Understanding Certificate of Deposit (CD) Beneficiary Rights

Certificates of deposit accounts, like other types of bank accounts, often have named beneficiaries. Generally, these beneficiaries fall into two groups: custodial account beneficiaries and pay-on-death, or POD, beneficiaries. The former are supposed to benefit from the account from inception, whereas the latter group only has access to the funds once the account owner dies.

Purpose of Beneficiary Accounts

The Uniform Transfers to Minors Act allows adults to establish accounts, including CDs, for the benefit of their children or other eligible minors. People often establish CDs to stow money intended for future school expenses. Typically, children don't earn enough to pay income taxes, so parents can reduce their own tax burden by transferring funds to their children.

Pay-on-death beneficiaries are added to CDs so that when the owner dies, funds held in the account don't have to go through probate. The named POD beneficiary can close the account.

Rights of Beneficiaries

Beneficiaries of custodial accounts have no direct access to funds or legal ability to make decisions regarding funds held in CDs. The custodian controls the account until the beneficiary reaches the legal age of adulthood, which varies between 18 and 21 in different U.S. states. Upon reaching adulthood, the beneficiary can petition a court to assume control of funds if the custodian doesn't close the account and disburse the proceeds. POD beneficiaries have no rights to CD accounts until the owner dies, after which they can do with the funds as they like.

Complications

Certain states enable account custodians to change the named beneficiary on custodial accounts. People may change the beneficiary if they intended to use the account to fund education costs and the designated beneficiary decided not to go to college.

CD account owners may name multiple POD beneficiaries on their accounts. If they use the word "and" between beneficiary names, all those named must redeem the funds together. However, if they use the word "or" between names, then any one named beneficiary can close the CD and access funds after the account owner's death.

Beneficiary Protection

CD accounts often last for several years — adding beneficiaries to an account minimizes the risk of losses if the bank holding the funds goes bankrupt. The Federal Deposit Insurance Corporation provides $250,000 of coverage for each account owner at every member bank; the FDIC adds an additional $250,000 of coverage for each named POD beneficiary. Custodial accounts are regarded as single-ownership accounts and only have $250,000 of FDIC coverage.