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Can A Bank Force Early Closure On a P.O.D. Certificate Of Deposit?

Tuesday, June 12, 2012 - 11:28 AM
In order to help me take advantage of a one-per-person limit on promotional CDs, an elderly family member opened one for me in his name, with my money, and with me as the POD beneficiary. 

At present the family member is 95 years old and there are about 12 years left until the CD matures. So I think there is a very high chance the POD provision will be executed, but with interest rates what they are (and this being a promotional rate to begin with) I'm worried that the bank will try to force early withdrawal rather than allowing the certificate to continue in my name until maturity.

Can the bank do this? The bank/account disclosures don't say anything about PODs or Totten Trusts and although the branch manager told me verbally that I would have the option to either close or continue it until maturity, she said "don't worry about that" when I asked her for written documention (which is not normally an answer I would accept, but I didn't push the issue because it was a promotion they were in the process of phasing out). The reason I'm asking is because I'm trying to do some long term financial planning and, given the drop in interest rates and the long term of this certificate, it will make a big big difference if I'm forced to withdraw early and reinvest elsewhere. 

Thanks for your input. 
5
FinerTheBetterFinerTheBetter7 posts since
Jun 7, 2012
Rep Points: 21
1. Tuesday, June 12, 2012 - 11:44 AM
I had experience with this issue at several credit unions and banks. Please refer to my blog post, My Experience as a Beneficiary Claiming POD Bank CDs.
3
Ken TuminKen Tumin5,442 posts since
Nov 29, 2009
Rep Points: 123,687
2. Tuesday, June 12, 2012 - 11:57 AM
Thanks so much Ken (and sorry about your father passing)...it seems like the more reliable thing to do would be to simply not notify the bank about the death until the maturity date,

but what to do with the 1099s in the meantime?
2
FinerTheBetterFinerTheBetter7 posts since
Jun 7, 2012
Rep Points: 21
3. Tuesday, June 12, 2012 - 12:37 PM
I must comment: This approach you have taken in order to get a promotion is fraught with much more worrisome possibilities than you might realize. Of course, you know the details of all, and maybe you have done something to avoid them.

But the second you gave that money to your family member to deposit in their name, that was a transfer to them, a transfer of ownership. That no longer is your money, even though you are listed as beneficiary. Also, that transfer could have tax implications under the gift tax rules. You can give only a certain amount each year before tax considerations kick in (Frankly I lost track of what that is this year, but I believe $14,000+). You must fill out a form to report anything over that amount, and you either would pay gift tax on it, or you could have it debited against your lifetime limit to leave as inheritance. 

Secondly, once that money is in the relative's name, it could end up being taken for such as assisted living charges, nursing home charges, medical care charges, or even any liens. Unless you have done something to completely protect that relative's money from any such, then that money you gave can also go down that hole. 

Whether that CD is closed early probably should be the least of your worries!
8
me1004me1004343 posts since
Jan 16, 2010
Rep Points: 2,357
4. Tuesday, June 12, 2012 - 1:19 PM
Wow!  I have to agree with poster 1004.  The very fact that you gave your relative "your" funds and he put it in a CD in "his" name would be my biggest worry no matter how close I was to that relative.  As old as he is may not work to your advantage if he unfortunately has to end up in a nursing home.  I sure hope you also got him to write out a will stating that the amount you "gave" him should be given back to you when he deceases. I think you are resting everything on the fact that you are POD on the CD but I do hope you got added back up for yourself to get that money back in his Will also.    You are so concerned about getting higher interest rates that I think you lost fact of the consequences you may incur by giving the relative the money.  I do hope you spoke to a lawyer and got your ducks in a row before doing this.   When it comes to money, there are many limitations as to what we can and cannot do. The CD being closed early would be my last concern in this matter.  We all want to make higher interest rates but we have to be very careful about how we go about it, imo.
3
paoli2paoli21,140 posts since
Aug 10, 2011
Rep Points: 5,087
5. Tuesday, June 12, 2012 - 9:39 PM
Don't worry guys I thought about all that before I opened the account:

#1. This money was not "gifted" or "given" to the relative. According to the IRS "If as the record holder, you receive Form 1099 showing amounts belonging to another person, you are considered a nominee recipient". So just because the money is in an account with someone else's name on record that doesn't make them the owner and, in fact, when I consulted with a professional they told me it cannot ever be regarded as a gift if there is an agreement in place to return the funds to the owner (in which case it MUST be treated as a nominee). Do you consider your brokerage account as having "gifted" money to the broker? Of course not and this relative files as a nominee recipient for the interest from this account every year and issues me a 1099-OID just like my brokerage does (or perhaps it'd be more accurate to say that I issue it to myself since I do his taxes). 

