Dear Dr. Don,
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If I were to purchase a payable-on-death CD, or POD CD, would there be an early withdrawal penalty if the beneficiary withdraws the deposit prior to maturity?
-- Missy Mortal-Coil
A payable-on-death, or POD, account allows you to name beneficiaries for the certificate of deposit. POD CDs are often used to avoid probate because the assets transfer when the account owner dies. Savings bonds and some other assets also can have POD beneficiaries.
According to the American Bankers Association, or ABA, banks are not required to waive the early withdrawal penalty for the beneficiary when the account owner dies.
There's no bank regulation that requires banks to waive the fee, but the ABA pointed out that in the Federal Reserve's Regulation D "Reserve Requirements of Depository Institutions," banks are allowed to waive the early withdrawal penalty "upon the death of any owner of the time deposit funds." If you're planning on a home for this CD, then you will want to make sure the bank's policy allows for penalty-free withdrawals at your death.
There's a lot of variability in state banking laws. I spoke with Harriet Clark, a private banker at Graystone Wealth Management, a division of Graystone Tower Bank, about POD CDs. She told me Pennsylvania does not recognize POD CDs. Instead, the title must read ITF, or "in trust for," when opening a new account. That said, her bank would not charge a penalty if the beneficiary were to redeem the deposit prior to maturity. She said it wasn't a formal bank policy, just a rule of thumb.
One of the attractions of a POD account is the account avoids probate court. Even so, POD designations can't sidestep state laws concerning a spouse's right to a share of your estate. Ask your banker about any limitations or requirements concerning POD transfers at death. Remember that just because the account avoids probate doesn't mean the funds aren't part of your taxable estate.
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