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Illinois Creates New Estate Planning Device for Individual Clients’ Residential Real Estate

by Michael A. Kraft

Often an attorney will meet with a client who requests an estate plan which is intended to avoid the time and expense of probate. If that client owns a home, the most frequently used options to avoid the need to probate the residence are (i) the titling of the property jointly with a third party or (ii) the titling of the property in the name of a trust. While beneficial, these options have certain down sides. The former creates potential issues with gift tax liability and client control, among others. The latter can be costly and time consuming to administer and maintain.

Effective January 1, 2012, the new Illinois Residential Real Property Transfer on Death Instrument Act (“TODI Act”) provides residential real estate owners with the authority to transfer their property outside of probate using a Transfer on Death Instrument (“TODI”). Under the TODI Act, only residential real estate may be transferred. Consequently, the TODI Act may not be used to transfer commercial real estate. Nonetheless, this is an important development which offers clients a relatively low-cost option to transfer title to residential real estate outside of probate upon an individual’s death.

Under the TODI Act, only an individual owner of real estate is allowed to make a TODI. However, the beneficiary designated under the TODI does not need to be an individual or natural person. The designated beneficiary may be a corporation, trust, partnership, limited liability company, or any other legal or commercial entity. Thus, while the TODI Act is limited to the transfer on death of residential property held by individual owners, it provides a broad range of options in naming beneficiaries to receive the property.

In order to legally execute a TODI, the individual owner must have the same mental capacity as is required to make a will under Illinois law. The TODI itself (1) must contain the essential elements and formalities of a properly recorded inter vivos deed, (2) must state that the transfer to the designated beneficiary is to occur upon the owner’s death, (3) must be recorded before the owner’s death, and (4) must be signed and attested to by two or more credible witnesses. The failure to comply with any of these requirements renders the TODI void and ineffective to transfer title to the residential real estate at the owner’s death.

Under the TODI Act, the designated beneficiary under the TODI acquires no rights or interest in the property before the individual owner’s death. In fact, a recorded TODI does not affect the right of the individual owner to otherwise sell or encumber the residential real estate during the owner’s lifetime and does not create any legal or equitable interest in favor of the designated beneficiary during the individual owner’s lifetime. Additionally, the TODI Act deems all TODI to be revocable, even if language to the contrary is found in the TODI. Thus, all TODI are fully revocable until the owner’s death.

If a valid TODI has been recorded, upon the death of the individual owner, the designated beneficiary is required to file a notice of death affidavit and acceptance of title to the real estate with the County Recorder. The notice of death affidavit and acceptance must contain the name and address of each designated beneficiary, a legal description of the property, the street address and parcel identification number, the name of the deceased owner, and the date of the individual owner’s death. Each designated beneficiary must sign the recorded notice of death affidavit before it is recorded.

While owners of residential real estate have previously had estate planning options which allow them to avoid probating their homes upon their death, these options have necessarily included significant setup and maintenance costs, potential loss of control of the subject real estate, and/or potential administrative hassles. For estate planning clients in Illinois, the TODI Act is a welcome addition in providing a tool for transferring residential real estate outside of probate at a relatively low cost.

Originally published in the Spring 2012 edition of Quinn Quarterly.