The most common method of distributing assets after death is by a will. A will has precise legal requirements, can sometimes require a lengthy probate proceeding, and should be drafted by a legal professional to ensure it adequately protects your interests regarding your assets (a house, a car, jewelry, furniture, even pets). However, when it comes to money, a Totten Trust can provide a simpler alternative.
A Totten Trust is a special bank account that anyone can set up at any bank they do business with. A Totten Trust account is specifically marked as being “in trust for” a particular person (or multiple persons) other than yourself, such as a child or grandchild. Banks will note this designation on the account card that opens up the bank account.
In life, a Totten Trust functions as a normal bank account. You can make deposits and withdrawals for your own personal benefit. The person that the account is being held “in trust for” has no interest in the account while you are alive, and has no say in what you do with the money in it. The money in the account remains yours to use as you choose.
After death, if the Totten Trust still exists and has funds, it vests in the designated beneficiary, and passes to him or her free of your estate. All the beneficiary needs to do is to provide the account owner’s death certificate to the bank at which the Totten Trust account is established, and the bank will pay the money to the named beneficiary. A Totten Trust effectively serves as a way for you to designate money to go to a particular person (or people) without having to go through probate.
However, there are exceptions to this automatic vesting. For example, a Totten Trust is an asset against which a surviving spouse can use his or her right of election, which in general provides a surviving spouse with a right to receive at least one-third of the deceased spouse’s total estate. A Totten Trust is also available for your creditors to seek compensation from, though generally courts will only allow creditors to go after Totten Trusts if the decedent’s testamentary assets are insufficient to pay these obligations. Otherwise, the trust beneficiaries remain entitled to the entire balance of the trust.
It is important to know establishing a Totten Trust is not irrevocable. You can freely revoke the beneficiary designation at any time, and can name one or more new beneficiaries as desired. A simple way to revoke a Totten Trust is to withdraw all of the money from the account. Revocation is also accomplished by providing a signed written document, usually notarized, to the bank requesting the termination of the Totten Trust designation. Another way to revoke the Trust is by a designation in your will, so long as the designation specifies the exact account, the beneficiary of the account, and the financial institution holding the account. If you wish to revoke a Totten Trust via your will, make sure to inform the attorney tasked with drafting your will.
If the proper steps for a Totten Trust revocation are followed, then the former beneficiary of the trust has no standing to demand any of the money formerly in the trust account. Again, beneficiaries of a Totten Trust, prior to the death of the depositor, have no vested interest and only possess a “mere expectancy” in the trust.
A Totten Trust provides a simple way of distributing monetary assets to specific people following your death. That being said, it is only applicable to money, and any other property you own would have to be distributed via a will or a living trust. A Totten Trust therefore is not a substitute for a well-designed estate plan, and anyone seeking to create a Totten Trust as part of an estate plan should consult with an estate planning attorney to see if it is appropriate in their case.
Totten Trust: a special bank account that anyone can set up at any bank with which they do business; specifically marked as being “in trust for” a particular person (or multiple persons), such as a child or grandchild