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What Happens To My CDs, Bonds If I Die?

Bank policies differ about removing money after death.Recently, I’ve been fine-tuning my estate plan.

I’m also toying with longer-term CD and bond maturities to improve yields.

This has me investigating what happens if I (now 65) die before my investment matures.

I don’t want my estate or payable-on-death beneficiaries stuck with the interest rate and/or market value risk.

I want them able to cash out quickly, without cost.

I’d always thought banks and credit unions were required, under deposit contracts, to permit withdrawal of a CD depositor’s funds in full, without penalty, upon his or her demise.

But I’ve found this isn’t necessarily the case.

Of course, many institutions do provide for penalty-free CD closure upon death.

Discover Bank, which offers 7- and 10-year certificates of deposit, is one.

Other institutions aren’t entirely clear on this point, however.

iGobanking (an online division of Flushing Savings Bank), which also has 7- and 10-year CDs, says “(i)n certain circumstances such as the death … of the owner … the law permits, or in some cases requires, the waiver of the early withdrawal penalty.”

This leaves me hanging. Should I consult my lawyer?

Bank of America, another issuer of long-term CDs (up to 10 years), has no provision for early withdrawal after the customer’s death. All early withdrawals are at the bank’s discretion.

(Yet another reason to shun BofA.)

Brokered CDs provide what are sometimes called “survivor’s options.” They’re also styled “conditional puts — death of holder.”

But these, too, can be a tad ambiguous.

Thus, Fidelity’s CD disclosures state that, upon death, “early withdrawal of the entire CD will generally be permitted.” (Italics mine)

That’s comforting — I guess. But exactly when does the “general” rule not apply?

Some corporate note programs, such as InterNotes offered through broker Incapital, also have a “survivor’s option.”

The problem is not their ambiguity but their perfect clarity. They’re very restrictive.

InterNotes have multiple hoops to jump through for repayment upon the owner’s death.

They also limit the annual amount available both in respect of one owner ($250,000) and all owners (generally, the greater of $2 million or 2% of the outstanding issue).

At least this is better than a Treasury Note or Bond, where the investor is stuck until maturity and must sell to get out.

Anyway, repayment after death is just one more thing for me to consider when investing.

And, along with an untimely visitation by the Grim Reaper, to worry about at night.

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