If you’re doing some estate planning and speak with someone at a bank about how to avoid probate for an account you have there, you may hear the term “Totten trust.” Such an account is really just a payable-on-death (POD) bank account—an account for which you name a beneficiary, who inherits the funds in the account after your death.
These accounts are widely used, because they provide an easy way to transfer money at death without probate court proceedings. To set up a Totten trust/POD account or to turn an existing savings or checking account into a POD account, all you have to do is fill out some paperwork provided by the bank, naming the POD beneficiary. The documents must be turned into the bank, so that the bank has a record of who the beneficiary is. It’s not enough to fill out the form and stick it in your desk drawer.
Naming a POD beneficiary doesn’t have any consequences while you’re alive. The beneficiary doesn’t have any rights to the money during your life. This means that not only that the beneficiary can’t withdraw money, but also that the money is not considered an asset of the beneficiary if the beneficiary gets divorced, runs up debt and is sued by creditors, or files for bankruptcy.
You are free to close the account, withdraw some or all of the funds, or name a different beneficiary at any time. The money in the account isn’t protected from your creditors; it’s just like any other bank account.
That’s it. After your death, the POD or trust beneficiary simply goes to the bank and collects the funds in the account. There may be a short waiting period before a bank will release funds, but no probate court proceeding is required. Usually, all that’s required is evidence of the death (a certified copy of the death certificate) and of the beneficiary’s identity. Banks have been doing this for years, and they’re very familiar with the process—they’re the ones who provide the forms on which account owners designate their POD beneficiaries, after all.
The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that it someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. Other courts hadn’t allowed this, objecting that such an arrangement was trying to take the place of a will, and that wills must be executed with much more formality—for example, witnesses must watch the will-maker sign.
The Totten court got around this problem by calling the account a “tentative trust”—in more modern language, a revocable trust. You, the account owner, are the trustee, in control of money that will eventually go to the trust beneficiary. But whether you call the arrangement a Totten trust, a revocable bank account trust, or a POD account, the result is the same.
After the New York court’s decision in the Totten case, other states adopted the idea of Totten trusts. Later, state legislatures began enacting statutes authorizing and regulating these accounts, but calling them "payable-on-death accounts" instead of "Totten trusts."