Illinois attorneys have a new weapon in their arsenal to help clients transfer real property. It comes in the form of Public Act 97-555 (HB 1153) which creates the Illinois Residential Real Property Transfer on Death Instrument Act (the “Act”), to be codified as 755 ILCS 27/1 et seq. The Act is intended to create a new probate-avoidance tool known as a Transfer on Death Instrument (“TODI”). The Act is effective January 1, 2012 but applies to any TODI made before, on, or after January 1, 2012, provided the owner (defined as the individual who makes the TODI) died on or after January 1, 2012. 755 ILCS 27/10.
Prior to the passage of the Act, in order to avoid real property passing through probate, an owner had to either own the property in joint tenancy (where the property would pass to the joint tenant upon death), create a living trust (where the property would pass to the designated beneficiaries), or, utilize the Uniform TOD Security Registration Act (815 ILCS 10/0.01 et seq.). Whether the latter method can withstand a legal challenge is debatable. The theory is that 815 ILCS 10/3 provides in relevant part that “[a] security may be registered in beneficiary form if the form is authorized by this or a similar statute of the state of organization of the issuer….” 815 ILCS 10/1(9), in turn, defines “security” as “a share, participation, or other interest in property….” Finally, 815 ILCS 10/1(6) defines “property” to include “both real and personal property or any interest therein and means anything that may be the subject of ownership.” The latter expansive definition, then, means that any property, including real estate, may be held with a TOD beneficiary designation and passed outside of probate.
Each of the aforementioned methods of transfer has problems. In order to pass real property via joint tenancy it had to be owned by two or more people – a problem for single owners. A living trust, meanwhile, required costs to create and maintain it over the owner’s life. And the Uniform TOD Security Registration Act arguably only applies to securities in the traditional sense of the word, which may include shares in land trusts but not simple ownership of real property. The Act addresses each of these problems.
The Act applies to residential real estate only. The “residential real estate” definition is consistent with the Illinois Property Disclosure Act and the Illinois Code of Civil Procedure. “Residential real estate” includes (1) real property improved with 1 to 4 residential dwelling units, (2) units in residential cooperatives, (3) condominium units, together with appurtenant limited common elements, and (4) a single tract of agricultural land consisting of 40 acres or less which is improved with a single family residence. 755 ILCS 27/5. While the Act only allows for transfer of residential real estate by an individual “owner”, it does allow for a “designated beneficiary” to be a corporation, business trust, partnership, limited liability company, association, joint venture, public corporation, government agency, or any other legal or commercial entity. Id.
A TODI must be formally executed pursuant to Section 45 of the Act. Every TODI must: (1) be signed by the owner or by another person at the direction of the owner and in the owner’s presence, (2) witnessed and signed by two or more credible witnesses, and (3) notarized by a notary public. 735 ILCS 27/45. The Act places significant importance on recordation. A TODI must be recorded to be effective. Id. It must be recorded before the owner’s death in the office of the recorder of the county in which the property is located. Id.
A TODI only springs to life at the time of the owner’s death. Thus, during the owner’s lifetime, a TODI does not affect the right of the owner to sell or encumber the property. Nor does a TODI affect the beneficiary during the owner’s lifetime. The beneficiary has no present interest while the owner is alive. Because the beneficiary has no present interest in the property while the owner is alive, creditors of the beneficiary cannot reach the property during that time.
A TODI is revocable, even if it or another instrument contains a contrary provision. 755 ILCS 27/25. A TODI can only be revoked by either (1) a subsequent TODI that revokes the prior TODI in whole or part by express reference or by inconsistent provisions, or (2) by an instrument of revocation that expressly revokes the prior instrument in whole or part. 735 ILCS 27/55(a)(1). Accordingly, unlike a will, a TODI cannot be revoked by physically destroying it with intent to revoke such as by burning, tearing or otherwise. It is also important to know that a TODI cannot be revoked by a will. 735 ILCS 27/55(b). The subsequent TODI or revocation instrument must be executed in the same manner as the TODI (as described in Section 45 of the Act). Further, just as a TODI must be recorded to be effective, the subsequent TODI or revocation instrument must be recorded to be effective. Id.
Assuming the owner retained ownership of the property and did not revoke the TODI, the TODI takes effect at the owner’s death. Upon the owner’s death the beneficiary must record at the office of the recorder of the county in which the property is located a Notice of Death Affidavit and Acceptance. 735 ILCS 27/75. The form of the Notice of Death Affidavit and Acceptance is also dictated by the Act in Section 100. Again, the Act places significant importance on recording. If the Notice of Death and Affidavit is not recorded within thirty (30) days of the owner’s death, the personal representative of the owner’s estate may take possession of the property in accordance with Section 20-1 of the Probate Act, and is entitled to a lien for all reasonable costs and expenses incurred in the management and care of the property. Id. If notice of death is not filed within two (2) years after the owner’s death, the TODI is void and ineffective and the property passes to the owner’s estate. Id. In effect, if the beneficiary does not record a notice of death within two (2) years of the owner’s death, the property goes through probate and the purpose of the TODI is thereby thwarted.
If a designated beneficiary fails to survive the owner or is not in existence on the date of the owner’s death (for example to the children of X and X has no children), then the property passes to the owner’s estate, except if the anti-lapse Section 65(a)(2) applies. The anti-lapse Section 65(a)(2) applies when the pre-deceased beneficiary is a descendant of the owner (as in a child). In that case, the descendants of the pre-deceased beneficiary living at the time of the owner’s death take the property “per stirpes.” 735 ILCS 27/65(a)(3). If the owner names a class of beneficiaries (none of them descendants), and one beneficiary pre-deceases the owner, the surviving beneficiaries take his share. Id. On the other hand, if the pre-deceased beneficiary who is part of a class of beneficiaries is a descendant of the owner, the pre-deceased beneficiary’s descendants take his share per stirpes. Id.
In conclusion, the Act provides an easier, less costly way to transfer residential property outside of probate. However, attorneys drafting the TODI must be wary of the formal execution requirements and both attorneys and beneficiaries must be wary of the recordation requirements. Miss a step and the TODI may be void.