Real Estate Checklist - Things Every Elder Law Attorney Needs to Understand

Transcription

1 4/19/2017 Real Estate Checklist - Things Every Elder Law Attorney Needs to Understand 4 th Annual Elder Law Bootcamp: Basics and Beyond April 27 & 28, 2017 Paul Peterson, Miles L. Jacobs and Erica Crohn Minchella Sole Owner or Tenant in Common Property of deceased sole owner or tenant in common passes to his devisees assuming will is probated, retroactive to date of death No time limit on probating will to his heirs at law if no will per Article 2 of Probate Act (755 ILCS 5/1-1 et.seq.) Subject to See Affidavit of Heirship and Heirship Chart attached as exhibits to Rights of Heirs and Devisees in Illinois Real Estate booklet claims against the estate of deceased 6 months from publication of notice or 3 months from mailing per Sec years from date of death if no estate opened rights of the personal representative state and federal tax liens 1

2 4/19/2017 Passage of Title - Probated Estate Independent representative unless prohibited in will or supervised estate requested Independent Administration set forth at Article 28 of Probate Act Power to sell, lease, mortgage without court order per Sec Good faith purchasers for value protected in dealing with independent representative per Sec If real estate distributed to heir or devisee, independent representative required to record instrument of release and distribution prior to closing estate NOT a deed Sample form CCP 0421 at Cook County Clerk of Court website Is Probate Necessary or Desired? Probate applies to assets not otherwise disposed of Probate necessary to Determine heirship Admit will to probate to vest title in devisees Will contest period is 6 months per Sec. 8-1 Shorten claims period and pay and/or resolve claims Sell without guardian proceeding Minor or disabled heir or devisee Hold assets for missing heir or devisee 2

3 4/19/2017 Is Title Insurance Necessary? The deceased probably had a title insurance policy insuring them as of the date that they took title for the purchase price years ago Owner s policy includes heirs and devisees who take by operation of law as of the date of the deceased s title acquisition If they sell, they will need a title commitment anyway Possible items since the acquisition of title: Deed into revocable trust Joint tenancy deeds Transfer on Death Instruments Line of credit mortgage or reverse mortgage Judgements Unpaid taxes Deed in Lieu of Probate If all heirs and devisees, if any, are competent adults willing to convey, title company will consider insuring purchaser without probate Deed can recite grantees as a, b and c, being the sole heirs at law and devisees of d, who died,, CTIC requirements listed at sample forms as exhibit in probate booklet Get forms from title officer Affidavit of heirship Death certificate Copy of will (if decedent died testate) State and Federal tax releases, if applicable Notarized Statement of Information re final expenses paid and no claims Personal Undertaking as to claims against the estate of the deceased Risk premium See exhibits re Statement of Information and Personal Undertaking 3

4 4/19/2017 Small Estates Affidavit 755 ILCS 5/25-1 et seq. Applies to transfer of personal property where total value of personal property in estate is less than $100,000 Purpose is to allow a holder of personal property to transfer assets to disclosed heirs or devisees without liability to third parties like undisclosed heirs or creditors for that distribution Affiant obligated to pay disclosed unpaid debts and valid claims prior to distribution to heirs or devisees Affiant indemnifies all relying on affidavit up to amount lost due to acts of affiant plus attorneys fees Surviving Joint Tenant 765 ILCS 1005/1 et seq. Four unities Time created at the same time Title acquired by same conveyance Interest equal shares Possession all have an undivided right to possession Title passes to the surviving joint tenant(s) on death Judgement solely against deceased joint tenant ceases to be lien on land Exceptions of tax liens and liens in favor of governmental bodies (Public Aid Code) Deceased joint tenancy affidavit See exhibit Certified copy of death certificate Certified copy of will, if any Information re no state or federal estate tax due 4

