What is a Totten trust?

With so many different types of trusts to choose from, you’re sure to find one that meets your needs. If you’re looking for an easy, straightforward way to transfer your cash assets to a loved one after you die, a Totten trust may be for you.

Totten trusts are bank accounts that you set up for the benefit of another person (called a beneficiary). You own and manage the account during your lifetime, and your beneficiary can only access the funds after you die.

Totten trusts can offer several benefits, but they aren’t right for every situation. Let’s break down exactly what these trusts are, who they’re best suited for, and how you can create your own today.

What is a Totten trust?

A Totten trust is a bank account that has a named beneficiary. Totten trusts are considered an “informal” trust option for transferring your cash assets when you die.

As the account holder, you act as both “grantor” and “trustee” of a Totten trust. This means that you not only set up the bank account, but you also manage it by making deposits, withdrawals, or changes to the account. You can also change who the beneficiary is or even close the account entirely.

You can use either a checking or savings account as a Totten trust, depending on your preferences.

Totten trusts get their name from a 1904 New York court case called In re Totten. In this case, the court ruled that a person is allowed to open a bank account as trustee over assets for another person (the beneficiary). The beneficiary, however, doesn’t have any claim to the account until after the account holder’s death.

Totten trust vs. POD account: What’s the difference?

While the term “Totten trust” may be new to you, you’ve likely heard of a “payable on death” (POD) account. So, what’s the difference?

There really isn’t one.

Totten trusts and POD accounts are basically the same thing: bank accounts set up to benefit a third party after you die. While the names are interchangeable, “POD account” is more common.

Pros and cons of a Totten trust

A Totten trust offers several key benefits, both to you and your beneficiary:

• They’re flexible and can be changed at any time. Totten trusts are generally considered an informal type of revocable trust. “Revocable” means that you can make changes to the trust whenever you want (or cancel it altogether). With a Totten trust account, you can deposit or withdraw funds at any time, change who your beneficiary is, or even close the account if you no longer wish to use it.
  
  
• They’re easy to set up. Totten trusts are easy to establish. You fill out some paperwork (your bank will provide you with the forms you’ll need), name a beneficiary, and manage the account like any other one.
  
  
• They allow the funds in the bank account to avoid probate. Probate is the court-supervised legal process of distributing your assets after you die. This process can be long and expensive, especially if you have a large or complicated estate. However, when you create a Totten trust, any assets in the trust are distributed directly to your beneficiaries after you die, avoiding probate.

Despite these benefits, there are also some limitations to Totten trusts:

• They can only hold cash. Because they’re a bank account, you can’t fill a Totten trust with property, stocks, or any other non-cash assets. To pass non-cash assets along, you’ll need a formal type of trust. One popular formal trust option is a living trust, meaning a trust you establish while you’re alive. A formal trust won’t offer the simplicity that a Totten trust does, but it can hold more than just cash assets.
  
  
• They give you less control over how the funds are distributed. A Totten trust account may not be the best option if you want to have more than one beneficiary. While you can name multiple beneficiaries on a Totten trust account, you can't specify how the funds in the account are distributed to them. The bank will often split the assets evenly between beneficiaries.
  
  
• They don’t protect you from creditors. While you’re alive, if you owe any debts, creditors can claim the assets in your Totten trust account. In some cases, creditors can even claim the assets in your Totten trust account after you die. However, this is less likely to happen after the assets completely transfer and belong to your beneficiary.
  
  
• They’re only effective at death. If you become incapacitated and unable to make decisions  — for example, if you’re diagnosed with dementia or fall into a coma — your beneficiary still can’t receive or manage your Totten trust. This is not the case with a formal trust, where you can name a back-up trustee to manage your trust if you’re unable to, and use your assets to take care of you and your loved ones.

How to set up a Totten trust

Ready to create your own Totten trust? The process is simple and straightforward. Here’s how:

1. Open a bank account. You can set up a POD account at any bank. This can be a new account or an existing one. You can also choose whether you want to use a checking or savings account.
   
   
2. Fill out a POD form from your bank. Your bank will have you fill out and sign a form to set up your Totten trust. Each bank has its own POD form, so contact your bank or log in to your online banking portal to find the form you need. This process can vary depending on your bank. To make this step easier, FreeWill offers a free online platform where you can track your POD account beneficiaries and get step-by-step instructions on how to find and fill out your bank’s POD forms.
   
   
3. Name a beneficiary for your bank account. When completing your bank’s POD form, there will be a place for you to name a beneficiary of your account. Depending on your bank’s policies, this could be a phrase such as “payable on death to” or “in trust for.” Your beneficiary could be a person (like a family member or friend) or an organization (like a charity that’s important to you).
   
   
4. Manage the bank account as usual. Once you set up your Totten trust, you can use the account just as you would any other bank account. You can deposit money, withdraw funds, or manage the trust account any way you see fit.

You have full control over and access to your Totten trust account while you’re alive — your beneficiary won't have any rights to the account. After you die, your beneficiary will gain access to funds in the account without having to go through the probate process. They usually only need to provide the bank with a copy of your death certificate and verify their identification.

While Totten trusts are an efficient way to transfer cash assets to your loved ones after you pass on, they often don’t offer enough protection on their own. You still need to have an estate plan in place to protect your other assets, like your real estate property, stock investments, and cryptocurrency.

If you want to create a Totten trust, you’ll need to locate your bank’s specific POD form, fill it out, and submit it properly. Not sure where to start? FreeWill can provide you with easy, step-by-step instructions to find and fill out the POD form for your bank. Start tracking your beneficiaries today.

Wondering which documents you should include in your estate plan? Check out our estate planning checklist to help you get started.