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When purchasing a long term CD , say 5 years, & the interest accumulates until the maturity date, does Uncle Sam want interest payments taxed & paid on a yearly basis ? Do all CD's have a POD or TOD , or is this info part of due-diligence ? Thanks for any info, Derf
All of my brokered CDs have the "Survivor' Option" (commonly called a Death Put) as defined below by Investopedia. When I set up my brokerage account, I included the Transfer on Death component for my heirs.
What Is Death Put? A death put is an option added to a bond that guarantees that the heirs of a deceased bondholder can sell it back to the issuer at par value. Another term for a death put is a survivor's option.
KEY TAKEAWAYS A death put, or survivor's option, allows a bondholder's beneficiaries to sell back the bond to the issuer at par value if the bondholder dies before maturity. A death put effectively protects the bondholder's estate from interest rate risk. A bond issuer may include a death put to make it more attractive to the buyer, although the holder may have to accept a lower interest rate in return.
All of my brokered CDs have the "Survivor' Option" (commonly called a Death Put) as defined below by Investopedia. When I set up my brokerage account, I included the Transfer on Death component for my heirs.
Sometimes a belt can get in the way of suspenders. Always read the fine print. In the disclosure of a JP Morgan CD is the following:
For purposes of clarification, the Survivor’s Option may not be exercised where CDs have been transferred from the estate of the deceased owner by operation of a transfer on death.
It gets a little complicated, and I haven't done the digging to validate this, but it may be that typically the Survivor Option is not available to CDs held in revocable trusts, and TOD accounts are considered informal revocable trusts. See, e.g. this generic CD disclosure statement from Fidelity:
Informal revocable trusts include accounts in which the owner evidences an intent that at his or her death the funds shall belong to one or more specified beneficiaries. These trusts may be referred to as a “Totten trust” account, “payable upon death” account or “transfer on death” account. Each beneficiary must be included in the Firm’s account records
Just keep in mind that POD/TOD is an easy estate TRANSFER mechanism that doesn't cost anything (if the designation allowed).
CD survivor/death-put option is an estate PROTECTION feature that will cost as lower interest rate (if allowed). There are also rules for triggering the feature. Its value may be if the brokered CD has to be cashed early.
Comments
CDs can have PODs/TODs. In fact, a trick is to change POD names to increase FDIC coverage as each POD is separately covered.
What Is Death Put?
A death put is an option added to a bond that guarantees that the heirs of a deceased bondholder can sell it back to the issuer at par value. Another term for a death put is a survivor's option.
KEY TAKEAWAYS
A death put, or survivor's option, allows a bondholder's beneficiaries to sell back the bond to the issuer at par value if the bondholder dies before maturity.
A death put effectively protects the bondholder's estate from interest rate risk.
A bond issuer may include a death put to make it more attractive to the buyer, although the holder may have to accept a lower interest rate in return.
Sometimes a belt can get in the way of suspenders. Always read the fine print. In the disclosure of a JP Morgan CD is the following: https://www.jpmorgan.com/content/dam/jpm/structured-products-documents/2019/feb/Rate_Linked_CDs_Disclosure_Statement_02_21_19.pdf
It gets a little complicated, and I haven't done the digging to validate this, but it may be that typically the Survivor Option is not available to CDs held in revocable trusts, and TOD accounts are considered informal revocable trusts. See, e.g. this generic CD disclosure statement from Fidelity: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/cddisclosure.pdf
CD survivor/death-put option is an estate PROTECTION feature that will cost as lower interest rate (if allowed). There are also rules for triggering the feature. Its value may be if the brokered CD has to be cashed early.
General https://www.investopedia.com/terms/d/deathput.asp
CDs http://www.pipersandler.com/pdf/04-1730_survivor'soptionsecurities.pdf
Fido CDs, pg 10-11, https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/cddisclosure.pdf
While there, also read about the SECONDARY MARKET for CDs - really, illiquid and on best efforts basis.