Convert a bank account into a Totten trust and enjoy flexibility while protecting assets

As estate-protection tools, trusts have a reputation for being less flexible than simple bank accounts. While this is by and large true, there’s a category of trusts called Totten trusts (also called payable-on-death, or POD, accounts) that are essentially bank accounts with a named beneficiary. Depending on your financial situation, the state of your heirs, and the level of flexibility you’d like to practice with your estate planning, a Totten trust may be right for you. Read on to find out more.

What is a Totten trust?

A Totten trust is essentially a bank account with a named beneficiary. It differs from normal trusts in that it is revocable, meaning you, the grantor (i.e. establisher) of the trust, are also the trustee (i.e. manager) of the account during your lifetime. You can spend the money in the account down to its total depletion if you so desire. Additionally, you’re able to close the account and withdraw the money during your lifetime.

Since a Totten trust is a bank account, the only asset the trust can hold is anything a bank account can hold - i.e. money. Physical property such as houses or jewelry cannot be included.

A Totten trust allows you to assign a beneficiary of your choice (as well as change this beneficiary). Upon your death, the beneficiary can go to the bank with your death certificate or any other evidence of your death and collect the funds in the trust. The bank may tell the beneficiary to wait for a certain period before they release the funds, but this period is usually very short. 

Why should I get a Totten trust?

There are several reasons why you may consider getting a Totten trust.

First of all, like many other trusts, a Totten trust lets you easily transfer money to your heirs without going through probate. The probate process is time-consuming, taking months or even years. It can also be an invasion of privacy since everything about the estate is investigated by the court.

Second, creating a Totten trust is a very inexpensive and easy process. It is similar to creating a bank account; slightly more forms are involved. A written trust document is typically not needed, and it often costs you nothing to establish the trust.

Lastly, because it is a revocable trust, it is easy to modify. If for whatever reason you wish to change your beneficiary, you can do this by simply changing the beneficiary name. 

What are the drawbacks of a Totten trust?

It is important to note the drawbacks of Totten trusts. For starters, not all states honor them, so you should look into whether your state does. If they don’t, the assets in a Totten trust will be treated as if they were part of the estate and will not be protected from probate.

Additionally, the assets will count negatively towards your Medicaid eligibility (if you are concerned about Medicaid, take a look at Medicaid trusts).

How do I establish a Totten trust?

If you have weighed the pros and cons and are interested in creating a Totten trust, follow this simple process to establish the trust. 

  1. Visit any bank of your choice and establish a new account. To create a Totten Trust, you will need to fill out certain forms provided by the bank.

  2. You will need to title the account in a specific language depending on the bank’s requirements. These titles will usually include: “in trust for," “payable on death to," “as trustee for," or initials such as, "IFF," "POD," "ATF” depending upon your bank’s requirements. 

  3. Name the beneficiary or multiple beneficiaries. For example, if your name is Jake Green and your beneficiary’s name is Kate Green, you can title your account as “Jake Green in trust for Kate Green.” The beneficiary does not have any rights to your money while you are alive, so naming the beneficiary does not affect your bank account during your life. Furthermore, since the money is not considered an asset of the beneficiary until the grantor’s death, the trust is untouched even if the beneficiary files for bankruptcy, gets a divorce, or gets sued by creditors.

  4. After naming the beneficiaries, make your deposit to the account. Also, make sure that all relevant documents are turned into the bank so that the bank can keep track of your beneficiaries.

There is another way to create a Totten trust, and this is to turn an existing bank account into the trust. To turn an existing checking or savings account into a Totten trust, fill out the relevant paperwork provided by your bank and choose your beneficiary.

The process of creating this trust is very simple and inexpensive, so if cash is the only asset you want to leave to an heir while avoiding probate, a Totten trust may be the best option for you. For larger estate questions, we do recommend that you consult with a legal professional, but if you require any assistance or have any further questions, feel free to make use of the concierge service here at Peacefully. We assist with referrals to trusted professionals, offer case-specific advice, recommendations, and coordination for you. For more about our concierge service or to schedule a free consultation, click here.

Lucy Jung