, banks can handle CDs belonging to a deceased account owner in two ways: Close the CD and pay out the balance to the beneficiary, or transfer or convert ownership of the CD to the beneficiary.

Closing the CD

Federal regulations allow an exception to early withdrawal penalties upon the death of an account holder, though the CD hasn't yet reached maturity. However, the exception isn't a requirement, so the penalty may still be charged.

To qualify for the withdrawal penalty waiver, you will likely need to present the death certificate of the original CD account holder.

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.

Just remember that you may not get the entire amount of the CD, but rather the amount minus any fees and outstanding debt that the deceased owed.

Transferring a CD to a Beneficiary

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 name one or more beneficiaries. 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.

Tax Rules for CD Beneficiaries

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

How much this impacts 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, talking to a tax professional may be helpful. They can give you insight into how your tax liability may be affected if you inherit CDs and suggest strategies for minimizing those taxes.

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.