Estate planning can seem like an unnecessarily complicated process. But there are ways to simplify matters. After all, the whole point of estate planning is to facilitate the transfer of assets from the deceased person to the chosen beneficiaries—and this does not always require a will or formal trust document.
Totten Trust vs. Payable-on-Death Account
In the early 20th century, courts began to recognize something known as a “Totten trust.” Also called a “bank account trust” or sometimes a “poor man’s trust,” a Totten trust is nothing more than a bank account opened by a depositor in his or her own name as trustee for a beneficiary. The depositor is free to withdraw funds or even close the account during his or her lifetime. Any funds remaining in the account at the time of the depositor’s death are then paid over to the beneficiary.
This arrangement is called a Totten trust after a New York case where the practice was first recognized. The New York court determined this type of account “does not establish an irrevocable trust during the lifetime of the depositor,” but rather “[i]t is a tentative trust merely, revocable at will, until the depositor dies or completes the gift in his lifetime by some unequivocal act or declaration, such as delivery of the passbook or notice to the beneficiary.”
In modern practice, a Totten trust is more commonly known as a “payable-on-death” (POD) account. Most banks allow you to set such accounts. You can even convert your existing bank account into a POD account. Generally this involves nothing more than filling out some paperwork with your bank. California law suggests the following wording in a bank account signature card or contract to create a POD account: “This account or certificate is owned by the named party. Upon the death of that party, ownership passes to the named pay-on-death payee(s).”
Creating a POD Account
You do not need to create a separate trust or mention a POD account in your will. Indeed, a POD account is not considered part of the probate estate disposed of by your will. You should take this into consideration before creating a POD account. For example, let’s say your will states that your estate should be divided equally among your three children. But prior to your death you also established a POD account naming just one child as beneficiary. The subsequent division of your estate into equal shares will not account for this, meaning one child will effectively receive a larger inheritance than the others.
On the other hand, the funds in the POD account will be available almost immediately to the beneficiary. It may take several months—even years—for your beneficiaries to receive final distributions under your will, depending on how long it takes to administer your probate estate. In this respect, a POD account can be a useful tool to ensure your family has enough cash to pay expenses arising immediately after your death (such as funeral costs).
A qualified San Diego estate planning lawyer can advise you on the proper use of POD accounts and other tools to help minimize the need for probate. Contact the Law Office of Scott C. Soady to speak with an estate planning attorney today.