How Does a Totten Trust Work?
A Totten trust can be one tool to consider when deciding how to protect assets, transfer wealth, and leave money to family members after your death.
A Totten trust is one of the simplest types of trusts. It is a living trust because it is created while the depositor is alive. It is also a revocable trust because the depositor can change or cancel it at any time before death. Totten trusts can be an effective and inexpensive means of estate planning.
The account owner acts as the trustee and keeps full control of the money in the bank account during their lifetime.
When the account owner dies:
- The funds are paid directly to the named beneficiary
- The beneficiary may be a family member, friend, or organization
- The beneficiary usually must provide proof of identity and a certified copy of the death certificate to claim the funds
Because the funds transfer directly to the beneficiary, the account generally avoids probate.
Example: How It Works
Imagine you and your spouse want to leave money to your adult grandson.
Step 1: Open or Convert an Account
You can:
- Open a new bank account, or
- Convert an existing checking or savings account into a payable on death account.
You complete the bank’s paperwork and name your grandson as the beneficiary. Once the bank records the designation, the Totten trust becomes legally binding.
Step 2: Fund the Account
You deposit $10,000 into the account. The money earns interest over time.
Because the trust is revocable, you remain in control. For example:
- If you need $2,000 for car repairs, you can withdraw it.
- If you want to increase the inheritance, you can deposit an additional $5,000.
Step 3: Transfer at Death
After seven years, assume the balance grows to $17,000, including deposits and interest.
If you die:
- Your grandson inherits the $17,000
- The bank transfers the funds directly to him
- The transfer occurs without going through probate
What Are the Benefits of a Totten Trust?
A Totten trust offers several advantages.
Probate Avoidance
Probate is the legal process that validates your will and distributes your assets. If complications arise, probate can take time and increase court costs.
With a Totten trust, assets transfer directly to your beneficiary after your death. The bank handles the account transfer, so it does not need to go through probate court.
Simple and Low-Cost Setup
To create a Totten trust, you complete the required bank forms. You do not need to hire an attorney.
After opening the payable on death account, you act as trustee and keep full control of the funds during your lifetime. You can manage, withdraw, or change the account as needed.
Work With a Bank or Credit Union You Know
If you already have a relationship with a bank or credit union, you can set up a Totten trust there. This allows you to keep your funds with a financial institution you are familiar with.
Quick Access To Funds for Your Beneficiary
After your death, your beneficiary can access the funds without delay. This can help them cover expenses and manage immediate financial needs.
What Are the Drawbacks of a Totten Trust?
A Totten trust can be simple to set up, but it has limitations.
Only Cash Assets Can Be Inherited
A Totten trust can hold cash only. It cannot transfer assets such as stocks, bonds, real estate, vehicles, or jewelry.
If your goal is to avoid probate for multiple asset types, a living trust may be worth considering.
No Alternate Beneficiaries
A Totten trust does not allow you to name alternate beneficiaries. If your named beneficiary dies before you, the trust is revoked. You would need to create a new account and name a different beneficiary.
You may name multiple beneficiaries, but that can create complications.
Multiple Beneficiaries Can Complicate Distribution
If you name more than one beneficiary, the financial institution will divide the cash evenly. You cannot assign different percentages.
This can make it harder to divide the rest of your estate according to your wishes.
Proceeds May Be Subject to Estate Taxes
Totten trusts are generally not subject to income taxes. However, after the account owner’s death, the funds received by the beneficiary may be included in the taxable estate. Estate taxes can apply depending on the size of the estate.
A tax professional can provide guidance on the possible tax implications before you set up a Totten trust.
How Much Does a Totten Trust Cost?
A Totten trust costs little to nothing to create, maintain, or administer. Its simplicity helps keep expenses low.
Other types of trusts may involve:
- Attorney fees
- Trustee fees
- Administrative costs
- Asset management fees
- Ongoing operational costs
A Totten trust avoids these expenses because it is simply a bank account managed by the financial institution you choose. When you die, the funds in the account transfer directly to your named beneficiary.
Designating a beneficiary is typically a free service. You can:
- Open a new account as a Totten trust
- Convert an existing account to a payable-on-death account
To identify the beneficiary, the account title should include language such as:
- In Trust For (ITF)
- Payable-on-Death To (POD)
- As Trustee For (ATF)
Totten Trust vs. POD Account
A Totten trust and a payable-on-death account are the same.
When the depositor, who also serves as trustee, dies, the assets in the account transfer to the designated beneficiary.
You can name a beneficiary on several types of accounts, including:
- Savings accounts
- Checking accounts
- Money market accounts
- Certificates of deposit (CDs)
Is a Totten Trust Right for You?
Understanding how trusts work can help you decide whether a Totten trust fits your estate plan.
A Totten trust offers a simple way to transfer assets to a beneficiary. To determine whether it suits your situation, consider speaking with an estate planning attorney. If your estate is more complex, reviewing your options with a legal professional and a financial advisor can help you choose the right approach.
