What Is a Totten Trust?

No one likes to think about death, but we do like to think about family This is why it’s important to consider your mortality when it comes to money and heirs. If you don’t, your family could face a number of financial difficulties at an already challenging time.. One popular estate planning strategy is to form a Totten trust, which is essentially a bank account with a named beneficiary.

A financial advisor can help answer your questions about trusts, life insurance, and other estate plans.

How a Totten Trust Works

A Totten trust is also known as a payable on death account. It is a type of bank account where the person who opens the account names a beneficiary. After the person who opens the accounts dies, the money in the account goes directly to the person named as the beneficiary.

Other than that, a Totten trust functions just like a normal bank account. You can add funds, withdraw funds or close the account at any time. If something happens and you want to change the beneficiary, you are free to do that too. The only real difference with a Totten trust is that you name a beneficiary and that beneficiary gets the money in the account when you die.

A Totten trust gets its name from a 1904 legal case in New York. The case, called In re Totten, ruled that one person could open a bank account as a trust for another person. Other states eventually followed suit. The accounts are technically called payable on death accounts. People still often refer to them as Totten trusts though.

Totten Trust vs. Will vs. Living Trust

A Totten trust, a will, and a living trust all transfer assets after death, but they work in different ways. A Totten trust passes money directly to a named beneficiary and avoids probate. A will directs how assets are distributed but generally must go through probate. A living trust holds assets during your lifetime and distributes them after death, usually without probate but often according to terms set by you.

A will is often used as a baseline estate-planning document. It can cover many types of property, name guardians for minor children and outline how remaining assets should be divided. However, assets controlled by a will typically move through probate, which can add time, cost and public record exposure.

A living trust can hold cash, investment portfolios, and physical property. Assets placed inside the trust are managed by a trustee and transferred according to the trust terms after death. Because the trust owns the assets, they usually bypass probate. Living trusts involve more setup steps and ongoing administration than a Totten trust.

A Totten trust is limited to bank accounts and holds only cash. It is simpler than a living trust and easier to set up than most estate-planning structures. It works well when the goal is to pass a specific cash balance to a beneficiary without probate.

In practice, many people use more than one tool. A Totten trust can handle certain bank accounts, a living trust can hold larger or more complex assets and a will can cover anything not addressed elsewhere. The right mix depends on asset types, family structure, and planning goals.

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Should You Get a Totten Trust?

There are a number of reasons why you might consider getting a Totten trust. The most common, though, is so your family can avoid probate when you die. Most estates must go through probate after the estate owner has died. In probate, the contents of the estate are counted and inventoried. The estate is then dispersed to the beneficiaries named in a will prepared by the deceased before their death.

Probate may not be too big of a deal for smaller estates, as many states have a simplified probate process for estate that are worth less than a certain amount, ranging from $20,000 to $100,000. Particularly for people with larger estates, probate may be a time-consuming process, as it can take months or even years to sort everything out. The process can also prove to be an invasion of privacy, as everything about the estate will need to be investigated by the court and thus become a matter of public record.

A Totten trust allows you to avoid probate. There is already an official beneficiary named, so once the person who creates the bank account dies, the beneficiary can simply go to the bank and collect their money. Before that, the beneficiary has no right to any of the money in the account.

Drawbacks of Totten Trusts

One disadvantage of a Totten trust is that, unlike other types of trusts, cash is the only asset that it can store. If you want to bypass probate with property other than cash, a living trust might be a better option.

A living trust is a legal framework that you can establish and then transfer property and assets into. While a Totten trust can only store cash, a living trust can store cash, stocks, bonds and other assets. This includes physical assets like jewelry, family heirlooms, homes and vehicles.

Just like with a Totten trust, putting your assets into a living trust allows your family to bypass probate. You’ll just need to decide who you want to pass what property onto after your death and who you want to serve as trustee. A trustee is in charge of managing your trust and ensuring your assets are distributed according to the trust’s directives after your death.

If cash is the only asset you want to leave while avoiding probate, a Totten trust can help. If you have a diverse portfolio with a lot of asset allocation you want to pass on to your heirs without the hassle of probate, a living trust may be better.

How to Open a Totten Trust

It is not difficult to open a payable on death account. All you’ll have to do is fill out some paperwork provided by the bank you use. Once you’ve set up your account and named your beneficiary, all you’ll have to do is make a deposit to the account.

A Totten trust is not technically a different type of bank account. In turn, you can just turn an existing checking or savings account you already have into a Totten trust. You can do this by filling out the relevant paperwork with your bank and choosing your beneficiary.

Bottom Line

A Totten trust is a bank account that has a beneficiary, who the person who opens the account selects. It is also called a payable on death account. Upon your death, the money in the account will automatically go to your chosen beneficiary. It will not have to go through the sometimes lengthy probate process. Unlike a living trust though, you can only store cash in a Totten trust. This means you can’t use a Totten trust to pass on items like property, vehicles, or other physical assets.

Retirement Planning Tips

Whether you’re thinking about getting a Totten trust or just have general questions about estate planning, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you have a 401(k) account, make sure you name a beneficiary. This can be a person or you can leave it to a living trust, if you form one.