5 4/19/2017 Tenancy by the Entirety 735 ILCS 5/12-112; 750 ILCS 65/22; 765 ILCS 1005/1c Requires marital residence owned as tenants by the entirety If valid homestead but later different homestead, title is in joint tenancy unless If divorce where order silent as to estate, tenancy in common If Tenancy by Entirety deed where property not homestead, unknown estate New judgement against one not enforceable against residence as long as parties stay alive, married to each other and both live in the residence Statute unclear as to whether judgement should be paid at sale of marital residence Judgement prior to purchase can be insured as subordinate to purchase money mortgage but raised as exception on owner s policy Judgement not enforceable against owner until tenancy broken Judgement enforceable against mortgage if not purchase money mortgage On death of one spouse, treat like joint tenancy property Illinois Trusts and Trustees Act 760 ILCS 5/ Powers and authorities of trust per Sec 4.1 et seq. Certification of trust to third parties per Sec 8.5 Revocable Living Trust Title in Trust Deed in trust should have full power and authority, third parties protected language. See exhibit. Trustee can certify validity of trust per Trustee or successor trustee can act for benefit of settlor during settlor s life if properly drafted incompetency provisions Pass beneficial interest or trustee conveys on settlor s death without probate Where settlor is trustee and beneficiary of trust, trust assets may be subject to claims of creditors upon settlor s death per Rush University Medical Center v. Sessions, 2012 IL Illinois land trust Separates beneficial interest from power of direction Trustee merely holds title, acts at direction of designated party Beneficial interest can be held as tenants by the entirety Contingent on death beneficiary can disclaim per 755 ILCS 5/2-7 5

6 4/19/ ILCS 27/1 et seq. Transfer on Death Instrument (TODI) Transfers title to defined property on death of the individual executing Transfer on Death Instrument (TODI) Revocable per Sec 45 Transferor can still convey, sell or mortgage TODI property per Sec 60 Applies to residential real estate only, per Sec 5 being 1 to 4 units, a condo or agricultural land of 40 acres or less with a single family residence Sec 40 and 45 requirements for valid TODI essential elements and formalities of deed Be executed by owner and two witnesses and all attested by notary If beneficiary is witness, legacy to beneficiary in excess of intestacy share is void unless two other witnesses State the transfer is to take place at transferor s death Be recorded prior to transferor s death Transfer on Death Instrument (contd.) Transfer effective on death of transferor Contestable within two years of death of transferor or 6 months from issuance of letters of office Purchaser or mortgagee prior to lis pendens of contest takes free of contest Subject to terms of TODI Subject to liens and encumbrances of record at time of death Subject to claims of creditors of transferor per Rush Medical case? Beneficiary may disclaim If predeceased beneficiary, TODI instrument can contain alternate contingent beneficiaries If predeceased beneficiary was descendant of transferor, to beneficiary s descendants per stirpies If to a class, to the remaining members of the class To the transferor s estate if none of above 6

7 4/19/2017 Transfer on Death Instrument Notice of Death Affidavit Notice of death affidavit to confirm title per Section 75 to include (1) the names and addresses of all beneficiaries, (2) the legal description of the land, (3) the street address and PIN for the land, (4) the date and recording number of the TODI, (5) the name of the deceased owner, (6) the date and place of death, and (7) the name and address to which future tax bills should be sent. The notice of death affidavit should be acknowledged before a notary public. The recording of a notice of death affidavit, however, is not a condition to the transfer of title under the TODI. Income Tax Basis of Transferred Assets Income tax basis is beyond the scope of this presentation Presenters are not qualified to give tax information This is a warning to refer client to qualified tax counsel or accountant Review IRS Publication 551: Basis of Assets at If it is not clear, get the Fair Market Value of the asset on transfer and the transferor s basis at transfer and send them to their tax accountant Basis on transfer can be subsequently be adjusted by things like recognized gains, capital improvements and depreciation 7

8 4/19/2017 Basis of Transfer from Spouse Basis of asset transferred from a Spouse is the basis of the transferring Spouse plus any gain recognized for transfer into trust where liabilities assumed are greater than basis of the property transferred Basis of Gift Gift Per Pub. 551, basis at transfer can be either Fair Market Value (FMV) or donor s basis If the FMV is equal to or greater than the donor s basis at transfer, then the basis is the donor s basis If the FMV is less than donor s basis at transfer and you have a capital gain on sale, your basis is donor s adjusted basis plus or minus your basis adjustments You have a capital loss on sale, your basis is FMV at the time of transfer plus or minus your basis adjustments No gain or loss if you use above to figure a gain and get a loss or to figure a loss and get a gain 8

