What is a Totten Trust?

A Totten trust, also called a payable on death (POD) account, is a form of estate planning in the US. It can be used as an alternative to a will and is therefore known as a type of will substitute. A Totten trust involves a bank savings account or security which is established by someone (known as the settlor or grantor) who is the named trustee for another person (the beneficiary). The beneficiary will receive the funds in that account or security when the settlor dies. A Totten trust has nothing to do with acting as a trustee under a will, a trust agreement, or a court order.

Totten trusts are sometimes created for the purpose of setting aside funds to finance the settlor's (or trustee's) funeral. Upon the death of the settlor, the savings account is then payable to the beneficiary as a means of reimbursing the beneficiary for funeral expenses. A caveat does apply here though: any claims pursued by the trustee's creditors are paid before the beneficiary is paid. Consequently, the beneficiary may not always receive the funds, or may receive only a portion of the funds.

The name of this type of trust originates from a 1904 court case litigated in New York. William Totten was the administrator for the deceased, Frances Lattan, who created what would come to be known as a Totten trust. The reason it was litigated in the first place is because the trust wasn't created in accordance with normal trust creation formalities. The court however, in Matter of Totten, found this type of trust to be a valid, albeit revocable, trust. While this type of trust is recognized in New York and other states that have adopted the Third Restatement of Trusts or Property, not all US states accept Totten trusts as a form of estate planning.

Unlike, non-revocable trusts, Totten trusts can be revoked at any time by the trustee. This can be accomplished by the trustee closing the savings account. Also, if the trustee executes a will that disposes the funds in that account, then the Totten trust is no longer valid.

If the beneficiary predeceases the trustee, then the Totten trust is considered to have lapsed, meaning it has no validity or effect. Any value in that account will simply pass into the body of the trustee's estate and be disbursed according to the trustee's will, trust agreement, or according to the laws of that particular state.

A Totten trust is sometimes referred to as a tentative trust because it is contingent upon the death of the trustee. It is also sometimes referred to as a poor man's will, because it can be set up by someone of modest means who otherwise cannot afford the costs of creating a trust agreement or a will. Since they are not subject to probate, they are a means of avoiding the high fees and costs connected with probate proceedings. For someone of modest means who does not want to burden his or her survivors in this way, a Totten trust can be a great convenience. Of course, it can be created by anyone of whatever means to avoid the fees and costs involved in creating a trust agreement or will or of probate.