Looking for a way to transfer real estate at death without probate? Illinois recently expanded the ways to do so.
Illinois adopted the Transfer on Death Instrument Act several years ago. The law allowed owners of residential property to sign and record a transfer on death instrument (TODI), but it only worked for residential property.
A TODI works much like a POD (pay on death) or TOD (transfer on death) bank or brokerage account. The named beneficiary of the account doesn’t have any interest in the account until the owner’s death. At death, the account immediately passes to the beneficiary simply by presenting the owner’s death certificate.
TODIs now may be used for all real estate
Effective Jan. 1, 2022, the Illinois Transfer on Death Instrument Act was expanded. It now may be used to transfer any real estate at death. This means that it may be used not only for one’s home but also for farm, commercial, industrial, recreational or any other real estate.
A TODI still must be prepared — usually by an attorney — and recorded. Technical requirements must be met, including that there be two witnesses.
Upon the death of the owner, an affidavit is then recorded providing information about the owner’s death and the new owner. It is simple, quick and efficient. Better yet, time and costs associated with estate administration is avoided.
A transfer on death instrument may be changed. Until death, the owner may revoke the TODI, change any beneficiary, sell the property, borrow against the property, continue to get all income or do whatever the owner wants with the real estate. It only takes effect on death. There’s no change in the owner’s authority while living.
Missouri, other states allow transfer on death instruments
By expanding the use of transfer on death instruments, Illinois joins most states that now allow their use. They may be especially appropriate to use when owning a single property in another state from one’s residence.
Some states don’t use the term “transfer on death instrument.” Instead, they use “beneficiary deed.” That’s the case in Missouri, which has allowed their use since 1989.
The effect is the same whether a TODI or beneficiary deed. Real estate transfers essentially automatically at death.
States do have differences. Some provide that real estate passing under a TODI or beneficiary deed is not subject to creditor claims. Under most circumstances, neither Illinois nor Missouri allows TODIs or beneficiary deeds to be used to avoid creditor claims. Other differences also may exist and need to be considered.
Estate taxes are not avoided
It’s sometimes assumed that a transfer on death instrument or beneficiary deed avoids estate taxes. That’s not the case. The real estate remains a part of the owner’s estate for tax purposes.
It’s worth noting that this also is the case for POD and TOD bank or brokerage accounts. The accounts count for estate tax purposes.
The same is true for life insurance, again worth noting. It’s often said that life insurance proceeds “are not subject to tax.” That’s usually true for income taxes. It’s not true for estate taxes where the person insured owns or controls the policy.
Estate taxes do not apply to everyone, of course. There are exemptions. What’s important if taxes might apply to know that real estate subject to a TODI or beneficiary deed remains a part of one’s estate for estate tax purposes.
TODIs, beneficiary deeds not always best choice
Despite the ease of using a transfer on death instrument or beneficiary deed, they aren’t for every situation. They are best used when each beneficiary is a competent adult and the transfer is outright.
A TODI or beneficiary deed may not be the best idea where the beneficiary arrangement is complicated. This might be the case where multiple beneficiaries are involved, they are to get differing interests, alternative beneficiaries are to be named, minors or those with disabilities are to be beneficiaries, the property is subject to debt, creditors will need to be paid, or tax planning is required.
Another frequent problem is that when updating one’s estate plan, the TODI or beneficiary deed might be overlooked. The TODI or beneficiary deed will trump or override one’s last will and testament or other estate planning documents. It’s important that each method of an estate plan work together.
If the goal is to avoid probate, a revocable living trust may be a better option. The owner still controls the property, but greater flexibility may be built in a trust.
A trust may be the beneficiary of a TODI or beneficiary deed. The trust can then address matters that are not able to be incorporated in the TODI or beneficiary deed. Usually, though, a trust would hold the real estate immediately and directly.
A transfer on death instrument or beneficiary deed provides a helpful way for many to deal with real estate outside of probate. It might be worth consideration with your estate planning attorney or advisor.
Jim Rapp has been practicing law for nearly 50 years and has been published and speaks extensively on estate planning, business, education law, civil rights and other legal matters. He is a founding partner of Muddy River News LLC.
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