What Is a Totten Trust?

How Does a Totten Trust Work?

Determining the best means of asset protection, wealth transfer, and how to leave a financial legacy for your family members after you’re gone can be complicated and intimidating. A Totten trust may be one element of estate planning you may want to consider to help achieve your financial goals.

Among the many types of trusts that can be established as legal entities, a Totten trust is one of the simplest and easiest to understand. A Totten trust is both a living trust—because the depositor sets it up while they are alive—and a revocable trust—because the depositor can change it while they are alive. Totten trusts can be an effective and inexpensive means of estate planning.

The account owner of a Totten trust is the trustee of the assets in the bank account and remains in control of this money until death. When the account owner dies, the funds in the Totten trust are payable on death to the named beneficiary, which could be a family member, friend or organization. To claim the assets, the beneficiary usually must provide the bank with personal proof of identity and a certified copy of the death certificate.

Can the Assets in a Totten Trust Be Withdrawn by the Owner Before Death?

Because the account owner acts as the trustee of this revocable living trust, they have the authority to withdraw part or all of the assets in the Totten trust before death. As the depositor of this revocable living trust, they can revoke the Totten trust by removing all the assets from the account and closing it. While living, the account owner/depositor retains full control over the management of the assets in a Totten trust.

What Happens If a Beneficiary Dies Before the Totten Trust Owner?

Another circumstance in which a Totten trust is revoked is when the beneficiary dies before the account owner of the Totten trust. The main feature of a Totten trust is its named beneficiary, so once this person predeceases the account owner, the bank account ceases to exist as a Totten trust. In the event that this occurs, the account owner will have to complete new paperwork to create a Totten trust with a different beneficiary.

Totten Trust Example

Let’s consider a simple example to illustrate how a Totten trust works. Imagine that you and your spouse have an adult grandson to whom you would like to leave a small inheritance.

Setting up a Totten trust is relatively simple, whether you want to open a new bank account or turn an existing savings or checking account into a POD account. Complete the necessary paperwork provided by the bank, naming your grandson as the beneficiary. Make sure to return the Totten trust documents to the bank so it has a written record of the named beneficiary on the account, and the trust becomes legally binding.

You decide to deposit $10,000 into the Totten trust, which will continue to earn interest and grow over time. However, if you have an emergency car repair, and you quickly need $2,000, you could decide to withdraw this money from the Totten trust as the account owner. You also might decide to leave a larger inheritance to your grandson and deposit an additional $5,000 into the account.

Let’s assume that over the next seven years, the balance in the Totten trust totals $17,000, which includes your additional deposits and compounded interest. If you died, your grandson would immediately inherit this cash sum of $17,000, and the bank would transfer these assets to him automatically, avoiding probate.

What Are the Benefits of a Totten Trust?

A Totten trust can offer you several key benefits:

• Probate Avoidance: Probate is the legal process through which your will is validated and your assets are distributed. If there are complications with the settlement of your estate, probate can be prolonged and result in additional court fees. A Totten trust generally avoids the probate process because assets are automatically transferred directly to your beneficiary after your death. Because the bank processes a Totten trust, there is no need to validate your account through probate court proceedings.
• Easy and Inexpensive Estate Planning: Aside from completing and returning the necessary bank forms — which you can do on your own — there is no need to hire an attorney to set up a Totten trust. Once you set up the POD account at the bank, you serve as the trustee of the Totten trust and are in complete control of managing these funds on your beneficiary’s behalf. A Totten trust is an inexpensive estate planning tool that leaves you in charge.
• Working with a Bank or Credit Union You Trust: If you already have a good working relationship with a local bank or credit union, you can feel confident establishing a Totten trust with a financial institution you know and trust.
• Peace of Mind: With a Totten trust, you can rest easier knowing that your beneficiary can access funds immediately upon your death and have additional financial support after you are gone.

What Are the Drawbacks of a Totten Trust?

A Totten trust also has its drawbacks. Here are a few to think about:

• Only Cash Assets Can Be Inherited: Perhaps the main disadvantage of a Totten trust is that it can only hold cash. If you want to bypass probate and transfer wealth of other types — like stocks, bonds, real estate, vehicles and jewelry — to your loved ones, you may want to consider a living trust.
• Totten Trusts Do Not Allow for Alternate Beneficiaries: A Totten trust does not allow for naming alternate beneficiaries. Your Totten trust will be revoked if your designated beneficiary dies before you do. You will then have to set up an account with a different beneficiary. You also can name multiple beneficiaries, but doing so can create other issues.
• Naming Multiple Beneficiaries May Complicate Inheritance: When you name multiple beneficiaries for your Totten trust, your financial institution will distribute the cash assets evenly. Because a Totten trust does not allow you to specify a different distribution of your cash assets, dividing the remaining assets in your estate among your heirs may get complicated.
• Beneficiary’s Proceeds May Be Subject to Estate Taxes: Totten trusts are generally not subject to income taxes. However, after the account owner’s death, funds that the beneficiary receives may be subject to estate taxes, which can potentially be at high rates. Consulting with your tax professional may offer you essential guidance regarding the potential tax implications involved in setting up a Totten trust.

How Much Does a Totten Trust Cost?

One key advantage of a Totten trust is its virtually zero cost to create, maintain, and administer because of its inherent simplicity. Other types of trusts often involve expensive attorney’s fees, trustee fees, administrative costs, asset management fees, and ongoing operational costs.

A Totten trust, however, avoids all of these fees and charges because it is a bank account managed and administrated by the bank you select. And when you as the depositor die, the funds in the Totten trust are automatically transferred to your named beneficiary.

Designating a beneficiary is a cost-free service offered by financial institutions that allows you to open a new account as a Totten trust or convert an existing account to a POD account. To identify the beneficiary for a Totten trust, the title on the bank account should include identifying language such as “In Trust For (ITF),” “Payable on Death To (POD),” or “As Trustee For (ATF).”

Totten Trust vs. POD Account

Keep in mind that a Totten trust is not different from a payable-on-death (POD) account—they are the same thing. A Totten trust is a POD account because upon the death of the depositor (and trustee of the account), all the assets in the account are payable on death to the designated beneficiary.

You can make arrangements with your financial institution to designate a beneficiary (thereby creating a Totten trust) for a variety of different kinds of bank accounts, which include savings accounts, checking accounts, money market accounts and certificates of deposit (CDs).

Is a Totten Trust Right for You?

Having a basic understanding of trusts may help you decide whether or not a Totten trust is an appropriate estate planning path for you and your loved ones.

While Totten trusts are quick and easy ways to pass on assets to your beneficiary, the best way to know if a Totten trust is right for your specific life situation is to consult an estate planning attorney. Depending on the complexity of your estate, it can be helpful to review and discuss all of your options with a legal expert — as well as your financial advisor — who can offer you professional guidance and advice on the best course of action.