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What is a Totten Trust?

Estate Planners | Monday, March 14th, 2011

The Totten trust is actually a trust in name only. In actuality, a Totten trust does not involve a trust document or trust instrument. The Totten trust is an informal trust arrangement that is accomplished simply by titling an asset or bank account in the fashion of “Ricky Ricardo in trust for Lucy Ricardo”. In this way, Ricky would be in complete control of the account or asset and have total access to the account or asset during his lifetime, but when he passes away, the property would automatically pass to Lucy without the hassle and red tape of probate court, giving Lucy immediate access to the account or asset. The Totten trust is also known as a payable on death or POD account. Since it is not a trust, there is no trustee.

How to set up a Totten Trust

Setting up a Totten trust is simple. All banks, credit unions, and savings-and-loans offer this type of account, usually at no additional cost. Some brokerage firms offer a similar account, which is known as a transfer on death or TOD account. However, only thirty-six states recognize this type of account, so not everyone can benefit from it. The account can hold cash, U.S. savings bonds, and U.S. treasury securities. Oftentimes, the Totten trust is useful for setting aside funds for the account holders funeral and final expenses, although it may be set up for other purposes. The Totten trust is often referred to as a tentative trust, due to the fact that it is conditional upon the death of the account owner. This trust is also referred to sometimes by the term “poor man’s will” as it can be set up by people of modest means who might not otherwise afford the expense of drafting a trust instrument. The Totten trust can be useful in avoiding the fees associated by probate proceedings.

Advantages of a Totten Trust

There are several advantages to the Totten trust, including:

* The beneficiary of the account cannot have access to the funds within the account until the account holder passes away.

* A co-owner of the account can be named if desired. If a co-owner is named, the beneficiary cannot have access to the account funds until both the owner and co-owner of the account have passed away.

* The account does not need to pass through probate court upon death of the account holder.

* The beneficiary of the account can be changed at any time. Changing the beneficiary involves going to the bank and filling out paperwork to make the change.

* The account is insured by the Federal Deposit Insurance Corporation or FDIC separately from the account owner’s other accounts, up to $100,000 for each beneficiary.

Disadvantages of a Totten Trust

Inversely, there is at least one drawback to the Totten trust. In some states, an estate tax will have to be paid prior to the funds in the account being made available to the beneficiary. The Totten trust is not recommended for accounts that hold more than $20,000.

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