Totten Trust: Will Substitutes

What Is It?

A Totten Trust is a bank account in which you name yourself trustee and hold the account in trust for one or more beneficiaries, but retain the right to alter or revoke the trust until your death. If the bank account wasn't held as a Totten Trust (or otherwise passed outside of probate), it would be subject to the expense, delay, and publicity of probate.

Example(s): Dr. Smith has a warm spot in his heart for Mr. Jones, a janitor in his building, and wants to provide for him. However, Dr. Smith wants to keep his generosity private and doesn't want his intentions disclosed in a reading of his will. Dr. Smith places a generous sum in a Totten Trust bank account and informs Mr. Jones of his plan. At Dr. Smith's death, Mr. Jones can collect the money from the account by presenting proof of identification and a copy of Dr. Smith's death certificate.

When Can It Be Used?

Can Be Used Only To Transfer Bank Account

Although referred to as a will substitute, a Totten Trust can be used only to transfer cash held in a bank account.

Not Recognized In All States

Strengths

Can Help You Avoid or Minimize the Expense of Probate

Probate can be expensive, and the largest expense is generally the attorney's fees. The attorney's fees can be especially expensive if set as a percentage of the gross probate estate. If you could avoid probate with a Totten Trust, your estate would avoid these fees.

Caution: In actuality, a Totten Trust can pass only the funds that are in the account at the time of your death, which will generally represent only a very limited portion of your estate. The person responsible for managing your estate during the probate process (your executor) is entitled to a fee for these services, although a friend or relative serving as an executor may agree to serve without a fee.

Tip: If you are giving property to your executor, it might be better to pay a substantial executor's fee, for which your estate can take a tax deduction.

Minimizes Delays in the Transfer of Property

Probate takes an average of 12 months and may last for several years. Transferring funds automatically by holding them in a Totten Trust provides for a quicker, almost immediate transfer of the money.

Discourages Interference with Your Plans to Distribute Your Property

Although it seems that anybody can bring a lawsuit, a will is generally much easier to challenge than your transfer of money by holding it in a Totten Trust.

Circumvents Some Statutory Limits on Your Power to Transfer Property

State law may limit your ability to leave property to charity. For example, some states invalidate any bequest to charity written within a month of your death. Other states won't let you leave more than a certain percentage of your property to charity. These laws generally don't apply to money transferred automatically because it was held in a Totten Trust. State law may also force you to leave a certain percentage of your property to your spouse. In some states, these laws don't apply to transfers of money through a Totten Trust.

Allows You to Retain Unlimited Power over the Account

You retain unlimited power over the funds in the Totten Trust account until you die or become incapacitated. You can take income or principal from the account, add funds, change your choice of recipient, or close the account entirely. Your designee has no right to the funds until you die.

Simple and Inexpensive To Create

Signing the appropriate forms with the bank and making the necessary deposits are the only steps necessary to create a Totten Trust.

Tradeoffs

Does Not Satisfy Other Estate Planning Needs

You may hold a Totten Trust with the intention that your surviving spouse have continuing access to the account to pay family bills. However, this is no guarantee that the account will actually hold enough cash to pay these bills. You may need to take other steps to provide economic resources for your family. Although referred to as a will substitute, a Totten Trust is a very limited device. Only funds held in the bank account can be transferred.

Does Not Avoid Estate Taxes

The funds in the account will be included in your gross estate. Recipients of the property are not protected from your creditors. In many states, the probate process requires that all claims against your estate be presented within months of your death, preventing delayed claims against your estate and beneficiaries. However, a creditor may, depending on the state, be able to bring a claim against property that passed through your Totten Trust for years after your death. Check your specific state's law.

Technical Note: The statute of limitations is a rule that prevents lawsuits that haven't been brought quickly enough. Someone can sue you (or your estate, if you are dead) until the statute of limitations for that claim has expired.

For example, if the statute of limitations for a breach of contract lawsuit is seven years, the Record Club has seven years to sue you for failing to buy that seventh cassette. However, if your property passes through probate or is otherwise subject to the short statute of limitations that applies to claims against a decedent's representative, that property is immune from claims by your creditors at the end of the short statute of limitations, regardless of whether the claim would otherwise be barred by the statute of limitations that normally applies to that sort of claim.

How to Do It

Verify That Your State Allows Totten Trusts

Create Account with Bank

Your bank will have information on how to create a Totten Trust at that institution.

Tax Considerations

Income Tax

A Totten Trust does not shift income or affect the donor's or designee's income tax liability.

Gift and Estate Tax

No Gift Tax Liability

Holding an account as a Totten Trust doesn't give your designee a right to those funds, so there is no gift tax assessed. However, if the trust becomes irrevocable (for example, because you become permanently incompetent and haven't appointed a durable power of attorney), there are gift tax consequences at the moment the gift becomes complete.

Funds Held in Totten Trust Are Subject To Estate Tax

However, if a gift tax has already been assessed on the transfer, this will be taken into account in determining your estate tax liability.

Questions & Answers

Why Isn't a Totten Trust Subject To Probate?

Funds held in a Totten Trust are paid automatically to your beneficiary at your death. Because the funds pass pursuant to a beneficiary designation and not under your will, the trust funds are not subject to probate.

Do You Have To Tell Someone That You Have Designated Him or Her As Beneficiary of Your Totten Trust?

No. You can name someone as beneficiary without his or her knowledge if you wish.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

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