A number of different types of trusts can be used when you are planning your estate. Some of them are complicated, and others are surprisingly simple and straightforward. The Totten trust falls into the latter category, and we will provide an explanation here.
Payable on Death Account
Way back in 1904, there was a court case in New York involving an individual named Totten. Prior to the ruling in this case, bank account holders could not arrange direct postmortem account transfers to beneficiaries. The court ruled that there was no legal reason why this arrangement could not be put into place.
Going forward, account holders could create accounts with beneficiaries, and they were initially called Totten trusts because of the court ruling. Now, this term is not commonly used, though you may hear it from time to time. This type of account is called a payable on death or transfer on death account.
In addition to banks, you can establish one of these accounts at brokerages. Plus, a number of states have payable on death motor vehicle registrations, and California is one of them.
This is a rather simple and straightforward dynamic. Let’s say that you want your daughter to inherit the assets in your bank account after you die. You could choose to establish a payable on death account.
She would have no access to the funds while you are living. After your passing, she would obtain a death certificate and present it to the bank. Assuming everything is in order, she would become the owner of the account.
Probate Implications
If you use a will to arrange for the transfer of assets after you are gone, you would name an executor to act as the administrator. When the time comes, they would admit the will to probate, and the court would provide supervision during the administration process.
It serves a purpose, because the validity of the will is ascertained, and creditors are notified about the passing of the decedent. There is also oversight when the executor is conducting the business of the estate. However, it is not necessarily a great thing for the rightful inheritors.
No inheritances are distributed while the estate is in probate, and it will take eight or nine months to a year at minimum, and occasionally up to three years. Interested parties can go through the proper channels to obtain the records to find out what transpired, so there is a loss of privacy.
Expenses are another negative. There is a filing fee, and the executor is entitled to remuneration. In many cases, the executor will bring in a tax accountant and a probate lawyer. This can average about 5% of the gross value of the probate estate. In addition to these fees, there can be appraisal and liquidation expenses and various incidentals.
Assets that are held by a payable on death account are transferred directly to the beneficiary. The probate court is not a factor, and this is the major benefit of this type of account.
More Comprehensive Alternative
A payable on death account is quite limiting on multiple levels. First, you can add multiple beneficiaries, but they typically have to receive equal percentages. When you are planning your estate, you don’t want the tail wagging the dog in this manner.
There is no asset protection after the assets have been distributed, and there are no spending safeguards. And of course, in most cases, an estate is not going to be entirely comprised of cash or securities.
If you use a revocable living trust, you get the same benefit and a whole lot more. You would be the trustee while you are alive, so you would maintain complete control of the assets. In the trust declaration, you name a successor to manage the trust after your death.
You can include a spendthrift provision, and the trust will become irrevocable after your passing. Creditors of the beneficiaries would not be able to access assets in the trust.
With regard to spendthrift protections, you can instruct the trustee to provide limited incremental distributions over time. These distributions would not be subject to the probate process, so the pitfalls would be avoided.
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Our doors are open if you are ready to work with a Burbank, CA estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 818-937-2335.
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