What is a Totten Trust and Can Creditors File a Claim Against a Totten Trust?

Article written by Attorney Kevin O'Flaherty
Updated on
February 13, 2020

In this article we’ll answer the questions, “what is a Totten trust”, “advantages and disadvantages of a Totten trust”, and “can creditors file a claim against a Totten trust?”

Totten trusts are essentially bank accounts with a named beneficiary. They are another tool in your estate planning toolkit and can help some of your assets avoid probate upon death. You may have also heard the term, “payable-on-death account” used interchangeably with Totten trust, and that’s because they are basically the same thing. They are both informal revocable trusts that are made when the account holder signs an agreement with the bank which details instructions on how to distribute the contents of the account to the named beneficiaries upon the death of the account holder. When creating a payable-on-death account one simply has to go to the bank, open an account, indicate in the paperwork that it is a payable-on-death account, and then record the beneficiaries. The person who opened the account can be considered the trustee and has complete power over the use of the account, while the beneficiaries cannot withdraw, deposit or do much of anything with the account until the account holder dies.

Advantages and Disadvantages of a Totten Trust

The primary reason for opening a Totten trust is so that the money in the account can avoid probate upon the death of the original account holder. Depending on the amount of money in a bank account it is not always necessary to have a Totten trust in place for that money to avoid probate or at the very least move quickly through probate. This amount differs from state to state but in Illinois it is suggested that if you have over $100,000.00 in a bank account that you set up that account as a Totten trust or include that bank account in some other portion of your estate planning.

Once the original account holder dies the bank account essentially becomes the beneficiary’s and they can do what they see fit with the funds in the Totten trust account. There are really no inherent disadvantages in a Totten trust beyond it only being used for money. Since it is a revocable trust the account holder can dissolve the account at any time, change the beneficiaries as he or she sees fit, all with the comfort of knowing if that he or she suddenly met an untimely demise the money would go to the indicated beneficiary. However, if the goal is to avoid property passing through probate then a Totten trust would not work. In this situation, a living trust or something similar that covers property would be a better option.

Can Creditors File a Claim Against a Totten Trust (Payable-On-Death Account)

While alive a Totten trust acts the same as a regular bank account, meaning if the account holder has debt a creditor can certainly file a claim against that person and funds from the Totten trust or Payable-On-Death account may be required to pay the claim. Upon death, this changes because the funds would normally avoid probate. Most of the time a creditor’s claim against a Totten trust comes about in the context of a surviving spouse arguing that these funds are subject to the spouse’s statutory share. In the past, the court has held that a Totten trust could not be used to defeat a spouse’s statutory share on the grounds that a Totten trust is illusory to the surviving spouse’s statutory share. Generally, in regards to probate, the funds in a Totten trust can be considered safe as far as transferring to the beneficiary, but a claim can still be filed against the funds in the Totten trust if the assets from the decedent’s estate were insufficient to pay off his or her debt.

The bottom line is that a Totten trust or payable-one death account is a quick and easy way to designate an account to a beneficiary so that it can avoid probate upon death. However, for more in-depth estate planning needs something such as a living trust may be necessary when real estate property is involved or debt is involved.

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