Breaking Down the Totten Trust

Since the New York Court of Appeals first established the legality of Totten trust in 1904’s Matter of Totten, the use of Totten trusts as a valid estate planning tool has spread throughout the nation. Nevertheless, when questioned, few can discern between a Totten trust and certain other revocable trusts.


What is a Totten Trust?

A Totten trust allows a grantor to place money into their own bank account so that it can financially benefit someone else. Totten trusts avoid the probate process and allow for funds to be distributed to the named beneficiaries when the account holder passes away. Totten trusts are also revocable, which means that at any given point prior to their death, the settlor can make changes to the designated beneficiaries. This type of informal trust is set up like a bank account and can be transferred to any bank, closed at any time, and may even be eligible to acquire interest. Essentially, a Totten trust is a payable-on-death account, and the inheritance is claimed immediately following the account holder’s passing.

Who Should Have a Totten Trust?

Totten trusts can easily be set up for anyone as they only require a few forms, which are supplied by the bank, and some identification for both the grantor and their beneficiaries. Setting aside money for a Totten trust can be a wise idea for anyone who wishes to leave their inheritance to their loved ones while avoiding the probate process.

Probate is a process where a deceased person’s will is validated and both the distribution of their assets to their heirs and payments of their debt are handled accordingly. Avoiding this process and the court’s interference significantly eases the financial burden on the intended beneficiaries. Additionally, it allows the assets to be distributed much faster than if probate were necessary.  While the release of the funds in a Totten trust may not be immediate, it is still much more favorable to the months or years that the probate process can take.

Another common reason for which one might decide to establish a Totten trust is to set aside money to pre-pay for their funeral arrangements. This payable-on-death arrangement enables the settlor’s family to have immediate access to your funds to cover the funeral costs, thus relieving some of the additional financial burden and stress.

Who Has Access to the Funds in a Totten Trust?

The account owner has unlimited access to the contents of their trust while they are alive. However, their named beneficiaries have no access to the enclosed assets until the grantor’s passing. Serving as the intermediary, when the grantor dies, the trustee retains control of the money before it gets distributed to the respective trust beneficiaries.

The only right a beneficiary has is to claim their inheritance after the grantor’s passing. Furthermore, after this happens, the beneficiaries must go to the bank with proof, specifically their identification a valid copy of the grantor’s death certificate, in order to claim the assets within the Totten trust.

The Pros and Cons of Totten Trusts          

As aforementioned, Totten trusts can be useful for a number of reasons. However, it is important to note the downsides as well. Totten trusts are advantageous because are free and easy to create, avoid probate, can be canceled at will, and can replace the need for having a joint bank account. Also, under the Federal Deposit Insurance Corporation’s insurance policy, POD accounts enable you to cover more money, meaning instead of insuring only up to $100,000, you can insure that amount for each of your beneficiaries.

However, like all revocable trusts, Totten trusts leave the involved assets available for debtors to come after. Assets placed in this trust are not protected from creditors and may get depleted in an attempt to satisfy your debt. Additionally, Totten trusts are not accepted everywhere. While transfer-on-death accounts are allowed everywhere, registering for one is slightly more complicated. All states, with the exception of Texas and Louisiana, allow transfer-on-death registration. Furthermore, by law, your broker does not have to offer you the option of registering for one, though you do have the option to do so.

While Totten trusts do have many benefits, they may not be right for you. Please contact the Law Office of Inna Fershteyn at 718-333-2394 or visit our website to schedule a consultation and satisfy your estate planning needs.