A Totten Trust Account, or Totten Trust, is named after a 1904 New York state court case in which a person opened a bank account and named a beneficiary of the account after he passed. Prior to this decision, other courts invalidated this sort of arrangement. Today, Totten Trust Accounts are common and generally referred to as “payable-on-death” or “transfer-on-death” accounts. Many states, including California and Hawai’i, have codified the Totten Trust in their respective probate codes.
A Totten Trust then really is not a Trust, but more of a tentative Trust. It’s a bank account opened in the name of one or more persons for the eventually benefit of one or more persons. As an estate planning tool, it can be an effective way to avoid probating assets. The depositor(s) of the funds maintain complete control over the assets until they pass. The named beneficiaries get an immediate right to the account funds when the depositor(s) pass. Thereby eliminating the need to retitle the account through the probate court process.
Benefits of the Totten Trust Account
The Totten Trust Account also has some benefits over another commonly used estate planning tool: the joint account. A joint account will also avoid Probate Court but can create problems as well. For example, a joint account holder has immediate access to the account funds and may start withdrawing the funds before you pass. Also, a more common problem with the joint account is a judgment creditor of your intended beneficiary could reach these funds if they are held jointly and take them when you still have a need for them.
Drawbacks of the Totten Trust Account
The Totten Trust is not without its limitations, or drawbacks, as well. One potential drawback of the Totten Trust — if you live in a community property state like California — is the loss of control after the passing of the first spouse. If the funds in the account are community property, one half of the account’s balance will be transferred to the beneficiary of the Totten Trust Account upon the first spouse’s death. The other half will remain under the control of the surviving spouse or domestic partner. You may instead wish for all funds to be held for the benefit of the surviving spouse until they pass.
A second potential drawback of the Totten Trust Account is the inadvertent disinheriting of beneficiaries. Unlike a revocable Trust, you must specifically name your beneficiaries on the Totten Trust Account. If a beneficiary passes before you, or you wish to change beneficiaries, you must constantly keep your account up to date.
A third potential drawback of the Totten Trust Account is that some financial institutions require each beneficiary to each receive an equal share of the account. This may not be what you want or need. You may have other types of assets in your estate that are difficult to divide equally and may fluctuate in value. For example, you may have a house that you want to pass to one of your children, while retaining an equal split of all total assets to all children. In this instance, a Totten Trust Account may make it difficult to accomplish that goal.
Takeaway
Not all estate planning tools are equally effective. The Totten Trust Account, or “payable on death” accounts, are commonly misused with unintended results. If you need more information of what estate planning tools are right for you? Contact CASHMAN LAW today for a free consultation to see how we might help you understand how to best craft your estate plan.
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