Transfer on Death Instrument - Underwriting Guidelines

EDITOR'S NOTE: This information is no longer current. Please see the Illinois Underwriting Guidelines, Chapter 8C-VI, Decedents' Estates: Transfer on Death Instruments.

The Illinois Residential Real Property Transfer on Death Instrument Act, effective January 1, 2012, created another way to transfer residential property while avoiding the expense of opening a probate case. 755 ILCS 27/et seq. When using a transfer on death instrument to transfer property, there are several underwriting issues to be aware of to effectuate a valid transfer. These underwriting guidelines are to assist ATG member attorneys in navigating the sometimes complicated title issues surrounding these transactions.

I. Title Commitment for Insuring the Grantor and Lender for a Title with a Transfer on Death Instrument (TODI) Recorded

Upon review of the title search, the examiner may find a TODI recorded in the chain of title. When preparing a commitment to insure the grantor under the TODI, and/or the grantor's lender, please raise the following exception on Schedule B:

Right, title, and interest of [Beneficiary or beneficiaries] under Transfer on Death Instrument exectued by _________ [owner] and recorded ________, 20__, as Document No. ________, in ________ County, Illinois.

Continue to raise this exception on Schedule B of the final Owner's Policy, and on a Schedule B, Part II of the Loan Policy. Per Section 60 of the TODI act, the lender will have priority over the TODI.

II. Title Commitment for Insuring a Beneficiary of a Transfer on Death Instrument (TODI)

  1. TODI in the Chain of Title

    Upon review of the title search, the examiner may find a TODI recorded in the chain of title. When preparing the commitment to insure the beneficiary under the TODI, please raise the following exception on Schedule B:

    Right, title, and interest of [Beneficiary or beneficiaries] under Transfer on Death Instrument exectued by _________ [owner] and recorded ________, 20__, as Document No. ________, in ________ County, Illinois. A validly executed Notice of Death Affidavit and Acceptance of Transfer on Death Instrument [requirements in 755 ILCS 27/100] should be furnished and this Commitment is subject to such further exceptions, if any, as may be necessary.

  2. Review of the TODI for Validity

    ATG may be willing to insure title in a beneficiary based upon a TODI. The ATG member should perform a careful examination of the TODI, and observe the following requirements:

    1. Verify that the property is residential in nature. The following properties qualify as residential:
      1. Real property improved with 1-4 residential dwelling units, units in residential cooperatives, or condominium units;
      2. A single tract of agricultural real estate consisting of 40 acres or less which is improved with a single-family residence. Note this may require checking with your client on the specifics of the property;
      3. Mixed use properties. If you have a property with a store-front on the first floor and residential above, this can be considered residential property for purposes of insuring. These types of properties are common in Cook County.
    2. Verify that the person who executed the TODI was the owner at the time the TODI was executed. Please note that an owner, under Section 5 of the statute, must be a natural person 18 or older. Corporations, LLCs, or other legal entities may not execute a TODI.
    3. TODIs are generally prepared by an attorney. However, the statute provides that an owner may also prepare a TODI. 755 ILCS 27/95.
    4. Confirm that the TODI contains all the essential elements of an inter vivos deed:
      1. Signed by the owner or the owner's agent;
      2. Signed by two or more credible witnesses;
      3. Owner and all witnesses are properly notarized;
      4. Accurate legal description of property is attached; and
      5. Contains name of owners, beneficiaries, preparer, and name and address of new owner to whom subsequent tax bills are sent.
    5. Verify that the TODI states that the transfer on death is to occur at owner's death; and
    6. Verify that the TODI is recorded.
    7. Look for the witnesses' attestations that on the date of signing, the owner of the property executed the TODI in the witnesses' presence as the owner's free and voluntary act, and the witnesses believed the owner to be of sound mind and memory.

    Please note that if any one of the items above is missing from the TODI, the TODI will be void and ineffective. If you have any questions about a TODI's validity, please contact an ATG underwriter. No consideration is needed to effectuate a TODI. In addition, because a TODI is not a deed, no notice or delivery is required to give the TODI validity. This means that beneficiaries need not know they are the beneficiaries of the TODI at the time of its execution and during the owner's life.

    Note that a credible witness may not be the beneficiary nor can a credible witness be a relative of either the owner or beneficiary. A beneficiary may be a legal entity (LLC or corporation).

