March 29, 2016
On January 1st, 2012, the Illinois Legislature passed the Illinois Residential Real Property Transfer on Death Instrument Act (“Act”). The purpose of the Act is to allow an owner of residential real estate to designate a beneficiary who would receive the residential real estate upon the owner’s death. This transfer was memorialized through a Transfer on Death Instrument (“TODI”). This article examines the statutory requirements for creating a TODI, analyzes notable amendments to the Act, and discusses key advantages to consider before using a TODI as part of your estate plan.
I. Statutory Requirements
There are four essential elements required to create a TODI. First, the TODI must contain the same elements and formalities as required to execute an inter vivos deed. In other words, the TODI must be done in writing, contain words of conveyance, and provide a legal description of the real estate. Second, the TODI must be signed by the owner and two witnesses who must attest to the fact they believe the owner is exercising a free and voluntary will and is of sound mind and memory and both the owner and witnesses signatures must be notarized. Third, the TODI must expressly designate a beneficiary and state the transfer to the designated beneficiary is contingent upon the owner’s death. Fourth, the TODI must be recorded in the county where the residential real estate is located in prior to the owner’s death.
II. Notable Amendments
On January 1st, 2015, the Illinois Legislation amended the Act in two notable ways. The first notable amendment limited the class of individuals who have the right to create or revoke a TODI. In the original text of the Act, there were two individuals who had the power to create or revoke a TODI. First, the owner of real estate has the power to create or revoke a TODI. Second, the owner could previously vest their right to create or revoke a TODI in a third party by expressly granting that third party the power to create or revoke a TODI through a power of attorney for property. Under the amended Act, an owner no longer had the ability to vest their right to create or revoke a TODI in a third person. The amendment limited that right strictly in the owner of the real estate. However, the amended Act does not restrict an agent, pursuant to a power of attorney for property, to sell, transfer, or encumber the residential real estate; which ultimately has the same effect of revoking the TODI.
The second notable amendment eliminated a requirement placed on a beneficiary receiving real estate through a TODI. In the original text of the Act, a beneficiary receiving real estate under a TODI had to file a notice of death affidavit within 30 days of the owner’s death to make the transfer. Otherwise, the beneficiary would be liable to the personal representative of the owner’s estate for the expenses incurred in the management and care of the property subject to the TODI. The original text also contained a 2 year statute of limitations period by which a beneficiary was required to file a notice of death affidavit. Otherwise, the TODI in its entirety would be null and void to transfer the real estate to the designated beneficiary. Fundamentally, the amendment to the Act eliminated the burden on a beneficiary and it no longer made the filing of a notice of death a condition to the transfer of the real estate.
III. Considerations
Further, there are some considerations to keep in mind when determining whether a TODI is an appropriate estate planning tool for your estate plan. First, the creation of a TODI does not affect an owner’s right to sell, encumber, mortgage, refinance, receive public assistance, grant a legal interest to a designated beneficiary, or subject the owner’s real estate to a beneficiary’s creditors. Much like transferring a piece of real estate to a self-declaration life time trust and re-titling the real estate in the name of the trust; the owner does not lose any ownership rights or control with respect to that real estate. Likewise, the mere creation of a TODI does not affect an owner’s present ownership interest, right, and control with respect to the real estate subject to the TODI because the TODI does not become effective until the owners death.
Second, the Act defines a TODI as a non-testamentary instrument. To keep it simple, a non-testamentary instrument generally passes outside of probate. Much like contracts, life insurance policies, and promissory notes, those instruments are considered non-testamentary and are generally excluded from a decedent’s probate estate. In effect, property passing outside of a probate estate is not subject to decedent’s probate creditors or claimants. Therefore, a TODI can be used as way to transfer a residential real estate to a beneficiary and may provide a level of protection against a decedent’s creditors.
Lastly, using a TODI to transfer residential real estate to a designated beneficiary can make it simpler, less costly, and more efficient to refinance instead of using a Land Trust. In most cases, lenders require real estate held in a Land Trust be deeded out of the Land Trust to refinance the real estate. Consequently, the owner must deed the property back into his or her name to proceed with the refinance. Then after the refinance is completed, the owner has to remember to deed the property back into the Land Trust. This process is repeated every time an owner applies for a refinance. Alternatively, if the owner used a TODI instead of a Land Trust to hold the residential real estate, the owner would not have to go through the same process of deeding the real estate back into their name and then deed it back afterwards. This is because the TODI does not become effective until the owner of the real estate passes away. Thus, using a TODI instead of a Land Trust to hold residential real estate makes the refinance process much simpler, less costly, and more efficient.
Always consult your estate planning attorney, financial advisor, and tax specialist to determine whether a TODI is an appropriate estate planning strategy for your estate plan.