9 4/19/2017 Basis of Inherited Property Per Pub. 551, Generally FMV on date of death FMV at time of alternate valuation if elected by estate Valuation for special use valuation if farm or closely held business if estate elects those valuation methods Decedent s adjusted basis if property donated for conservation easement Basis of Surviving Joint Tenant If sole survivor did not contribute to purchase price and had no income from property, then FMV on date of death of deceased joint tenant If sole survivor did not contribute to purchase price and had income from property, then FMV on date of death less survivor s share of prior allowed depreciation If sole survivor contributed to purchase price and shared income, then survivor s purchase price plus deceased percentage times FMV on date of death less survivor s share of depreciation Remember: This is not tax advice. It is a warning to refer your client to qualified tax counsel or accountants. 9

10 4/19/2017 Statutory Attacks on Transfers US Bankruptcy Code Sections 547, 548 & 544 Uniform Fraudulent Transfer Act 740 ILCS 160/1 Probate Act 755 ILCS 5/2-6 Person who intentionally and unjustifiably causes the death of another Treat as having predeceased person killed If joint tenancy interest, treat as if joint tenancy severed Financial Exploitation AARP, in an October 2016 bulletin, noted there are 40 million family caregivers in the U.S. who are providing $470 billion in uncompensated care every year. That figure does not include the amounts paid to compensated caregivers A 2009 study in which the National Committee for the Prevention of Elder Abuse participated in estimated an annual $2.6 billion in financial elder abuse per year 10

11 4/19/2017 Statutory Penalties for Financial Exploitation of Elderly or Disabled 755 ILCS 5/2-6.2 Financial exploitation, abuse or neglect Misappropriation includes undue influence, breach of a fiduciary relationship, fraud, deception, extortion and conversion Convicted under Section or of Criminal Code of 2012 or found by a preponderance of evidence to be civilly liable Treat guilty party as having predeceased decedent, but sever joint tenancy estate If deceased knew of conviction or finding of civil liability and thereafter ratified transfer, convicted party can keep transfer Holder of property not liable for transfer prior to conviction or holding or transfer thereafter if no knowledge of conviction or holding Court may allow convicted to get a reduction in benefits instead of no benefit Statutory Penalties for Financial Exploitation of Elderly or Disabled 755 ILCS 5/2-6.6 Person convicted of violation of Section 12-19, 12-21, or or a of Criminal Code of 2012 or person found by preponderance of evidence to be civilly liable for financial exploitation Treat convicted as having predeceased deceased or sever joint tenancy If deceased knew of conviction or finding of civil liability and thereafter ratified transfer, convicted party can keep transfer Holder of property not liable for transfer prior to written notice of conviction or holding or transfer unless knowledge of conviction or holding Court may allow a reduction in benefits instead of no benefit 11

12 4/19/2017 Presumptively Void Transfers to Caregivers 755 ILCS 5/4.1 et seq. Rebuttable presumption that TRANSFER INSTRUMENT executed after 1/1/15 is void if the transferee is a nonfamily member caregiver and the fair market value of the transfer exceeds $20,000 Action against transfer instrument must be brought within 2 years of death Caregiver is person or their spouse, cohabitant, child or employee who has assumed responsibility for all or a portion of the care of another person who needs assistance with activities of daily living. Family member caregiver is spouse, child, grandchild, sibling, aunt, uncle, niece, nephew, first cousin, or parent of person receiving care but does not appear to include their spouses Presumptively Void Transfers to Caregivers (contd) Caregiver pays all attorneys fees if he contests presumption and loses Presumption rebutted by 1) preponderance of evidence that transferee s share under transfer instrument is not greater than the share that transferee was entitled to under the transferor s transfer instrument in effect prior to the transferee becoming a caregiver or 2) by clear and convincing evidence that the transfer was not the product of fraud, duress or undue influence 12

13 4/19/2017 Presumptively Void Transfers to Caregivers (contd) Assume a new trust written after 1/1/15 leaves $50,000 to daughterin-law who was taking father-in-law to doctors, preparing his meals and making sure father-in-law took his medications and $5 million to State University. Is daughter-in-law a non-family member caregiver? The entire trust agreement is presumed void if daughter-in-law is a caregiver. Can university attempt to rebut presumption if daughter-in-law does not try to? (Her husband probably gets all or part of the $5 million if she does not.) Is drafter of trust liable to university for frustration of settlor s intention? Seniors and Foreclosure 13

