What is a Death-Put Feature of a Certificate of Deposit?

Some certificates of deposit (CDs) have a death-put feature that allows a decedent's estate to redeem the CD at face value in the event the holder of the CD dies before the CD's maturity date.

An NASD complaint from February 1, 2005 against Andrew J. Patton explains the death-put feature and how Patton allegedly violated it:

18. The CD provided for redemption of the certificate at face value in the even the holder of the CD died before the maturity date.

19. For an estate to property exercise the death-put, the deceased customer must have been the holder of the certificate at the time of death.

20. Patton sold the CD from JF to the estate account of SC for 99.5% of the face amount.

21. After transferring the CD to the estate account, Patton submitted a death certificate from the previously deceased customer and collected the face value of the CD plus interest from the issuer.

22. Exercise of the death-put feature was invalid under the terms of the certificate of deposit, because the account did not hold the CD at the time of the account owner's death.

Another NASD complaint made on May 20, 2005 against James A. Swanke and Colin P. Collea also explains a death-put feature:

5. The terms of the [callable certificates of deposit (CCDs)] were usually for extended maturities of 15 or 20 years. These products typically offered customers a higher interest rate for the first year, and the rate "stepped down" to a lower rate (usually 1% to 2% lower) for the remaining term. The CCDs varied in terms of how often they paid interest; there was a monthly payout on some CCDs, and a semi-annual payout on others. The CCDs also offered a death put redemption clause, which meant that in the event the CCD holder died, the CCD was redeemable for its full (par) value by the heirs of the deceased. Most of the CCDs were callable by the issuing institutions after a one-year period, and then for every six months thereafter. The CCDs were FDIC-insured up to $100,000 per institution.