  3. Capacity of the Owner to Make a TODI

    An owner of a property must have the same mental capacity to make a Transfer on Death Instrument as he or she would have to make a will. 755 ILCS 27/35.

    If you find a TODI in the chain of title, even where you are insuring title passing through a recorded TODI, you do not have to try to verify the question of capacity.

    However, when drafting a TODI, you are required to verify the question of the grantor's capacity , and in the case of a challenge to a TODI, the issue of capacity can arise. To make a will in Illinois, a testator must have sufficient mental capacity, described as follows:

    1. Knows the natural objects of his or her bounty;
    2. Comprehends the kind and character of his or her property;
    3. Understands the particular business in which he or she is engaged; and
    4. Makes disposition of his or her property according to some plan formed in his or her mind.
    5. Note, however, that a testator does not have to be absolutely of sound mind in every respect in order to have sufficient mental capacity to make a will.

    Also, see Peters v Catt, 15 Ill 2d 255 (1958). Further, in Catt, discussing evidentiary requirements for lack of capacity, "while a non-expert can give his opinion as to the mental condition of the testator for a reasonable time before or after making a will, he must first testify of sufficient incidents, facts and circumstances to indicate his opinion is not a guess, suspicion or speculation." (Id., page 7.) Facts and circumstances or incidents are required as a foundation or the non-expert's opinion will not be admitted in evidence.

  4. Review of the Notice of Death Affidavit for Validity

    A TODI is effective on the owner's death upon recording of a Notice of Death Affidavit and Acceptance of Transfer on Death Instrument (Illinois), ATG Form 3056, by the beneficiary. The purpose of the Notice of Death Affidavit is to give notice of the owner's death and for the beneficiary to accept the transfer.

    Upon receipt of a Notice of Death Affidavit and Acceptance (hereinafter, "Notice"), either in the chain of title or before recordation, you must examine the document carefully, as statute has specific requirements for the Notice. Verify that the Notice contains all of the following:

    1. Name of owner who executed the TODI and the date of the owner's death; (ATG requires that a certified copy of the owner's death certificate be attached.)
    2. Legal description, street address, and Permanent Index Number (PIN) of the property;
    3. Name and address of each beneficiary;
    4. Signature of each beneficiary on the Notice; and
    5. Notarization ofowner and all witnesses according to the statute. Most notarial acknowledgements have insufficient language in them to notarize every person who signs the document. Draft your "notary acknowledgement" section of the document very carefully.
    6. Notice is recorded [in the county where the property is located] after the death of the owner by at least one beneficiary.
    7. Notice is recorded within two (2) years of the owner's death. If not recorded within two years, the TODI is void and ineffective and title passes to the owner's estate. In that case, find title in the heirs and devisees of the deceased owner and follow the underwriting guidelines for a decedent's estate.

    Note that the statute also indicates that an "authorized representative" of the beneficiary can sign the Notice. While the statute does not define who the authorized representative is, presumably this would be the managing member of the LLC if the beneficiary were an LLC, or the president of the corporation if the beneficiary is a corporation. Review the appropriate LLC or corporate documents to determine who is authorized to sign on behalf of the entity.

    The statute also provides that if the Notice is not recorded within 30 days of the owner's death, the personal representative of the owner's estate may take possession (not ownership) of the property. This personal representative is entitled to a lien for all reasonable costs and expenses incurred while managing the property, after a reasonable attempt to notify the beneficiary.755 ILCS 27/75. If you find that the personal representative has taken possession, then please add the following exception to the commitment for title insurance:

    Lien of the personal representative of the estate of [deceased owner], filed as case no. ____ in the circuit court of _____ County, Illinois, for reasonable costs and expenses in managing the insured property.