14 4/19/2017 Reverse Mortgages Seniors can wind up in foreclosure on Reverse Mortgages in the following situations: 1. Non-payment of taxes 2. Non-payment of insurance 3. Failure to occupy the property 4. Death of obligated party 5. Death of second to die of couple Solutions to Foreclosure of Reverse Mortgage Pay outstanding obligations (sometimes, the homeowner just forgets to make payment or misses an installment) (Investigate a chapter 13 as a possibility if catching up debt is necessary) Sell the property can obtain any equity in the property for the homeowner. The Estate or Heirs of the homeowner have the right to purchase the property for 95% of the appraised value. Secretary of Housing and Urban Development Rules, Chapter 13, Rev-5, (A)(!). 14

15 4/19/2017 Appointment of Guardian If the Homeowner is known to be incompetent, the Foreclosure Court can be asked to appoint a Guardian to watch out for the interests of the Homeowner. Timing is critical, since the Guardian would need to be appointed before the sheriff s sale. That presumes that someone is aware of the fact that a foreclosure is pending and a Guardian needs to be appointed. Appointment of a Guardian can assure that family members can protect the property and equity in the property. Appointing a Special Representative for a Deceased Homeowner Circuit court lacks subject matter jurisdiction when a lawsuit is filed against a deceased person because such a suit is a nullity. To avoid this rule and confer jurisdiction, a plaintiff may substitute the deceased party s personal representative. 735 ILCS5/ See ABN Amro v. McGahan, 237 Ill 2d 526 (2010) Foreclosure cases are deemed quasi-in rem proceedings, so, even though the mortgagee is foreclosing against property, and may be the only remedy they may seek, the mortgagor is a necessary party. The appointment of a Special Representative may help in identifying heirs to provide defenses, but may not be under an obligation to do so. 15

16 4/19/2017 Probate Court Can Force Short Sale of Property If the sale real property of descendant is mortgaged for more than its value and selling is a prerequisite to closing the estate, probate courts can force the lender to accept a short sale. 755 ILCS 5/20-6(b) See IL App (2d)

17 CIDCAGO TITLE INSURANCE COMPANY DECEASED JOINT TENANCY AFFIDAVIT STATE OF ILLINOIS COUNTY OF ss. ORDER NO.: being duly sworn states that resides at in the City That was acquainted -... deceased who, at the time of death, was one of the owners of the land in County, Illinois, described as: That the deceased died -::-:--:----:--:--:-:----- copy of death certificate of the deceased attached hereto., as evidenced by a certified That the deceased died: Leaving no Last Will & Testament. Leaving a Last Will & Testament a copy of which is attached hereto. The original of the W!proven will should be filed with the Clerk of Probate Division of the Circuit Court of COW!ty, Illinois. Leaving a Last Will & Testament which was filed in the Unproven Will Box of the Probate Division of the Circuit Court of CoW!ty, Illinois about That the total value of the estate of the deceased, including both real and personal property owned by the deceased either individually or in joint tenancy at the time of the death of the deceased, does not exceed the sum of dollars. Affiant makes this affidavit for the purpose of inducing Cbicago Title Insurance Company to issue its Title Insurance Policy, describing the above mentioned property. Subscribed and sworn to before me by the said this day,a.d. 20 DJTAf'f

18 Excerpts From IRS Publication 551: Basis of Assets Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce) is the same as your spouse's adjusted basis. However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. For more information, see Pub. 504, Divorced or Separated Individuals. Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its Fair Market Value ("FMV") at the time it was given to you, and any gift tax paid on it. FMV Less Than Donor's Adjusted Basis If the FMVofthe property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. Example. You received an acre of land as a gift. At the time of the gift, the land had an FMV of $8,000. The donor's adjusted basis was $10,000. After you received the land, no events occurred to increase or decrease your basis. If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. If the sales price is between $8,000 and $10,000, you have neither gain nor loss. For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. Business property. If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property.

