Most banks and credit unions allow you to name payable-on-death beneficiaries on your accounts. I reviewed many times how this can be used to increase your deposit insurance coverage. If you don't need to worry about increasing your deposit insurance coverage, you may still want to specify beneficiaries on your accounts. It can make it much easier on your heirs. When the owner dies, the account doesn't have to go through the probate process. This can save your heirs time and legal expenses. The beneficiary can claim the account directly at the bank or credit union.
I was the beneficiary on several small bank accounts that my dad owned. He passed away in March, and this year I had my first experience of claiming accounts as a beneficiary. Except for my problems at Wells Fargo, the process of claiming the accounts was simple. However, there were a few issues that I had to consider. I thought it would be useful for me to review these in a blog post.
In the last 20 years of my dad's life, almost all of his savings were in CDs. He had several small CDs at a few banks and credit unions. In addition to the safety and simplicity of the CDs, he also liked the ability to designate beneficiaries. He didn't have enough to worry about higher deposit insurance coverage. His main concern was to make it easy for me and my two brothers to inherit his savings without having to go through probate.
Specifying beneficiaries on bank accounts is indeed an easy way to keep money out of probate. Most banks allow you to add one or more beneficiaries to an account. They typically label beneficiaries as "payable on death" (POD) or "in trust for" (ITF).
One downside to specifying a beneficiary is that many banks and credit unions require the beneficiary's social security number. One of my credit unions refused to add a beneficiary without the beneficiary's social security number. I know readers have also reported this problem at some banks. I was wanting to add my brothers as the beneficiaries, but I didn't want to carry their social security numbers. Also, I didn't want to provide this number. I trust the credit union, but nothing is 100% secure. The more you give out these numbers, the more likely it could be found by hackers.
While you are alive, the beneficiaries have no access to the bank accounts. Access is only available after you die. In my experience, I just had to bring the certified copy of the death certificate and my ID. I also brought the copies of the account documentation with the account number and the beneficiary designation. This made it easier for the banks to look up the accounts in their system, but I don't think this was necessary for all cases except for that one Wells Fargo CD in which they had used the wrong beneficiary form.
Keeping the CD Rates and Terms
If a beneficiary is claiming a certificate of deposit, he or she can typically close the CD without an early withdrawal penalty. That was the case for all of my dad's CDs. However, there was an interesting issue with this. Many of my dad's CDs were 5-year CDs that were opened a few years ago when the rates were much higher. If I closed those CDs early, I would lose out on the high rates.
I was hoping that the banks and credit unions would allow me to take ownership of the CDs with the original rates and maturity dates. However, only two banks allowed this. The credit unions and the other banks required that the CDs be closed before I could take ownership of the funds.
The two banks that changed ownership without closing the CDs were SunTrust and PNC.
SunTrust Bank had the best process. They quickly gave me this choice at the branch, and converted the CDs with my name as the owner. They also allowed me to add new beneficiaries. The CD rates and maturity dates remained the same.
PNC also converted the CDs, but it did one surprising thing. It converted the CDs that listed me as the beneficiary without my permission. My brother was also a beneficiary on some PNC CDs, and he went to a PNC branch before I did. For some reason, PNC not only converted my brother's CDs, but it also converted my CDs. When I visited PNC, I learned that I was already the owners of these CDs. The main problem was that I could no longer close the CDs without an early withdrawal penalty. Fortunately, I had wanted to keep the CDs opened with the original rates and maturity dates. So I didn't protest what they did.
For all the other banks and credit unions, I was not allowed to keep ownership of the CDs with the original rates and maturity dates. The CDs had to be closed before I could take ownership of the funds. However, I still had a choice to make. Most would allow me to wait before closing the CDs. My dad had set up all of the CDs so interest would accrue in the CDs. I could just let the CDs mature and close them at maturity. There were two issues with this approach. First, all of the CDs would mature after 2011. My brothers and I felt that it would simplify tax reporting to have the CDs closed before 2012. Second, there's an issue of FDIC coverage. According to the FDIC:
The FDIC insures a deceased person’s accounts as if the person were still alive for six months after the death of the account holder. During this grace period, the insurance coverage of the owner’s accounts will not change unless the accounts are restructured by those authorized to do so.
Thus, for reasons of safety and simplicity, my brothers and I decided to close the CDs at the end of this year.
Not all of the banks were as willing to let me wait. Bank of America and Wells Fargo did not give me the choice to wait. I had two Wells Fargo CDs that had me as the beneficiary. Only one was done wrong. When I learned of the problem with that CD, I asked if I could wait to close the other CD. The banker insisted that the CD had to be closed immediately. I had a similar issue with Bank of America. Since the rates of these two CDs weren't that high, I didn't protest. It does show that you need to be careful when you decide to claim the account if you want to maximize the interest.