    If a Notice is executed but not recorded, please follow the steps below:

    1. On Schedule A, show heirs and devisees of owner, deceased, as vested titleholders and beneficiary as buyer; and
    2. Raise this exception if you have not already done so: Right, title and interest of [beneficiary or beneficiaries] under Transfer on Death Instrument recorded ________, 2012, as Document No. ________. A validly executed Notice of Death Affidavit and Acceptance of Transfer on Death Instrument [requirements in 755 ILCS 27/100] should be furnished and this Commitment is subject to such further exceptions, if any, as may be necessary.
    3. You may waive the above exception upon reviewing a fully-executed Notice of Affidavit of Acceptance. If the Notice is not yet recorded, raise an additional exception requiring recordation in the county where the property is located.
  5. Challenge Period after the Owner's Death – Unprobated Estate

    After the death of the owner who has executed a TODI, if no probate is opened, the owner's heirs and devisees (in the owner's will) have the ability to contest the TODI within two (2) years after the date of the owner's death. Additional exceptions need to be raised on the commitment to effectively deal with the ability of the heirs to contest the TODI.

    When a beneficiary of a TODI is the Proposed Insured on Schedule A, and it has been less than two years since the date of the owner's death, raise the following exceptions on Schedule B of the commitment:

    1. A satisfactory table of heirship and proof of death, testacy or intestacy, and of the value of the estate of [Owner], deceased, should be furnished; and this Commitment is subject to such further exceptions, if any, as may be necessary. In the meantime the following exceptions are noted and this Commitment is made subject to:
    2. Claims against the estate of [Owner], deceased.
    3. Federal and Illinois estate taxes that may be charged against the estate.
    4. Statutory rights, powers and duties of the personal representative of the said decedent, when appointed.
    5. Right, title and interest of heirs and devisees of the estate of [Owner], deceased.

    To waive the above exceptions, you must provide all of the following:

    1. An Affidavit of Heirship of the owner (see Chapter: 8C - I: Decedents' Estates: Title Commitment for an Unprobated Estate for requirements in the affidavit), together with a copy of the death certificate;
    2. A copy of the will of the owner, if any;
    3. The exception for federal estate taxes may not be waived unless one of the following is true:
      1. You obtain proof of payment; or
      2. You obtain a statement, from a person with knowledge of the size of the decedent's estate, that no tax is owed together with a satisfactory personal undertaking; or
      3. Ten years have passed since the date of death.
    4. Beneficiary taking title to the property must execute a Personal Undertaking with the language from items 2, 3, 4, and 5 of the above exceptions listed; and
    5. All heirs and devisees must execute a deed to the beneficiary of the TODI.

    In some circumstances, additional documentation may be required. The beneficiary always has the option, if desired, to take title subject to the estate exceptions noted above. In that case, those exceptions will remain on the final title policy during the two-year challenge period. Beneficiary may then request a Date Down Endorsement, ATG Form 2017 to be attached to the Owner's Policy after the two-year challenge period has expired and no challenge has been filed. Because the Transfer on Death statute is silent on the issue of venue for a challenge case, the default provision in Civil Practice likely applies: venue would be in the county where any defendant resides. 735 ILCS 5/2-101.

    Bona fide third Party Purchasers. ATG will insure a third party, bona fide purchaser as the titleholder as long as the above requirements have been complied with. At the present time, the TODI statute has no provision to provide for a "purchaser for value" exception during the two-year challenge period. ATG will insure the beneficiary free and clear of the right to challenge the TODI as long as the above procedures have been followed, even if the beneficiary takes title within the two-year challenge period.

    ATG requires that a Personal Undertaking be executed by the beneficiary and proof of payment of federal estate taxes be supplied in order to waive the above exceptions because under Federal law, TODI property is still subject to estate taxes. The statute is as follows:

    26 U.S.C.A, Section 2037 – Transfers taking effect at death:

    • General rule. The value of the gross estate shall include the value of all property to the extent of any interest therein which the decedent has at any time after Sept.7, 1916, made a transfer...by trust or otherwise, if—
      • Possession or enjoyment of the property can, through ownership of such interest, be obtained only by surviving the decedent, and
      • The decedent has retained a reversionary interest in the property...and the value of such reversionary interest immediately before death of the decedent exceeds 5 percent of the value of such property.

    Note that in this statute giving the definition of estate taxes, "gross estate" is very broad. Also, the "reversionary interest" is of significance in that an owner may revoke the TODI at any time before death. This is very similar to a reversionary interest in the property.