#2. Even if it were a gift, this is an installment CD, so the yearly deposits are below the $14k/year threshold.

#3. The relative gifted the majority of his assets to me many years ago, the income from which I use to pay his expenses. So even if there were somehow a gift tax issue it would be canceled by this arrangement.

#4. Since I am well acquianted with this relative's finances and medical insurance I know with absolute certainty (at this point...obviously did not know this when his assets were gifted to me) that his assisted living and medical charges will not exhaust the assets he previously gifted to me. Moreover there are no liens nor will there be any nursing home charges because I promised him that he would not go into a nursing home under any circumstances (nor can I imagine a scenario where he would need to, given the size of the nest egg I'm using to pay his expenses). I have seen many people (relatives and nonrelatives) of whom it was said they "had to go to a nursing home" and as far as I can tell that's simply a lie family members tell themselves so they don't feel guilty about discarding their elders (and if you think this way you should be ashamed of yourself!). 

#5. There is a will and I have discussed this issue with the executor (who's an even closer relative), but it really doesn't matter because the elderly relative isn't the record holder for any assets except this CD. So there wouldn't be anything to give back when he deceases no matter what were written in the will. 

So I'm not worried about these things and the only reason I've enumerated them here is for the benefit of others who might be in similar situations.

I'm also no longer worried about the CD being closed early because, thanks to the information provided by Ken, I've decided that when the time comes I will simply go to the bank branch with death certificate in hand and if they don't agree to allow me to continue the CD until maturity then I simply won't hand over the death certificate (until I revisit the branch upon CD maturity). I looked into it and apparently the tax procedure for unclaimed POD CDs is the same nominee procedure I'm already doing...so although it'd be a hassle to continue filing tax returns for many years after the relative deceases, it would guarantee non-closure. 
3
FinerTheBetterFinerTheBetter7 posts since
Jun 7, 2012
Rep Points: 21
6. Tuesday, June 12, 2012 - 10:10 PM
Not sure how the interest would be credited after a death. The income tax paid on interest of an estate is very high.
1
AllyAlly777 posts since
Jan 16, 2010
Rep Points: 2,261
7. Tuesday, June 12, 2012 - 10:46 PM
Not sure how the interest would be credited after a death. The income tax paid on interest of an estate is very high.

CDs with terms over 1 year are issued 1099-OIDs (Original Issue Discount). There's no actual interest payments nor is there technically interest (1099-INT) for tax purposes but rather a discount on the face/maturity value which becomes income upon maturity (like a zero coupon bond). Although since 1984 the tax code requires individuals to amortize the taxes on this income over the term of the bond/certificate (otherwise it'd be effectively tax deferred like an IRA), I'm not sure what the requirement would be for an estate.

However, for an estate I now also understand that since the account would be POD and the "record holder" deceased, the estate would not even be liable for the tax because the estate would not be the legal owner of the account/income (because the POD provision takes precidence over probate). But, until the bank is notified of the death, the estate would still be receiving "1099-OIDs showing amounts belonging to another person" and thus would still need to file a tax return as a nominee and issue a 1099 to the beneficiary (who'd be the actual legal owner of the unclaimed income).

In general, any time someone receives a 1099 for amounts that do not belong to them (or are held on another's behalf) they need to file a tax return as a nominee and issue a 1099 to the actual owner. So in my example the procedure's the same regardless of if it's my relative (who opened the account on my behalf as a middleman) or his estate (which would simply be receiving erroneous 1099s due to the bank not yet having the necessary paperwork to retitle the account) who's receiving the 1099: file as a nominee and issue a 1099 to the actual owner (me). 
3
FinerTheBetterFinerTheBetter7 posts since
Jun 7, 2012
Rep Points: 21
8. Tuesday, June 12, 2012 - 11:03 PM
Welcome to the Forum........

I like you already FTB
1
RicochetRicochet131 posts since
Jan 19, 2010
Rep Points: 358
9. Wednesday, June 13, 2012 - 9:21 AM
Well, Finer, good luck. But I must say, a lot of your explanation sounds like your interpretation of what you read. Its good that you did that research, but I'm not so sure your interpretations are correct. You said you spoke on one point with a "professional." I don't know what that was, but any old "professional" doesn't necessarily know all the ins and outs of this stuff. You should speak with an attorney classified as an expert in these matters. 

Like I said, good luck. 
1
me1004me1004343 posts since
Jan 16, 2010
Rep Points: 2,357
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