Can You Bypass Probate With CDs?

Certificates of deposit (CDs) often form part of an inheritance. These are low-risk investments, available through any bank, credit union, or brokerage, that allow people to deposit some spare cash for a short period of time in return for a modest return.

They might turn out to be particularly valuable as a source of ready cash for your loved ones in the event of your death. You need to make sure they get access to that cash without delay, and that means bypassing the probate process.

There are two ways to do this:

• Record the name of the beneficiary or beneficiaries on the account, and keep it updated as needed. Your account will have an option to fill in or edit your beneficiary information.
• Open a joint account rather than an individual account. The co-owner will have immediate access to the account.

Either step will get the money into the hands of your heirs without the delay of probate, the judicial process that validates the distribution of an estate.

It's important to note that you should take one or the other of these steps on all of your financial accounts, not just CDs, in order to free your heirs from the delay of a probate process.

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 that are simpler and cheaper than probate.

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

1. Jointly owned property 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. Contract property includes life insurance, retirement accounts, and any non-retirement accounts that have named beneficiaries. That designation overrides any will. You need to add the designated heir to the personal information on the 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.

Avoiding Probate for Your CDs

If you want to avoid probate for the money you hold in your CD, the two options are to add a payable-on-death (POD) beneficiary to your account or to 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 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. The maturity date on the CD usually stays the same. Once it reaches maturity, the joint account owner can close it and withdraw the funds. 

In other states, joint accounts work differently. If a 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 the 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, 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 beneficiary.

In either case, the money in the CD is transferred 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.