  6. Challenge Period after the Owner's Death – Probated Estate

    If heirs of the owner open a probate estate, the heirs and devisees' time-period to contest a TODI is shortened to no later than six (6) months after the date of the issuance of the Letters of Office. Please perform a title search to determine if a probate estate has been opened. If it has, raise the appropriate estate exceptions depending upon the administration:

    If the estate is either supervised intestate or supervised testate and the six-month claims period has not expired, raise the following exceptions on Schedule B:

    1. Claims against the estate of [Owner], deceased.
    2. Federal and Illinois estate taxes that may be charged against the estate of [Owner], deceased.
    3. Statutory rights, powers and duties of the personal representative of the estate of [Owner], deceased.
    4. Right, title and interest of heirs and devisees of the estate of [Owner], deceased.
    5. In addition, other matters may be disclosed by our examination for which exceptions must be raised.

    To waive exceptions numbered 1, 2, 3, and 4, follow the same procedures as are listed in Section D, above. Note that exception 5 will require a review of the probate case. Keep a copy of the Letters of Office in your title file.

    A more common type of estate case is Independent Administration. If you have an estate that is an Independent Administration (and the six-month claims period has not yet expired), please raise exceptions 1, 2, 3 and 4 as shown above. Please review a copy of the Letters of Office to ascertain the claims period. For Independent Administration, the four exceptions may be waived upon providing the same documentation required in Section D, above.

    Once the exceptions have been cleared (see Chapter: 8C - II: Decedents' Estates: Title Commitment for a Probated Estate for procedure to clear these exceptions), they may be waived from Schedule B. If more than six months have passed since the issuance of the Letters of Office and the beneficiary under the TODI is being insured as the new owner, ATG will not require the heirs and devisees to execute a deed to the beneficiary.

III. Special Rules for Predeceased Beneficiaries in a TODI

  1. Predeceased Beneficiaries

     

    Under the Transfer on Death Statute, if a beneficiary is not a descendant of the owner and predeceases the owner, then the property passes to the owner's estate. However, the statute was drafted in such a way as to give the descendants of pre-deceasing beneficiaries named in the TODI ownership interests in the property. 755 ILCS 27/65. Those statutory provisions are similar to provisions found in the Illinois Probate Act. A short outline of these provisions is as follows:

    • If the beneficiary who predeceases is a descendant of owner, then that beneficiary's descendants (who are living at owner's death) take the property per stirpes;
    • If the beneficiary who predeceases is one of a class of beneficiaries, then the remaining members of the class (living at the owner's death) take the share of the pre-deceased beneficiary, EXCEPT:
    • If the beneficiary who predeceases who was one of a class and was a descendant, then descendants of predeceased beneficiary (living at the owner's death) shall take the pre-deceased beneficiary's share per stirpes.
  2. Title Commitment and Predeceased Beneficiary

    To review, you will have already found a TODI in the chain of title. On the commitment, the following exception will already have been raised:

    Right, title and interest of [Beneficiary or beneficaries] under Transfer on Death Instrument recorded __________, 2012 as Document No. _________. Note: A validly executed Notice of Death Affidavit and Acceptance of Transfer on Death Instrument, per 755 ILCS 27/100, should be furnished and this Commitment is subject to such further exceptions, if any, as may be necessary.

    If the beneficiary predeceases, waive the above exception by completing the following steps:

    1. Provide a certified copy of the deceased beneficiary's death certificate;
    2. Provide an affidavit from the heirs affirming and attesting that the deceased beneficiary was not a descendant.

    If the predeceasing beneficiary was, in fact, a descendant of the owner, provide the following additional documentation:

    1. An affidavit of heirship or other document that shows the relationship to the owner;
    2. An affidavit indicating who the beneficiary's heirs were at the time of death; and/or
    3. Other documents as required by the circumstances.

IV. Joint Owners and a TODI

One or more joint owners may execute a TODI. 755 ILCS 27/70. Additionally, a TODI executed by joint owners does not sever a joint tenancy or a tenancy by the entirety. In Section 5 of the statute, a tenant in common is not a joint owner, so tenants in common may not execute a valid TODI.

If less than all of the joint owners make a TODI, in the event the owner who dies last did not execute the TODI, then the TODI is null and void.

V. Revocation of a TODI

The purpose of the revocation section of the statute was to give an owner the final say on whether a TODI is revoked. During the owner's life, the TODI may always be revoked. 755 ILCS 27/55.

