New Real Estate Transfer on Death Deed – a Solution or a Problem

The Illinois legislature recently passed a bill allowing a homeowner to name a beneficiary  who will receive the property when the owner dies.  The hope was that this new type of real estate deed would simplify estate planning for people with smaller estates.  Unfortunately, it may create more problems than it solves.

The bill will become law on January 1, 2012.  This a link to the full text of the bill.

How this would work is that a homeowner would prepare a new deed naming one or more people as beneficiaries.  Those beneficiaries would receive ownership of the house when the owner died.  The new deed would have to be signed in the same way that a Will is signed.  So, the homeowner would sign the new deed in front of two witnesses and the witnesses, at the same time, would need to sign the deed too.  

This new deed would have to be recorded with Recorder of Deeds office in the county where the home was located (just like other deeds are now recorded).

When the current owner died, the beneficiaries would need to prepare an affidavit saying that the owner had died and acknowledging that they accept the real estate.  This affidavit would also need to be recorded with the local county recorder of deeds.

This sounds like a great way to avoid the time and expense of probate for people who have very few assets other than their house.  But the legislation has some important restrictions.

Those restrictions may significantly limit the effectiveness of this new deed.  This deed can be challenged anytime within two years after the homeowner dies unless a probate estate has been opened and then the time limit is six months.

Practically what does this mean.  It depends upon how title insurance companies treat this situation. Today, no one can sell a house unless they can provide the buyer with a title insurance policy.  So, how the title companies treat transfer on death deeds will have a large effect on whether such a deed is practical.

I have spoken to underwriters and and attorneys with two of the largest Illinois title insurance companies.  Both of them are analyzing the situation, but neither one of them has adopted formal guidelines. One title insurance company indicated that they anticipate reviewing each situation separately and making individual decisions on whether to issue title insurance.  Another title insurance company indicated that they might charge an additional premium equal to 2% of the sale price for sales within 1 year after the person’s death and a 1% premium for sales more than one year, but less than two years after a person’s death.  

In comparison, a Will  and the cost of probating the Will probably would cost significantly less than a the extra premium on the title insurance policy.

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