mak wrote:I didn't know there were prospectuses on the normal bank-issued fixed rate brokered CDs, I got one CUSIP and tried to do some research but found nothing. This was a simple bank CD, 3%, 20 year, brokered CD. I'm worried now about a similar rule, that the death put only applies if you were the original purchaser!
Yes, they typically do have prospectuses on them, and is a good idea to read them. Congrats on doing your research - I can't recall at this point if many of the CDs I purchased for my grandmother had the similar clause that you had to be the original purchaser or not (it was several years ago), but the CDs she purchased were always at the initial issue with the broker or at Vanguard.
I do question about the "original purchaser" clause - I have no evidence of this, but I would expect that it's one of those fine-print details that may not always be exercised by the bank, since it would be a pain to track and look-up. Kind of like it's there as insurance and they don't bother if they have just a few % of people redeeming, but if they start getting a flood of redemptions, then they start checking. But like I said - just a feeling, no evidence whatsoever. The reason why I think this is that the CD is held by your broker - people change brokers and move securities from one broker to another or one account to another, or retitle accounts (marriage/divorce/death), so the issuer can't simply just go by the original brokerage account info at purchase.
If it were a CD that has some convoluted equation like the LIBOR one you referenced, and if rates rose it would pay out essentially nothing, then I wouldn't try gambling on the "original purchaser only can redeem" clause...but if it's a straight-forward CD (i.e. just a flat rate CD or a step-up rate with 1 rate for the first few years, and another flat rate for the later years) and if the rate isn't THAT bad where you could grin and bear it for holding another 5-10 years to maturity, I might gamble buying it with just a small position, and in the event they deny the death put, you simply hold it to maturity.
And actually, now that I think about it - this is an excellent
way to reduce one's estate if you're above the $5+ million estate credit!!! Just buy bonds with small coupons at low prices now (might have to go out 7-15 years), and if the person passes on when the bonds are still low-priced, it reduces the value of their estate. Then, the heirs hold them to maturity, when the prices rise up. Of course, this requires the bond buyer to be able to tolerate the low current yield to maturity on the bonds....but if the time to maturity isn't excessive, and if the price of the bond is right, you can really do well in reducing your estate value, and converting that bond increase in value to capital gains (taxed at 15%), instead of the estate tax taxed at 35%-40%!