What Is a Totten Trust and Is It Right for You?

Over a hundred years ago, an appeals court in New York established that a person could create an account and name a beneficiary on it to receive the money held in the account upon the account holder’s death as an entirely revocable form of estate planning. This arrangement was tentatively named a Totten trust and has since been identified as a payable-upon-death account.

Totten trusts are a popular arrangement, although they aren’t a trust at all – at least not in the conventional sense. What they are, however, is a valuable estate planning tool – especially if you mean to leave behind some money outside the confines of probate.

Analyzing a Totten Trust: Everything You Need to Know

A Totten trust is a bank account with a named beneficiary. The wording on the account would be such that the depositor creates and holds the account “as a trustee for” a given beneficiary.

If you were to request opening a Totten trust with a savings bank, you would be opening the account as a “trustee” for a chosen beneficiary. In practice, it becomes a way for you to manage money in an account that would one day be payable to a beneficiary of your choice.

An essential facet of a Totten trust is that it is revocable. The nature of this revocability is total. You can end the account at any time, with no repercussions, because you are not obligated to leave any money in the account. You have no obligation to the beneficiary to ensure that they receive anything – and you can, at any point, make a second, third, or fourth Totten trust with the same or entirely different beneficiaries.

It’s as easy as going to the bank and requesting that your account be closed or perhaps withdrawing every cent and waiting for the bank to close it based on their account thresholds and minimums policies.

The Benefits

Ultimately, a Totten trust dramatically benefits anyone who wishes to leverage the option of leaving wealth behind for a loved one without explicitly or assuredly tying off that money, never to be touched again. Its flexibility is its core trait. A Totten trust is straightforward to set up and very easy to revoke.

In addition to being revocable, a Totten trust is automatically ended if the beneficiary dies – meaning if you’re leaving one to your sister but do not wish for the money to go to her partner, then rest assured: if she passes away before you do, the contents of the account go to no one until another beneficiary is named.

Bypassing probate is another significant benefit of a Totten trust. When a person dies, their belongings are distributed among the living. This process must occur mainly within the confines of the probate courts. Here, a person’s will is legitimized within the early stages of the probate process. An administrator is named and given the necessary powers to execute the will and care for the decedent’s remaining affairs – such as debts and other obligations.

Without a will, the decedent is found intestate, and their earthly possessions are distributed as per the rule of state law (intestate succession). However, particular possessions bypass the courts because they’re already spoken for.

A Totten trust is one such arrangement. Instead of waiting for the probate process to conclude, the beneficiaries can immediately inherit after the bank receives proof of the depositor’s death and the beneficiary’s identity.

The Drawbacks

As always, there are drawbacks to consider – or other factors that may impact your decision to open a Totten trust. For one, the only asset one may transfer is cash. There is no way to transfer property through a Totten trust. However, depending on your state, similar arrangements exist for select vehicles and properties below a specific value.

A Totten trust cannot store stocks, investments, or other financial instruments. It cannot store family jewels or other heirlooms and cannot be used to transfer ownership of your beloved roadster.

Many states have a limit on the total value an estate may reach before the probate process must be expanded past its simplified or expedited form. Arrangements such as Totten trusts can be used to lighten the load, so to speak, and reduce the total value of what goes through probate. Why bother setting one up at all, then?

Furthermore, Totten trusts are a cost-effective way of transferring cash if you only intend to transfer cash or wish for your loved ones to receive a specific windfall at the time of your death for funerary costs and other necessities.

Totten Trust vs. Other Trusts

A Totten trust is not a trust in the traditional sense. While the account is held in trust, and the account holder is a trustee, a Totten trust is a bank account first and foremost. Trusts, on the other hand, are living legal entities.

When a trust document is signed and notarized, a trust is created. The trust holds things. It can be its own separate entity, which allows it to be immensely versatile in asset protection, legal tax liability reduction, and estate planning. Living trusts are established the moment a trust document becomes official. They must be continuously managed and actively funded by the trustee and grantor, respectively, for one or multiple beneficiaries.

Because trusts can own nearly anything, they can be used to hold and protect assets of all kinds. Revocable trusts are still tied to the grantor, meaning that the assets held within may still be affected by liabilities the grantor faces. But irrevocable trusts can be separated from the grantor – meaning even if they become bankrupt, the contents of an irrevocable trust cannot be touched.

Revocable and irrevocable living trusts are more expensive to set up than a Totten trust, but they have their purposes in a larger estate plan.

Do I Need a Totten Trust?

A Totten trust is a relatively inexpensive way to transfer cash to a loved one outside of probate. However, if you do not intend to do so, there is little reason to set one up. Nevertheless, discussing the matter with your lawyer or an estate planning professional may be a good idea.