Can TOD CD be re-titled or need to break it early?

[SecretlyFI]

I posted recently about starting the process to transfer all my mother-in-law's monetary assets into my husband's name, as she recently passed away. All her accounts had him as POD or TOD beneficiary. The manager at our bank, where MIL had a CD, told me that it could not be re-titled into his name. The CD would have to broken early and then open a new one in his name and it would be at the current prevailing interest rates (i.e. lower).

This does not sound right to me, just based on what I would expect to be the meaning of the words "transfer on death". I would normally be inclined to believe the banker about their own terms, but she also told me several things in the same conversation that sounded like bad advice or incorrect.

One of them was that we should just leave the CD alone until it matures (1 more year). I told her that would cause the estate to have income for most of the year and therefore cause us to file an estate income tax return. We don't want to do that because the income tax rates on an estate are higher and we were not planning to probate her will, since there's no assets to pass via probate (all are TOD & POD). She then went on to tell me we would not have to file an estate income tax return because the threshold for that is "much higher". I explained to her that the threshold is if an estate has income of only $600 or more for the year and this CD is currently earning $300 a month - this was a surprise to her I am assuming she is confusing "estate taxes" with "estate income taxes".

Anyway, does anyone know if what she said about the CD is true--can it be re-titled and stay in tact, or would we have to break it early?

 

[pb4uski]

Not sure on the first part... I would have thought that they would just take the same CD and replace MIL TOD DH with DH both in name and TINs and that would be it.

I would ask her if you can change the TIN on the CD from MIL to DH and if so, then do that and let it be until it matures. If not, then escalate because it doesn't sound right to me.

 

[The Cosmic Avenger]

I'm pretty sure that's not legal. POD/TOD is supposed to be a kind of trust, and the assets transfer automatically to the beneficiary on death, regardless of the terms of the account. There's no exception or difference for CDs than for any other accounts. My guess is that this person thought her computer system or her bank's policies wouldn't let her do it; many people conflate their employer's policies with the law.


EDIT: The way that bank transfers it to your husband might depend on the bank's policies, but I would think they should have to transfer it as-is, otherwise a bank could try to transfer your MIL's money in rubles or something underhanded.

 

[pb4uski]

Interesting thread on the subject:

https://www.bogleheads.org/forum/viewtopic.php?t=50578

 

[SecretlyFI]

Thank you both so much! The linked thread was also very helpful and confirmed that I am not wrong in thinking the bank manager's advice was misguided at best. I still can't believe she told me we should leave the CD alone, in MIL's name, until it matures in another year. That would mean my deceased MIL would get a 1099 in Jan 2021 AND Jan 2022 when she died in April 2020.

Several posts on the Boglehead thread were on point here:
An estate would need to be wrapped up to file a final tax return so keeping longer term CD's going would not be an option...
CU would keep a deceased person's account open for six months to allow for settlement of the estate. After that the account had to be empty and closed. Lingering CDs still earning interest for a deceased person are a tax problem. The deceased won't be filing tax returns after the year of death....
At death with a POD account the funds need to change ownership to the survivor. The primary reason for this is so that the interest/earnings from the account are reported to the correct SSN for tax purposes. Whether a CD account is liquidated or simply transferred over to the beneficiary for the remaining term may depend on the bank's customer agreement.

Another golden nugget of advice from the bank manager, in reference to another CD within MIL's IRA....She said we should cash it out and take it as a lump sum. Ummmm NO !! It will become an inherited IRA in my husband's name, and he will be required to take out the balance over 5 years. But I believe we get a reprieve this year because of the recent legislation allowing you to skip RMD's in 2020. I need to research that a little and confirm it applies to inherited IRA's, but either way I don't want the tax hit of cleaning out an IRA in a lump sum all at once!!!

Seems like this bank manager is just trying to simplify her paperwork as much as possible. Sorry, but you're gonna have work a little harder for me here.

 

[audreyh1]

Isn’t inherited IRA a 10 year period now?

Sorry - your bank manager is giving terrible advice. Do you have someone else who can advise you?

Yes, I agree bank manager is trying to simplify plus make it nicer for bank not to pay higher CD interest.

 

[SecretlyFI]

Audreyh1, you're right, it's 10 years, thank you. I just found that, in looking up whether the suspension of RMD's is applicable to inherited IRA's also. Turns out RMD's are not even applicable to the inherited IRA anymore. You just have to liquidate the account by the end of the 10th year following the year of death. So that gives us some breathing room on that one.

And yes, I'll be checking in each step of the way with MIL's accountant to make sure we're considering taxes in the right way in this process. Taxes are really my main concern with her accounts right now.

 

[pb4uski]

... in looking up whether the suspension of RMD's is applicable to inherited IRA's also. ...

No RMDs on inherited IRAs... just need to drain account before 10 year anniversary of date of death of original accountholder.

 

[SecondCor521]

No RMDs on inherited IRAs... just need to drain account before 10 year anniversary of date of death of original accountholder.

I think OP has a little longer.

The SECURE Act that changed it to 10 years is based on the older 5 year rule. The 5 year rule in Pub 590-B says:

"Five-year rule. The 5-year rule requires the IRA beneficiaries to withdraw 100% of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death. For example, if the owner died in 2019, the beneficiary would have to fully distribute the plan by December 31, 2024. The beneficiary is allowed, but not required, to take distributions prior to that date." (https://www.irs.gov/pub/irs-pdf/p590b.pdf page 9)

So since OP mentioned that the original owner died earlier this year, the account needs to be drained by 12/31/2030.

 

[pb4uski]

Agreed, I forgot about that nuance.