19 FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. See Adjusted Basis earlier. Gift received before If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. However, do not increase your basis above the FMV of the gift at the time it was given to you. Example 1. You were given a house in 1976 with an FMV of $21,000. The donor's adjusted basis was $20,000. The donor paid a gift tax of $500. Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. Example2. If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. Gift received after If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. Figure the increase by multiplying the gift tax paid by a fraction. The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. For information on the gift tax, see Pub. 559, Survivors, Executors, and Administrators. Example. In 2016, you received a gift of property from your mother that had an FMV of $50,000. Her adjusted basis was $20,000. The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). She paid a gift tax of $7,320. Your basis, $26,075, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 + $36,000) 0.83 Gift tax due to net increase in value $6,075 Adjusted basis of property to your mother 20,000 Your basis in the property $26,075

20 Inherited Property The basis of property inherited from a decedent is generally one of the following. The FMV ofthe property at the date of the individual's death. The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706. The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later. The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706. If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. For more information, see the Instructions for Form 706. Appreciated property. The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. Example. John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. John furnished two-thirds of the purchase price and Jim furnished one-third. Depreciation deductions allowed before John's death were $12,000. Under local law, each had a half interest in the income from the property. At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. Jim figures his basis in the property at the date of John's death as follows: lnterestjim bought with his own funds-1/3 of$30,000 cost $10,000 Interest Jim received on John's death-2/3 of $60,000 FMV 40,000 $50,000 Minus: Y, of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property.

21 Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. It does not matter how much each spouse contributed to the purchase price. Also, it does not matter which spouse dies first. A qualified joint interest is any interest in property held by married individuals as either of the following. Tenants by the entirety, or Joint tenants with right of survivorship if the married couple are the only joint tenants. Basis. As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. Decrease the cost by any deductions allowed to you for depreciation and depletion. Increase the reduced cost by your basis in the half you inherited. Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Special-use valuation. If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Post-death appreciation is the property's FMVon the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. Figure all FMVs without regard to the special-use valuation. You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. The increase In your basis is considered to have occurred immediately before the event that results in the additional estate tax. You make the election by filing with Form 706-A a statement that does all of the following. Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) ofthe Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. For more information, see the instructions for Form 706 and the Instructions for Form 706-A.

22 RIGHTS OF HEIRS AND LEGATEES AND THEIR PURCHASERS IN ILLINOIS REAL ESTATE With Chart on Intestate Descent The appended chart is an update of the previously published and widely used chart Rights of Surviving Spouse and Law of Descent in Illinois by John D. Lagorio, Jr. former Vice President of Chicago Title Insurance Company. Paul Peterson V.P. & Senior Underwriter Chicago Title Insurance Company Fidelity National Title Insurance Company Commonwealth Title Insurance Company

23 INTRODUCTION The lawyer dealing with real estate previously owned by a deceased sole owner or tenant in common must often resolve the conflicting rights of heirs, legatees, 1 claimants, and purchasers and decide whether to institute time consuming and expensive probate proceedings. How a lawyer proceeds will vary from case to case depending on whether the heirs, the legatees, or a third party purchaser will be the ultimate title holder, whether there are unpaid claims against the estate, and whether a foreign decedent is involved. This publication is intended to assist the lawyer in understanding these conflicting rights and to aid in deciding whether probate proceedings are desirable in a particular case. It will discuss how title insurance can be used to insure against risks when probate proceedings are not contemplated. Prohibited, Decreased or Void Transfers Complicating this process are the provisions of the Probate Act which may affect the passage of title by any vehicle, whether through intestacy, will, trust, joint tenancy, tenancy by the entirety or transfer on death. Sanctions are imposed where an heir murdered an ancestor 2, where a party taking was convicted of financial exploitation, abuse or neglect of an elderly or disabled person 3, where a parent neglected a deceased child 4, or where a person is convicted or found civilly liable for certain abuses against the deceased elderly or disabled person 5. Further complicating passage of title is the new presumption that the entire transfer instrument and not just the specific transfer is void if it includes a transfer on death to a non-family caregiver in excess of $20, Deceased Joint Tenants / Tenants by the Entirety Passage of title to real estate formerly owned by a deceased joint tenant 7 or tenant by the entirety 8 ordinarily provides few problems and should not require probate proceedings. As a general rule, on the death of a joint tenant the interest of the deceased joint tenant passes by operation of the joint tenancy to the surviving joint tenants. The title is subject to the lien for any state estate tax or federal estate tax due against the estate of the deceased joint tenant. Generally, judgments solely against the interest of the deceased joint tenant perfected after the creation of the joint tenancy but not levied upon do not affect the interest of the surviving joint tenant. 9 Once the attorney has ascertained that the decedent held title in joint tenancy and the joint 1 Legatee, as defined in 755 ILCS 5/1 2.12, includes devisee ILCS 5/ ILCS 5/ ILCS 5/ ILCS 5/ ILCS 5/4a-5 et seq ILCS 1005/ ILCS 1005/1c 9 See Gayton v. Kovanda, 368 Ill.App.3d 363, 857 N.E.2d 929 (1st. Dist. 2006). See, however, 305 ILCS 5/ and 305 ILCS 5/3-10 providing for the survival against the share of the deceased joint tenant of the lien for Medicaid payments and for payments for Aid to the Aged, Blind or Disabled provided for the benefit of the deceased joint tenant and United States v. Craft, 535 US 274 (S.Ct. 2002) holding a federal revenue lien against the deceased tenant by the entirety remained against half of the homestead of the surviving tenant by the entirety

