Totten trusts, or payable-on-death bank accounts, are an estate planning tool that allows you to transfer money to a chosen person upon your death. When you make a Totten trust, you put funds into a revocable trust and designate a beneficiary to receive them.
As the individual who made the account, you are the acting trustee. The beneficiary is the person you have selected to receive the funds when you die. As trustee, you manage the funds for the benefit of this person.
Unlike irrevocable trusts, which transfer ownership to another party, revocable trusts allow the account holder to maintain control over the account's contents. When you make a Totten trust, your designated beneficiary cannot get the money while you are alive. The money remains yours and is not an asset of the beneficiary, which can protect the money for your loved one if your loved one gets divorced or is pursued by creditors. Like a typical bank account, a Totten trust is subject to your creditors while you are alive.
Since the trust is revocable, you can access the funds in the account, allowing you to use the money if needed. If, for instance, an emergency happens and you need to withdraw the contents of the account, you will be able to do so.
When you select who will obtain the contents of your account, you may name multiple people. Unlike a will, you cannot specify how much goes to each person. In instances with multiple beneficiaries, banks typically split funds evenly.
Benefits of Totten Trusts
When you draft a will, you decide who will receive your possessions when you die. For your beneficiaries to acquire the money and assets you left them, in many cases, your estate must go through probate, which the court oversees. During the probate process, an individual dissatisfied with the terms of your will can challenge it, creating a lengthy and costly ordeal for your family and friends.
A key advantage to using a Totten trust is that it bypasses probate. The funds in the trust pass to the person you select to be your beneficiary immediately upon your death, without court oversight. However, this does not mean that funds received by a beneficiary from a Totten trust or payable-on-death account are automatically safe from creditor claims or will defeat a spouse's elective share. State laws vary on this somewhat, but as a general rule if a decedent's estate does not have sufficient funds to pay creditor claims or the surviving spouse's elective share, funds in a Totten trust or payable-on-death account can be pulled back into the probate estate to pay those claims.
Unlike some (not all) irrevocable trusts, Totten trusts offer flexibility. In addition to taking money from your account, you can change the beneficiary. Suppose your first beneficiary passes away prematurely, or you have a fundamental disagreement and wish to select another person to give your funds. You can change the beneficiary on the trust for any reason.
How to Create a Totten Trust
Setting up a Totten trust entails contacting your financial institution and designating a beneficiary on your account. The bank will need to have the name of your chosen inheritor on file. After you pass away, your beneficiary will need evidence of your death, such as a death certificate, as well as personal identification, to claim the account.
In come states there are subtle differences with respect to how Totten trusts work compared to payable-on-death accounts. Also read here about some downsides of utilizing beneficiary designations (which is how Totten trusts and payable-on-death accounts work).
Contact your estate planning attorney to learn more about how a Totten trust or payable-on-death account can fit into your overall legacy plan.