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totten trust

No one likes to think about death. It’s important, though, to consider your mortality when it comes to money. If you don’t, your family could end up having to scramble when you do pass on. One way to prepare for your eventual demise is to form a Totten trust, which is essentially a bank account with a named beneficiary.

Remember that whatever form of estate planning you do, it may make sense for you to find a financial advisor to help you. SmartAsset can help you find the right financial advisor for your needs with our free financial advisor matching service.

Totten Trust: Payable on Death Accounts

A Totten trust is also known as a payable on death account. It is essentially a bank account for which 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.

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 going through the probate process 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. This doesn’t become an option until the account opener dies. Before that, the beneficiary has no right to any of the money in the account.

How to Open a Totten Trust

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, so 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.

Disadvantages of Totten Trusts

totten trust

One disadvantage of a Totten trust is that 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 to an heir while avoiding probate, a Totten trust may be the best option. If you have a plethora of assets you want to pass on to your heirs without the hassle of probate, a living trust may be better.

The 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 houses, vehicles or other physical property.

Estate Planning Tips

  • Whether you’re thinking about getting a Totten trust or just have general questions about estate planning, it can be a good idea to find a financial advisor. But finding the right financial advisor is not always easy. Luckily for you, SmartAsset has a free financial advisor matching service that can make it easier. All you have to do is answer a few simple questions about your finances. We will then match you with up to three advisors in your area. We have fully vetted all advisors on our platform and ensured they don’t have any disclosures. Once you’re matched, you can read the advisors’ profiles and interview them to determine who might be a good fit.
  • 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.

Photo credit: ©iStock.com/The_Light_Painter, ©iStock.com/courtneyk, ©iStock.com/DragonImages

Ben Geier, CEPF® Ben Geier is an experienced financial writer currently serving as a retirement and investing expert at SmartAsset. His work has appeared on Fortune, Mic.com and CNNMoney. Ben is a graduate of Northwestern University and a part-time student at the City University of New York Graduate Center. He is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance (CEPF®). When he isn’t helping people understand their finances, Ben likes watching hockey, listening to music and experimenting in the kitchen. Originally from Alexandria, VA, he now lives in Brooklyn with his wife.
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