We endeavor to demystify various elements of the estate planning process, including the devices that are sometimes used. In this post, we will take a look at the Totten trust, which is much simpler than it sounds.
Payable on Death Account
When you open an account at a brokerage or bank, you can choose a payable on death or transfer on death option. If you go this route, you name a beneficiary who will inherit the account after your death. You do not share control of the assets while you are living because the person you designate would have no access.
Prior to 1904, this arrangement was not recognized under the law. During that year, the Matter of Totten was decided by the New York Court of Appeals. It allowed for the creation of bank accounts with beneficiaries. After the ruling, an account like this was called a Totten trust. Over the years, the name has slowly been fading away, but the term is still used at times.
Probate Avoidance
Why would you use a Totten trust when you could just leave the money to someone in a will? This is a good question, and it boils down to the probate process. If you utilize a will to facilitate postmortem asset transfers, the executor that you name will admit the will to probate.
This is a court proceeding, and there are some drawbacks that go along with it. Probate expenses reduce the value of the estate before it is transferred to the heirs. It is public, so privacy is lost. Thirdly, it is time-consuming, and no inheritances are distributed while the estate is being probated.
If you have a Totten trust or payable on death account, the beneficiary would obtain the death certificate after your passing. Subsequently, they would present it to the institution, and they would become the owner of the account. The probate court would not be involved at all.
Totten Trust Limitations
Avoiding probate makes sense, but a payable on death account or Totten trust is not the best way to do it. First, there is a matter of the percentages. Most people want to leave assets to more than one beneficiary.
You can sometimes do this with a payable on death account, but you will typically have to allow for equal shares to be distributed to each beneficiary. This may not be consistent with your wishes.
Secondly, there would be no spending safeguards going forward, and the inherited assets would not be protected from creditors. Thirdly, what about assets that are part of your estate that are not in a bank or brokerage account?
A Viable Alternative
A revocable living trust is a far better choice all things considered. While you are alive and well, you would be the trustee. This means that you have absolute control of the assets. You can change the terms, and you would retain the right of revocation.
When you draw up the trust, you name a trustee to succeed you. This can be someone that you know, or you can engage a professional fiduciary. You have no limitations about the way the assets will be distributed after you are gone. The trustee will follow any instructions that you record.
For example, you could instruct the trustee to distribute the earnings broken up into monthly increments. When the beneficiaries reach certain age thresholds, you can allow for distributions of portions of the principal. This is just one arrangement that is sometimes utilized, but the choice is yours.
In addition, the trust will become irrevocable after your passing. The beneficiaries would not have direct access to the resources, and this would extend to their creditors.
When it’s time for distributions, probate would not be a factor. As a result, all of the pitfalls would be avoided. Plus, you can include a pour-over will that allows the trust to absorb assets that were in your direct personal possession at the time of your passing.
Another Risky Probate Avoidance Solution
While we are on the subject, we should take a look at another probate avoidance solution that is less than ideal. If you own property, you can change the paperwork to create a joint tenancy.
For example, let’s say that you are going to leave your home to your son, and you want him to sell the house after he inherits it to obtain liquidity that can be spread among others. He could be the joint tenant, and he would become the sole owner of the home after your death.
This transfer would not be subject to probate, and a lot of people think this is a great way to simplify the process. In fact, this is an extremely risky move for a few different reasons.
First, you would need your son’s cooperation if you want to sell or otherwise encumber the home. Secondly, if your son was the target of a legal action, his ownership share would be an asset that could potentially be attached, even though you are a joint tenant.
Thirdly, from a legal perspective, he would not be compelled to follow your verbal instructions to sell the home and divide the proceeds in any particular way. The property would be his, plain and simple, and he would be the final decision-maker.
You don’t have to take this type of risky step to facilitate the transfer of the home outside of probate. The property could be transferred to your revocable living trust or some other type of trust, and you would get the same result with none of the risk.
Take Action Today!
Today is the day to end the procrastination if you do not have a plan in place. When you work with our firm, we will make sure that you understand all of your options so you can make safe decisions that bring your wishes to fruition effectively.
You can call us at 651-478-8999 to set up an appointment at our Oakdale, MN estate planning office. If you would rather send us a message, fill out our contact form and we will be back in touch with you promptly.
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- What Is a Totten Trust? - October 30, 2023
