August 23

The Importance Of A Totten Trust

A client of ours was losing sleep over who should be his heirs and the amounts to leave them. His assets are in a trust and changing bequests can mean significant legal costs. What’s the solution? His attorney recommended a Totten Trust.

What Is a Totten Trust?

A “payable-on-death” (POD) bank account is also named Totten Trust. A beneficiary is named for the account, and they inherit the funds in the account after the owner passes.

A 1904 New York court decision in the case In re Totten, determined that “someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died.” (source) Before this, other courts ruled against such cases. They argued that such an action attempted to replace the will. To avoid this, the New York court referred to these accounts as “tentative trusts.” We now use the term revocable trusts.

Other courts followed suit. States passed legislation that authorized and regulated these accounts. The legislature referred to these accounts as “payable-on-death accounts” rather than Totten Trusts. (source)

How a Totten Trust Works

Totten Trust accounts provide an easy way to transfer money at death without probate court proceedings. Banks need some forms completed to open a new POD account or change an existing account. The name, date of birth, and social security number of the beneficiary are usually required.

Naming a POD beneficiary doesn’t have any consequences while someone is alive. The beneficiary doesn’t have any rights to the money until the death of the account owner.

The beneficiary can’t withdraw money. The funds are not considered an asset of the beneficiary if the beneficiary gets divorced, is sued by creditors t, or files for bankruptcy.

The account owner can close the account or withdraw funds at any time. They can also name a new beneficiary at any point. The money in the account isn’t protected from creditors; it’s like any other bank account.

When the account owner passes, the trust beneficiary provides the bank with the death certificate, along with their ID. There may be a short waiting period before a bank will release funds. But no probate court proceeding is required.

What Does This Have To Do With Our Client?

Our client has a trust which directed most of his funds to relatives. However, there were others that he wanted to leave money to, but the list and the amounts kept changing. His attorney suggested opening a “payable-on-death” (POD) bank account and selecting a beneficiary that he trusted would follow his instructions upon his death.

We drew up a document that listed the people and organizations he wanted to leave money to and the percentage in the account they were to receive. The beneficiary has a copy of the document and periodically asks if he’d like to alter it. Any changes are made to the document. The new one is dated and sent to my client, with no costly attorney fees.

It was the perfect solution to our client’s problem, and he’s sleeping better because of it.


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