What is a Totten trust?

A Totten trust is not actually a type of trust at all. In fact, it is a type of payable on death account, or revocable trust, that is payable to another after the demise of the accounts owner. This form of trust earned its name from a landmark case in which the court found in favor of the named person on the account over the actual family of the deceased person. Additionally, it showed that the trust was not trying to substitute for wills. Not all states recognize the Totten trust, so it is always best to speak with an attorney first.

What are the advantages of a Totten trust?

A Totten trust, or tentative trust, is like traditional trusts and life insurance and is not considered part of a deceased person’s estate (does not involve personal property). This means that a Totten trust will not pass through the probate process –the activity when a deceased individual’s will is confirmed and the assets are distributed to the appropriate individual(s) and the debt will be handled. So, it allows for a simple procedure of transferring money at death. The Totten trust is completely private. In fact, all that is required for the named person to retrieve the account is to present the bank with a certificate of death.

The privacy even extends in that the benefitting person will not even realize the account exists until you die. Finally, Totten trusts are simple to create and can be a very reliable means of removing funds from your estate.

What are the disadvantages of a Totten trust?

As mentioned earlier, not all states honor Totten trusts. In the event that your state does not acknowledge them, the funds in the Totten trust would be added to your estate and would pass through probate and be distributed to your heirs according to your will, or according to your state’s rules regarding who receives funds when you have not designated anyone as an heir, with estate taxes being charged where applicable.

Additionally, the Totten trust removes your ability to control the funds. With a traditional trust, the benefactor is able to specify who will receive the money and how much they will receive at one time. In fact, traditional trusts can even go so far as to prevent an irresponsible beneficiary from signing away their interest in the trust. A Totten trust, however, is simply a bank account with no strings attached. The interested party may withdraw all the funds from the account at once and do whatever they desire with the money.

How do you create a Totten trust?

When creating the Totten trust, the first step is for the depositor to open the bank account with the proper drafting on the name of the account. Also, a savings or checking account that already exists can be used. States that honor Totten trusts will look for phrasing such as, “Jane Smith, in trust for Michael Smith.” Once the account is set up, it is completely revocable, and Michael will never know that the account existed or that Jane cancelled it.

As the trustee, the next step is to include detailed instructions about the trust and place them in a safe but easy to find location. Your instructions should include who the trust beneficiary is and what is required for them to access the account. Avoid placing the information directly into your will, as some courts may consider this a reason to include the account in your probated estate. After your passing, a copy of the death certificate will be needed to access funds.

Regarding settling debts of the trustee, creditors have the ability to access funds in the account.

A Totten trust can be a good option to add to estate planning. If this sort of trust sounds like a useful means of estate planning for you, contact an estate planning attorney for a consultation and to verify that your state upholds Totten trusts.

Case Studies: Understanding Totten Trusts

Case Study 1: Beneficiary Success

Mary, a financial planner, sets up a Totten trust for her nephew, Jason. She opens a bank account with the phrasing, “Mary Johnson, in trust for Jason Adams.” As the trustee, Mary includes detailed instructions about the trust’s terms and places them in a secure location.

Unfortunately, Mary passes away unexpectedly. Jason, as the beneficiary, presents the bank with a copy of Mary’s death certificate and successfully accesses the funds in the Totten trust. The process is straightforward, and the privacy of the trust allows for a seamless transfer of funds without going through probate.

Case Study 2: Non-Recognized Totten Trust

Tom, a business owner, decides to set up a Totten trust for his daughter, Sarah. However, Tom resides in a state that does not acknowledge Totten trusts. As a result, the funds in the Totten trust would be considered part of his estate and go through the probate process.

Unfortunately, Tom’s will is outdated, and it does not mention the Totten trust or Sarah as a beneficiary. The assets in the Totten trust are distributed according to state rules, and estate taxes are applied where applicable. The lack of recognition for Totten trusts in Tom’s state results in unintended consequences.

Case Study 3: Limited Control and Creditor Access

Robert, a retiree, establishes a Totten trust for his granddaughter, Emily. He chooses to include a significant sum of money for her future. However, Robert realizes that a Totten trust does not offer the same control over the funds as a traditional trust.

When Emily comes of age, she withdraws the entire amount from the account without any restrictions. Robert’s hope of providing a structured financial future for Emily is hindered by the lack of control in the Totten trust. Additionally, creditors have access to the funds in the account, potentially jeopardizing Emily’s inheritance.