What is a Totten trust?
UPDATED: December 13, 2019
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A Totten trust is not actually a type of trust at all. In fact, it is a type of payable on death account that is payable to another after the demise of the account owner. The Totten 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. Not all states recognize the Totten trust, so it is always best to speak with an attorney before using this method for your estate planning.
Advantages of a Totten Trust
A Totten trust, like traditional trusts and life insurance, is not considered part of a deceased person’s estate. This means that a Totten trust will not pass through probate or be calculated into a deceased person’s estate taxes. 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 further than a traditional trust, 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.
Disadvantages of a Totten Trust
As mentioned earlier, not all states honor Totten trusts. In the even 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 to Create a Totten Trust
When creating the Totten trust, the first step is to open the bank account with the proper drafting on the name of the account. 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.
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 Totten trust was designated for 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.
If a Totten 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.