Transfer on Death Instruments: The Good and the Bad
Effective January 1, 2012, Illinois created a new planning tool for attorneys and their clients relating to the transfer of residential real estate at death. The new transfer on death instrument (“TODI”) Act (755 ILCS 27/1 et seq.) allows an individual to name a beneficiary of their residential real estate during their lifetime that will pass to a beneficiary at the owner’s death. Here are a few brief points:
Residential Real Estate Only. A TODI may only be used to transfer residential real estate. Residential real estate means real property improved with not less than one nor more than four residential dwelling units, condos, or a single tract of agricultural real estate consisting of 40 acres or less which is improved with a single family residence.
Revocable Instrument. The TODI is revocable even if the instrument or another instrument provides otherwise.
Owner. Only a natural person may create a TODI.
Beneficiary. A beneficiary may be any person, including individuals, corporations, trusts, estates, partnerships, limited liability companies or any other legal or commercial entity.
Three Requirements of a TODI:
- A TODI must contain the essential elements and formalities of a deed and must be executed in the presence of two witnesses and acknowledged by a notary public. The witnesses must attest in writing that the owner executed the TODI in their presence as his own free and voluntary act and at the time of execution the witnesses believed the owner to be of sound mind and memory. (similar to the requirements of the execution of a will)
- A TODI must state that the transfer to the designated beneficiary will occur at the owner’s death; and
- A TODI must be recorded before the owner’s death in the county where the real estate is located.
Beneficiary Must Accept. After the owner’s death, the transfer to the beneficiary will be effective upon filing a notice of death affidavit and acceptance by the beneficiary with the county recorder’s office. If this notice is not filed within two years after the owner’s death, the TODI shall be void and ineffective and the real estate will pass to the owner’s estate (subject to some exceptions).
Revocation of TODI. A revocation of a TODI must also be recorded for it to be effective. This revocation may either be another TODI that revokes the instrument or names a new beneficiary.
Overall, this new legislation gives attorneys and their clients a new and likely inexpensive alternative to a living trust or a land trust by allowing the owner to directly name a beneficiary and avoid probate. Because it is also revocable until death, it may be a better alternative to joint tenancy which creates the presumption of a gift on the creation of the joint tenancy. Holding property in joint tenancy also subjects the property to the creditors of a joint owner.
Another good provision in the new law requires the TODI to be prepared by an Illinois licensed attorney. With the many, many issues that we see with joint tenancy and payable on death accounts, this requirement should provide clients with some protection, although the owner is not prohibited from preparing his own TODI. Additionally, owners may now hold property as tenants by the entirety and provide for a beneficiary (such as the survivor’s living trust) upon the death of the surviving spouse which provides owners with the asset protection features of tenancy by the entirety along with the avoidance of a probate estate. Finally, as a practical matter, clients who hold property in an Illinois land trust can avoid having to take property out of their land trust to refinance the property (which lenders almost always require) if the property is instead held under a TODI.
The Bad (or Not So Good)
One of my biggest fears is that the TODI may not be coordinated with a client’s estate plan. If a client has a living trust that provides for a certain disposition of assets, and their home, which may be one of their largest assets, is left to a beneficiary in a TODI, this may have unintended consequences. The TODI beneficiary may have unintentionally received more assets than the client intended. More importantly, if the client’s estate is subject to estate taxes, the client’s trust may direct estate taxes to be paid from only trust assets, in which case the TODI beneficiary will receive the real estate without any liability for estate taxes, even though the real estate is included in the client’s estate for estate tax calculations. In that case, the trust beneficiaries may be on the hook for estate taxes on an asset that passes to the TODI beneficiary.
Additionally, what if the beneficiaries don’t know about the deed or don’t know that they need to record a notice of death affidavit? If a beneficiary has not recorded a notice of death affidavit two years after the owner’s death, the TODI is void and that beneficiary may have lost his rights to the property. Further, the TODI may also be subject to challenge in a probate estate. There may also be new title insurance issues to deal with. Finally, and somewhat beyond the scope of this article, the incapacity of the owner under a TODI likely creates problems.
Although the TODI legislation creates new opportunities for planning, careful analysis by your trusted attorney and coordination with your existing estate plan should not be overlooked.