We believe that it would be a best practice to pay the certificate of deposit (CD) funds directly to the beneficiaries of the accounts, instead of distributing the funds to a business entity that is not a beneficiary or owner of the accounts. Distributing CD funds directly to the account beneficiaries will create a clean paper trail for your records, and there may be some legal risks if you do not distribute the funds directly to the beneficiaries, which we discuss below.

As to the payable on death CD, we believe that your institution must distribute the funds directly to the beneficiary of the account in order to receive a safe harbor from any other claims to the account. Under the Illinois Trust and Payable on Death Accounts Act, once a payable on death account holder dies, the bank “shall distribute the proceeds to the beneficiary or beneficiaries designated in the agreement controlling the account.” You are not required to distribute the account proceeds until the beneficiaries submit written instructions to “close the account and distribute the proceeds in a form acceptable to the institution.” 205 ILCS 625/10. Without distributing the CD proceeds directly to the beneficiaries, you may risk losing the safe harbor from other claims, which applies only if your institution makes payments to account beneficiaries “in compliance with this Act” and its requirements. 205 ILCS 625/5.

As to the CD held in joint tenancy, the Illinois Joint Tenancy Act provides a similar safe harbor. Under that law, when a CD (included in the term “other evidence of indebtedness”) owner dies, your organization may distribute the CD to the surviving owner “without liability to any other person who might claim an interest in or a right to receive all or a portion of the property so transferred.” 765 ILCS 1005/2(b). As with the payable on death account, you may risk losing this safe harbor if you distribute the CD proceeds to a third party, rather than directly to the surviving owner.