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Estate Planning Newsletter

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    Minors have no legal capacity to manage property. Thus, transferring property and other assets to minors can be problematic. For example, parents or other adults may wish to convey a small amount of property to a minor without investing... Read more.
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    A “conservator” is a court-appointed individual assigned to handle the daily affairs of those who cannot care for themselves due to physical or mental limitations (the “conservatee”). Conservatorships are... Read more.
  • Estate Tax Rates in 2013
    Much to the relief of many, the American Taxpayer Relief Act of 2012 (“2012 Tax Act”) was enacted in the beginning of 2013, making permanent many of the tax benefits that were scheduled to expire at the end of 2012. The... Read more.
  • Certain Real Property May Qualify for Special Use Valuation
    Calculation of the Value of Estate Assets Estate taxes are calculated based upon the value of the assets in the estate. One duty of the executor or administrator is to inventory all estate assets and assign a... Read more.
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The Passing of Assets to Named Beneficiaries from a Totten Trust

A decedent’s assets may be transferred upon their death to their heirs or other beneficiaries through probate. “Probate” is the legal process by which a court determines who receives a decedent’s assets under their will or, if there is no will, under the applicable state intestate succession laws. In some states, the probate process may be both costly and time consuming, involving court fees, commissions for estate representatives, attorneys’ fees and/or appraiser’s fees, etc. Another potential disadvantage of probate is that the process is a matter of public record; many would prefer that the details of the administration of their estate, including information on their assets and beneficiaries, be kept private.

To avoid the costs and potential time delays associated with the probate process, and to keep their estate administration private, property owners sometimes seek ways to distribute their assets outside of probate. Depending upon the jurisdiction, methods of achieving a non-probate transfer of assets include holding title to an asset as joint tenants with right of survivorship, establishing a revocable or irrevocable trust, or creating a contract with payable-on-death provisions or a multiple-party bank account, such as a “Totten trust.”

Totten Trusts in General

Totten trusts are also referred to as “savings account trusts” and are accepted in a large majority of jurisdictions. A Totten trust is not generally considered to be a true “trust” at all. Rather, these accounts are a specific type of multiple-party bank account which function as a “payable-on-death” (P.O.D.) savings account.

A Totten trust savings account is considered to be a “non-probate” asset. That is, the Totten trust account is a relatively simple way to pass assets at death while simultaneously avoiding probate. Further, rather than setting up Totten trusts in addition to a will, some individuals may establish Totten trusts as “will substitutes.” However, there are specific procedures, rights and limitations that should be considered.

Establishing a Totten Trust and Rights of Trustee

Generally, in order to establish a Totten trust, the settlor or “grantor” of the account holds the account as a trustee for a named beneficiary (or beneficiaries). For example, the grantor/trustee makes deposits in a savings account in the name of “O as trustee for A, a beneficiary.” Once established, the trustee retains several rights including:

  • Withdrawing funds;
  • Depositing additional funds; and/or
  • Amending the terms of the account.

The grantor has significant power to control the trust, in whatever way they choose, during their lifetime. However, once the grantor dies, provided they have not otherwise revoked the rights of the beneficiary, the contents are automatically transferred to the named beneficiary.

Contingent Rights of Totten Trust Beneficiary

The beneficiary of a Totten trust theoretically owns the account. However, ownership does not occur until the grantor dies. As such, the beneficiary’s rights are not vested while the grantor is still alive. Since the beneficiary has no immediate rights in the Totten trust, the beneficiary’s creditors cannot attach the account to satisfy the beneficiary’s debts during the grantor’s lifetime.

Grantor’s Power to Revoke a Totten Trust

The grantor of a Totten trust may revoke the trust at any time during their life. Revoking the trust extinguishes the contingent rights of the named beneficiary. The grantor may revoke the trust either by:

  • Spending all of the money in the account; or
  • Amending the terms of the account to name another person as the beneficiary.

Advantages of a Totten Trust over a Joint Tenancy

A Totten trust is just one method of transferring assets at death while avoiding probate. A similar and common alternative method is to establish a “joint tenancy” bank account with the right of survivorship. In general, under a joint tenancy, each party takes equal title to the account, has an equal and undivided interest in the funds and retains the right of survivorship on death of one party. On the death of one joint tenant, the assets in the joint tenancy account pass by right of survivorship to the surviving joint tenant, without the need for probate administration.

Unlike a Totten trust, the named beneficiary’s rights are immediately vested in the joint tenancy, rather than being contingent upon the death of the grantor. The beneficiary and the grantor become “co-owners” of the joint tenancy account. This can have adverse consequences for the original grantor due to the following:

  • Each co-owner has the right to draw on the account at any time; and
  • Creditors of either co-owner may reach the account.
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