  1. Ways to Revoke a TODI

    The two common ways of revoking a TODI are as follows:

    1. If the owner executes and delivers a deed to a grantee other than the beneficiary in the TODI; or
    2. If the owner executes and delivers a deed to a trust (after the TODI).

    In the above examples, this will be discovered simply be performing a title search of the property. If a title search shows the TODI has been revoked by a properly executed, notarized and recorded deed to a trust or a third-party buyer, then show the vesting in the grantee on the deed on Schedule A and the presence of the TODI in the chain of title may be ignored.

  2. Executory Contract Issues
    1. If an owner executes a TODI and subsequently executes a contract to a third-party (not the beneficiary) to sell the property and then owner dies when contract is executory (contract not fulfilled), then the beneficiary takes the property subject to the unfulfilled contract. 755 ILCS 27/60(b).
    2. If the owner signs a contract purporting to revoke a TODI and dies when the contract is still executory, raise the following Special Exception on Schedule B:
      Right, title and interest of [buyer's name] disclosed by unrecorded contract for sale of the subject property executed ________, 2012 by [owner's name] and given to [buyer's name].
    3. If the beneficiary decides to allow the buyer to complete the purchase of the property, obtain either a Disclaimer (discussed below) from the TODI beneficiary or a quitclaim deed from the beneficiary to the buyer.
    4. In the event the beneficiary purchases the property but wishes on the final Owner's Policy to delete the exception for the contract, obtain a release of the contract from the prospective buyer.
  3. Other Ways to Revoke a TODI

    Some other ways a TODI may be revoked are as follows:

    1. The owner executes a subsequent TODI that either expressly revokes the previous TODI or revokes it by inconsistency; or
    2. The owner executes an instrument of revocation that expressly revokes the TODI.

    For either of the above, some of the same formalities will be required to revoke as were required to execute the original TODI:

    1. Revocation must be executed, witnessed and notarized properly; and
    2. Revocation must be recorded before the owner's death.
    3. If an instrument shows up in the title search showing a revocation document, raise the following on Schedule B:
      Revocation of Transfer on Death Instrument executed by [Owner] and recorded ______, 2012 as Document No. ______, in _______ County Recorder of Deeds.
    4. To waive the above exception, review the revocation document carefully to make sure it complies with all statutory requirements. Proof of the owner's death by a certified copy of owner's death certificate will also be required. If you find a document in the chain of title that might be construed as a revocation but you are unsure, please check with an ATG underwriter.
  4. Revocation by Joint Owners of a TODI

    All joint owners of a TODI must execute a revocation for it to be valid. Additionally, a TODI is revocable by the last surviving joint owner notwithstanding any contract or agreement between the joint owners to the contrary. 755 ILCS 27/70.

  5. How a TODI May Not be Revoked

     

    A TODI that is properly executed and recorded cannot be revoked by any of the following:

    1. An unrecorded instrument;
    2. A provision in a will; or
    3. A revocatory act on the instrument itself. Thus, tearing, burning, crossing out, or any other alteration of the TODI itself will be ineffective to revoke it.

VI. Title Requirements – Terms and Conditions in a TODI

A TODI may contain terms and conditions. You must review the TODI carefully for any terms and conditions and additional documentation may be required by ATG to make sure that those have all been satisfied.

  1. Beneficiaries and Terms and Conditions
    1. Beneficiary, upon acquiring the property through a TODI, is subject to any terms and conditions stated in the TODI.
    2. Beneficiary also takes subject to all liens and encumbrances affecting title at the owner's death. You must raise each lien and encumbrance that existed at the death of the owner on Schedule B.
    3. The statute also provides that a beneficiary, upon taking title, will obtain no covenant or warranty of title even if the TODI provides otherwise.
  2. Disclaimer by One or More of the Beneficiaries

    One or more of a beneficiary under a TODI may disclaim his or her interest in the property as provided by the Disclaimer Under Nontestamentary Instrument Act. 755 ILCS 27/80. In order for a disclaimer to be effective for title purposes, require that the beneficiary disclaiming follow the procedure outlined in the Probate Act found in 755 ILCS 5/2-7. You must record a disclaimer in the county where the subject property is located.

    If you have any questions regarding insuring title passing by a transfer on death instrument, please Contact an Underwriter. Thank you.

Posted on: Wed, 10/17/2012 - 10:50am