What Are Totten Trusts?

Written by True Tamplin, BSc, CEPF®

Reviewed by Editorial Team

Updated on March 10, 2023

Totten trusts are bank accounts used by grantors to bequeath cash and property to beneficiaries.

They are also known as Payable-On-Death (POD) accounts.

Totten trusts simplify the process of passing on assets from one generation to another by avoiding court-mandated probate processes for wills.

The disadvantage of Totten trusts is that they cannot be used for complex estates with multiple beneficiaries.

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Basics of Totten Trusts

Totten trusts are also known as a “poor man’s trust” because they are simple and easy to create.

They are named after a 1904 court case in which the New York Court of appeals upheld a case, In re Totten, involving bank account cases.

The court’s judgement stated that grantors could open bank accounts for beneficiaries without giving them access to funds or assets in the account until after their death.

Totten trusts are revocable trusts, meaning they can be modified even after creation. A Totten trust can be identified by the use of specific language.

For example, a bank account opening form with the words “as a trustee for” or “in trust for” indicate that the account is a Totten trust.

You can also use Totten trusts to pass on property to beneficiaries.

How Do Totten Trusts Work?

The process to create Totten trusts is simple and legal help is not required.

All you need to do is fill out a couple of forms provided by the bank and name a beneficiary.

The beneficiary does not get access to the account until after the grantor’s death. This means that the grantor is free to operate the account as they would operate any other regular account.

The beneficiary of the Totten trust must provide proof of identity to gain ownership of the account’s contents after the grantor’s death.

Totten Trusts and Taxes

The taxation of Totten trusts depends on the amount contained in them. When they are inherited, the trusts are subject to state inheritance taxes.

The amount of these taxes can vary depending on state laws regarding inheritance taxes.

The funds contained in a Totten trust are also part of the taxable estate of the decedent.

Therefore, they are included in these calculations. In 2021, the federal threshold for estate taxes was $11.7 million for single individuals, meaning that estates below that amount were not liable for taxes.

If the funds contained in a Totten trust earn income, then capital gains tax must be paid on the increase.

Depending on whether the beneficiary had a direct business relationship with the decedent, they might be directly responsible for paying taxes on the increase.

Advantages and Disadvantages of Totten Trusts

Some of the advantages of Totten trusts are as follows:

  • Totten trusts help beneficiaries avoid the time-consuming probate process.
  • Totten trusts can be formulated without legal help and are inexpensive to maintain.
  • Totten trusts are flexible because they allow operation of bank accounts even while the grantor is still alive.

Some of the disadvantages of Totten trusts are as follows:

  • They do not provide protection to the grantor (the individual making the trust) from creditors, meaning the funds could be depleted if they are sued by creditors and the court rules against them.
  • While they can be used in complex estates, Totten trusts can complicate operation of such estates through mixing of account funds with estate funds.

Totten Trusts FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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