Totten Trusts were named after a famous case in 1904 that established the ability to designate a beneficiary on an account and have the account paid to the beneficiary upon death. This kind of arrangement is also known as Transfer on Death or Pay on Death (“TOD” or “POD.”)
A Totten Trust is a simplified method of transferring an account or asset from one person to another as in the situation of husband and wife. This kind of arrangement does not involve any trust instrument or trust document instead it is just an informal trust arrangement. For that reason, a Totten Trust is not a true trust in that the asset is paid to the beneficiary and there are no restrictions on what the beneficiary can or cannot do with the asset.
Be cautious about that fact, however; a common misconception is that using Totten Trust or any other informal trust agreement is that you can save money by not hiring an attorney to do the legal process. That couldn’t be further from the truth; a substantial percentage of my business is cleaning up mistakes that people have made thinking that they could take estate planning into their own hands. If you should ever wonder if that’s the case, imagine if you had appendicitis. If that were the case, imagine taking out your own appendix rather than seeking the services of a trained medical doctor with a consistent record of performing that surgery. It would certainly not be advisable.
Using of Totten Trust was legalized in the 20th century and since then many states allow their citizens to use it. It is very easy and simple to set up Totten Trust. Credit unions, banks and the likes are offering this type of account without additional cost. The account can hold cash, U.S. treasury securities and U.S. savings bonds. Likewise, a Totten Trust can be used for other purposes such as funeral expenses for the account holders. It is also considered as tentative trust because the beneficiary can only use the account once the account owner dies.
Moreover, using a Totten Trust has several advantages. The beneficiary cannot use or have access to the funds unless the account holder dies. This kind of account does not require court procedure once the account holder dies. On the other hand, the beneficiary of the Totten Trust can be changed anytime as wished by the account holder. Changing of the beneficiary can be implemented by filing the necessary documents to the bank. When you use the Totten Trust the fund is secured because it is insured to the Federal Deposit Insurance Corporation and the beneficiary can claim up to $100,000.
On the other hand, Totten Trust also involves potential problems. The most possible problem to occur is the lack of flexibility as compared to legitimate testament. It is because in Totten Trust the settler can only name a beneficiary without adding spendthrift clauses or creating complex terms. In the same manner, Totten Trust is vulnerable to creditor especially when the settler has debt.
In addition, Totten Trust also shows potential complications that would be resolved by using a qualified estate-planning lawyer. Some of the potential complications include divorce, multiple beneficiaries, ineligible beneficiaries and contradictory will provisions. Obviously, in the case that the couple divorces the Totten Trust is automatically cancelled. If there are multiple beneficiaries, the fund within the Totten Trust is divided to the beneficiaries equally. However, if the multiple beneficiaries have inherited large bond then it is recommended to seek advice from a lawyer in order to know the right process of dividing the asset.
For couples who want to create Totten Trust, as much as possible you should seriously discuss the thing. See to it that both parties understand the advantages and disadvantages of using Totten Trust. If you have children it is ideal to let them know your decision of opening a Totten Trust. In this way, in time that the account holder passed away everyone in the family knows who will claim for the fund as well as other benefits.
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