24 tenancy was not severed, 10 he should obtain a certified death certificate, a copy of the last will and testament, if any, a state estate tax release and a federal estate tax release 11 or a certification that no taxes were due. Considerations for the deceased joint tenant should also relate to the deceased tenant by the entirety. Additionally, an ordinary judgment creditor whose lien was perfected after the creation of the estate cannot enforce its lien solely against the interest of a tenant by the entirety until the estate is terminated except if the estate was created for the sole intent of avoiding payment of existing debts beyond the transferor s ability to pay those debts as they become due. 12 The death certificate must be examined for the date of death, the identity of the decedent, and the cause of death. The cause of death must be reviewed since a party who intentionally and unjustifiably causes the death shall not receive any property, benefit or interest by reason of the death. 13 This test appears to be a codification of existing case law which applied to lesser crimes than murder. 14 A person convicted of certain crimes against the elderly or disabled may not receive any benefit from the joint tenancy or tenancy by the entirety but would retain what interest in the property they had prior to the crime. 15 The will of the deceased joint tenant or tenant by the entirety should be examined to ascertain that the case law dealing with joint and mutual wills or the doctrine of election is not applicable. A joint and mutual will, executed by both the deceased joint tenant and the surviving joint tenant, can create a contract to devise the property to the devisees set forth in the joint and mutual will. 16 While title still passes through the joint tenancy to the surviving joint tenant, the title is subject to the survivor s contract which may be enforced by the devisees against the survivor, his estate, or in some cases, his purchaser. The doctrine of election, on the other hand, arises where the deceased joint tenant s will devises the specifically described joint tenancy property to someone other than the surviving joint tenant and devises other property to the surviving joint tenant. The surviving joint tenant must decide whether to take as a surviving joint tenant or as a legatee under the will. 17 The final items to be considered, the lien for state estate tax and federal estate tax, will be discussed at length in a later section. 10 Lawwe v. Byrne, 252 Ill. 194; Szymczak v. Sszymczak, 306 Ill. 542; Duncan v. Suby, 378 Ill A bona fide purchaser for an adequate and full consideration from a surviving joint tenant has the protections afforded by 26 U.S.C (a)(2) and Revenue Ruling , 24 U.S.L.W with respect to the lien for federal estate taxes, but some title insurers are hesitant to rely on this revenue ruling, especially where a large estate tax is due ILCS 5/ ILCS 5/ State Farm Life Insurance Co. v. Davidson, 144 Ill. App. 3d ILCS 5/ Tontz v. Heath, 20 Ill.2d Carper v. Crowl, 149 Ill See, however, Williamson v. Williamson, 657 N.E.2d 651, 257 Ill.App.3d 999 (1 st Dist. 1995) holding the doctrine of election inapplicable to joint tenancy property unless the will shows a clear intent to put the beneficiary to the election.

