On July 9, 2021, Governor Pritzker signed a bill amending the Illinois Residential Real Property Transfer on Death Instrument Act (the “Act”), effective January 1, 2022. That Act has allowed persons owning residential real estate in Illinois to designate a beneficiary of the real estate through a transfer on death instrument (“TODI”), thereby avoiding probate of the real estate at death. It can be very useful especially in a situation in which the owner does not have a revocable trust but does not want to subject his or her heirs to probate.
The amendments to the Act make some significant changes. The most significant is that a TODI will no longer be limited to residential real estate. It may now be used for any real estate located in Illinois. (The Act will now be called the “Real Property Transfer on Death Instrument Act.”) Thus, an owner of a commercial building can also use a TODI to avoid probate at death. Note that under the amendments, an owner does not include a trustee or other individual acting in a fiduciary, representative or agency capacity.
The amendments clarify that the beneficiary of a TODI may be a trust that is in existence at the time the TODI is signed, that is created under the owner’s will or under the TODI itself, or that is created under the will of someone else who has predeceased the owner even if that trust is revocable or amendable. Some practitioners have been concerned that this was not possible under the statute. If the beneficiary trust is later amended, the amended terms control the disposition of the real estate.
The amendments clarify that the TODI does not have to state that any consideration was given to the owner in return for executing the TODI. The addresses of the beneficiaries also do not need to be included in the TODI. The TODI must be notarized and witnessed by two credible witnesses and recorded before the owner’s death. Failure to follow these procedures will result in the TODI being void. As with a will, the witnesses should not be beneficiaries under the TODI.
The amendments add a new section related to a possible renunciation of the TODI by a surviving spouse. If the spouse renounces the TODI, it is treated the same way as a renunciation of a will. The spouse is entitled to one-third of the real estate if the owner also left a descendant or one-half if there is no descendant. In order to make a renunciation, the spouse must file a written renunciation in the same Recorder’s office as the TODI was recorded within seven months after the owner’s death. The rest of the real estate passes pursuant to the TODI as if the spouse had predeceased the owner unless specified otherwise in the TODI.
A beneficiary under a TODI is subject to the same claims of creditors of the owner as someone who would take under a revocable trust. Under Section 505 of the Illinois Trust Code, the property of a trust that is revocable at the settlor's death generally is subject to claims of the settlor's creditors, costs of administration of the settlor's estate, the expenses of the settlor's funeral and disposal of remains, and statutory allowances to a surviving spouse and children to the extent the settlor's probate estate is inadequate to satisfy those claims, costs, expenses, and allowances.
The amendments clarify that similar rules for contesting wills apply to contesting a TODI. An individual has two years to contest the TODI unless a probate estate has been opened. In that case, the period is shortened to six months after letters of office are issued to the executor.
Finally, the amendments retain the requirement that a lawyer draft the TODI but eliminate the requirement that he or she be licensed in Illinois. However, an owner of real property can draft his or her own TODI, and that will not void the transfer.
In situations in which an individual has a revocable trust, transferring the real property to the trust may be a better solution than using a TODI. If an owner of real property uses a TODI and becomes disabled, the owner will still need a financial power of attorney so that someone can make decisions related to the property. Although powers of attorney should be respected, there are still many situations in which a third party balks at the use of one. A trust eliminates that issue. However, in many situations, a TODI can be a useful and cost-efficient tool in the estate planning process.
Scott Bieber is a partner at Thompson Coburn, where he focuses his practice in the areas of family wealth preservation, federal transfer taxation and family business planning.
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