Just over 109 years ago (August 5, 1904), New York’s Court of Appeals decided what may be the single most important case for consumers in the history of banking. The case, In re: Totten, 179 N.Y. 112, 71 N.E. 748 (1904) resulted in New York’s Court of Appeals doing much more than settling the affairs of a shrewd spinster who died without a will but with dozens of savings accounts, it helped bring banking to the masses.
I’m exaggerating, you say? How many of your credit union’s account cards designate an account to be “in trust for” a friend or relative? How much less money would be deposited in credit unions today if members didn’t have the ability to designate beneficiaries to receive what’s leftover when they die? Imagine if the only way to protect that money was to draw up a will or trust with money that the member couldn’t access? There is a reason why the Totten Trust is called the “poor man’s will.” We take it for granted, but it is an essential mechanism for millions of people to protect their assets. It’s also a case worth knowing because while it was decided in 1904 it reminds regulators and policy makers that for regulations to be more than a passing nuisance they need to respond to the practical needs of everyday citizens.
Like most good estate cases, the controversy had its roots in a family dispute. It all started in 1866 after Lewis Lattan, who was having “some trouble” with his wife, handed over to his sisters $20,000 to be managed as they saw fit. Aunt Fanny knew how to handle funds and had some her own money, as well, and by the time of her passing there was more than $40,000 to divvy up.
The money was deposited in Savings Banks. At the time, rules limited the maximum amount of money that could be deposited by an account holder in any one savings bank, so Aunt Fanny ultimately established 31 accounts in seven different banks over several decades. Most, but not all of the accounts, were opened by Aunt Fanny “in trust for” various relatives. For example, the three accounts that resulted in the Totten decision were titled “Fanny A. Lattan, trustee for Emile R. Lattan,” who was Lewis’s son.
The catch was that even though she labeled herself a trustee for account purposes, she kept control of the accounts occasionally depositing and withdrawing money over the years. The beneficiaries didn’t even know they were beneficiaries; Emile didn’t know the disputed accounts existed until after she died.
We’ve all seen or heard a story similar to what happened next. Eccentric Aunt Fanny died, but wasn’t a penniless spinster after all; in fact, she was loaded, leaving behind no will but dozens of accounts, many of which designated relatives as beneficiaries. The vultures started circling. Most of the relatives were no doubt pleasantly surprised by their tidy windfalls except for her nephew Emile. He found out that of the three accounts opened in trust by his Aunt designating him as the beneficiary, two were drained by her, who spent the money as she saw fit.
He cried foul and, in the finest tradition of disgruntled relatives with dollar signs in their eyes, ran to court claiming the aunt’s estate, being administered by one William H. B. Totten, must reimburse him for the money originally deposited in the closed accounts.
Today, his argument would be laughed out of court, but at the time it was being made the greedy freeloader had the better side of the argument. The Aunt had every right to establish trusts, but once the trusts were created the money did not belong to her but had to be managed for the designated beneficiaries.
According to a Pepperdine University Law Review Article published in 1977 urging reforms to the trusts, the use of “in trust for accounts” was not unheard of at the time of the case. Their use was particularly attractive to the working class for whom the cost of a will was prohibitive.
The New York courts were faced with the following dilemma: How do we allow the accounts to be treated as trusts for some purposes and not others? When the Appellate Division took a crack at this conundrum, it concluded that a trust was created at the moment the Aunt opened a savings account and designated a beneficiary. The court essentially ignored the fact that the Aunt continued to spend the money as she wished concluding that, “whatever may have prompted the deceased to draw out the deposits from two of the accounts, it was not done because of the absence of an intention to create a trust at the time when each deposit was made.” The nephew was entitled to be reimbursed from the Aunt’s estate.
Fortunately for us, the representatives of deceased Aunt Fanny were none too happy with this decision and had the means to appeal to New York’s Court of Appeals. New York’s highest Court was not afraid of judicial activism nor was it willing to pretend that by opening up the accounts” in trust” for her nephew but continuing to spend the money a traditional trust had been created.
The Court’s solution was to recognize a new type of “tentative trust.” It decided that “a deposit by one person of his own money in his own name as trustee for another person” does not create an irrevocable trust but “a tentative trust merely, revocable at will, until the depositor dies…In case the depositor dies before the beneficiary without revocation, or some decisive act or declaration of disaffirmance, the presumption arises that an absolute trust was created as to the balance on hand at the death of the depositor.” Suddenly, without any act of the Legislature, people could designate beneficiaries by putting their money in banks and have a cheap way of passing on their savings.
This was a bold strike at the time and people knew it. According to the law Review article one commentator described the decision as “judicial arbitration” and another complained it was a “radical innovation that was difficult to justify.” The merits of the case were debated for decades. The Kansas Supreme Court didn’t approve of Totten trusts until 1987.
A hundred years later we are all better off that the Court came to the decision it did. The credit union industry wouldn’t be the same without it.