Can You Bypass Probate With CDs?

Certificates of deposit (CDs) are a low-risk way of putting aside some money for the short term and earning a modest return on it. When you take out a standard CD, your bank or credit union guarantees that they will pay you a set return on your money. In exchange, you agree to leave your money, untouched, in the account.

Because CDs are a low-risk, time-constrained investment, they are popular among seniors, and often form part of inheritance settlements. When the owner of a CD passes away, it can be inherited in one of three ways: if a CD is a joint account, a beneficiary is named, or it can be inherited through probate. If the owner wants someone to inherit directly, a joint account or naming a beneficiary are the best methods to do so.

This means that it’s possible to use a CD to pass on money without it going through probate. However, other accounts also allow you to do this. In this article, we’ll explain what you need to know.

How Probate Affects Savings Accounts

Certificates of deposit (CDs) are treated just like any other account when it comes to the inheritance process. Though probate is often used to decide who will inherit particular assets after someone passes away, it’s important to recognize that there are other ways of passing on accounts and that these can be much simpler and cheaper than probate.

There are three common ways to inherit property and only one of these involves probate:

1. Some property is jointly owned, and this passes directly to the co-owner without involvement from probate courts. This applies to joint accounts (including joint CDs), and real estate that is owned jointly.
2. The second category is contract property. This includes life insurance, retirement accounts, and any non-retirement accounts that have beneficiaries designated upon death. These designations override any will and also pass outside of probate directly to the named beneficiary. These accounts are often designated as payable on death (POD) or transfer on death (TOD) and it is possible to add this designation to your CD account.
3. The third category is everything else. All property not covered above will generally have to go through probate.

These procedures apply to all types of accounts and property, including CDs. This means that you can use a CD to avoid having to put your assets through probate, but you can do the same with most types of accounts. In other words, there is nothing special about CDs when it comes to avoiding the probate process.

Avoiding Probate For Your CDs

If you want to avoid probate for the money you hold in your CD, there are two options available to you—you can either add a payable-on-death (POD) beneficiary to your account or hold it as a joint account.

Holding a CD as a joint account

CDs can be held as joint accounts, but the rules on joint bank accounts vary a lot by state. In some states, if one owner of a joint account passes away, the other owner is automatically given full ownership of the account. If you inherit a CD in this way, the CD will typically continue to run in the same way it was before. Once it reaches maturity, you can close it and withdraw the funds. 

In other states, joint accounts work differently. In some cases, if the joint owner of a bank account dies, the funds will be split between the surviving owner and the estate of the deceased. In this case, the bank will normally close the CD—perhaps waiving the early withdrawal penalty, perhaps not—and distribute the funds as instructed.

No matter how your state or bank deals with joint CD accounts, however, it will not have to pass through probate if you hold it in this way.

Adding a POD beneficiary

Some CD accounts allow the owner to name a payable-on-death (POD) beneficiary. This is a person who will automatically inherit the funds in a CD if the account owner dies. Some banks will terminate a CD when the account owner dies and allow the POD beneficiary immediate access to these funds. Other institutions will make them wait until the CD reaches maturity. In either case, though, the CD will not have to go through probate.

The Bottom Line

Certificates of deposit (CDs) are treated the same as other forms of property during the inheritance process. Just as with other types of accounts, you can hold a CD as a joint account with your spouse or name a payable-on-death (POD) beneficiary. In this case, the money in your CD passes to the co-owner or to your named beneficiary without going through probate. If you hold a CD on your own and there is no POD beneficiary, it will normally have to go through probate.

Though you can use a CD to avoid the probate process—by either holding the account jointly or naming a POD beneficiary—many other types of accounts let you do the same. CDs do not have any special benefits (over, say, a savings account) when it comes to avoiding probate.