Differences Between a Totten Trust & a Payable-on-Death Account

The terms “Totten trusts” and “payable-on-death account” represent different names for the same thing: an informal revocable trust. Both Totten trusts and payable-on-death accounts are deposit accounts held at a bank, credit union, savings and loan or other financial institution, that transfer to designated beneficiaries upon the account owner's death. Different states, or even different financial institutions within the same state, may refer to such accounts as payable-on-death accounts or as Totten trusts.

The term “Totten trust” stems from a 1904 New York state lawsuit, namely Matter of Totten (179 NY 112 [1904]). This case represents the first court ruling that allowed an the establishment of a bank deposit account in trust for a beneficiary, who had no rights to the funds until the depositor’s death. Prior to the Totten case, similar lawsuits had ruled that such accounts were essentially attempts to establish a will without fulfilling the legal requirements that a will entails. Though the initial New York ruling referred to this type of account as a revocable or tentative trust, over time these accounts became known as Totten trusts or payable-on-death accounts.

Several subsequent lawsuits challenged the Totten ruling on matters such as whether or not the beneficiary should receive an account passbook and whether an oral directive or a will could revoke a trust. In New York, these matters weren’t conclusively answered until 1975, when laws passed specifying that Totten trusts could only be revoked during the depositor’s lifetime by removing funds from an account and in a will only through an explicit direction. In 1985, a further statute allowed termination or modification of a Totten trust through written instruction filed with the holding financial institution. Many other states have explicit legislation surrounding how to revoke or modify a Totten Trust.

Payable-on-death accounts offer several benefits; foremost among them is ease. Account holders simply file the account beneficiary’s name with the bank – an easy, free process. Totten trusts also keep money out of probate. These types of accounts are often referred to as “poor man’s trusts” in that they allow funds to pass directly to beneficiaries after the account holder’s death, without the need to hire legal assistance to create a trust. Accounts can hold investment share certificates, share accounts and stock deposits as well as funds, all of which pass directly to the beneficiary after the account holder’s death.

In most cases, revoking a Totten Trust is simple. The account owner can simply withdraw all the funds in the account and close it, in which case the trust no longer exists. Alternatively, they can nominate another beneficiary to receive the account proceeds upon the account holder's death. If the beneficiary dies before the account holder, then the trust will automatically lapse and the account proceeds will form part of the account holder's estate for distribution to heirs.