25 Title Passing via Residential Real Property Transfer on Death Instrument (TODI) Decedents dying on or after January 1, 2012 may pass title to their residential real estate through the use of a recorded Transfer on Death Instrument (TODI) to the beneficiaries named in the TODI. To be effective, the TODI and any revocation of the TODI must be from individuals, affect only residential property as defined in the statute, meet the essential elements and formalities of a deed, state the transfer is to occur at the owner s death, meet the signing, attestation and acknowledgement formalities of the Illinois Residential Real Property Transfer on Death Instrument Act (TODI Act) 18 and must be recorded during the lifetime of the owner in the county that the property is located in. During the owner s lifetime, the TODI is revocable and does not affect the right of the owner to sell or encumber the real estate and gives the beneficiary no vested interest in the real estate until the owner s death. Upon the grantor owner s death the beneficiaries or their representative may record a Notice of Death Affidavit. 19 If a beneficiary predeceases the owner, title will pass per the TODI Act. Title is subject to all liens and encumbrances affecting the title at the time of the owner s death, rights of heirs or devisees to contest the TODI within the earlier of two years from the death of the owner or 6 months from the issuance of letters of office for the owner s estate, state inheritance and federal estate taxes and most likely subject to claims against the estate of the owner. 20 A purchaser or mortgagee for value and without notice before the recordation of a lis pendens for an action to set aside or contest the transfer on death instrument for any reason takes free and clear of any such action or contest by the heirs or devisees to set aside the TODI but may be subject to claims against the estate and state inheritance and federal estate tax. 21 Clearance of claims against the estate of the owner and state inheritance and federal estate taxes is based upon documentation similar to that obtained with a deed in lieu of probate, which is discussed subsequently. Title to the Real Estate of an Intestate Decedent When the owner of Illinois real estate dies intestate, title to his real estate vests by operation of law in his heirs as determined by the Illinois laws 22 in effect on the date of death. 23 These laws have undergone a series of evolutionary changes over the past century. For the convenience of the reader, the appendix to this pamphlet sets forth the various rules of descent and distribution in effect in Illinois between 1872 and Title to Real Estate of a Testate Decedent If the decedent died testate, the situation is more complex. The legatees have the right to divest the heirs and vest title in themselves as of the date of death of the decedent by having the will of ILCS 27/1 et seq ILCS 27/75 Note, however, that such a Notice of Death Affidavit was required prior to January 1, ILCS 27/85 While unsettled, consider the nontestamentary transfer discussed in Rush University Medical Center v. Sessions, 2012 IL , 980 N.E.2d 45, 366 Ill.Dec. 245, which held a trust is subject to claims against the settlor s estate to the extent that a settlor retained benefits in the trust assets at the time of his death ILCS 27/90 as amended Janary 1, ILCS 5/2.1; McNamara v. McNamara, 303 Ill. 191, certiorari denied, 260 U.S McCormick v. Hall, 337 Ill. 232.

26 the decedent admitted to probate in a court of competent jurisdiction in Illinois. 24 An unadmitted will does not vest title to Illinois real estate in the legatees. Even a will which has been admitted to probate in a foreign state is insufficient to vest title to Illinois real estate. 25 Probate of the will gives the heirs an opportunity to examine the will and, if they desire, to contest the validity of the will in court or submit a different will for admission to probate. The order admitting the will to probate has the effect of a conveyance from the decedent to the legatees. It divests the heirs and renders conveyances by the heirs, or liens affecting the real estate by reason of title in the heirs, ineffective against the decedent s land. 26 There is no statutory time limit for the filing of a petition to admit the will to probate. The will may need to be interpreted. The most innocuous clause in a will can lead to a will construction suit that may not be filed for years after the probate proceedings have closed. 27 Determining Heirship Problems may arise in determining heirship due to children born out of wedlock, 28 a posthumous child, 29 adopted heirs or parties inheriting from adopted decedents, 30 persons intentionally and unjustifiably causing the death of the decedent, 31 persons convicted of the financial exploitation, abuse or neglect of the decedent, 32 parents neglecting a deceased child, 33 parties convicted of certain offenses against the elderly or disabled, 34 disclaimers, 35 simultaneous deaths 36 and missing or unknown heirs. Additionally, with the recognition of civil unions 37 in Illinois in 2011, a party to a civil union has the same rights and responsibilities as a spouse, including the right of inheritance, the right to a surviving spouse s award and the right to renounce a will, and the affidavit of heirship must affirmatively deal with civil unions. Same sex marriages are also authorized in Illinois. 38 In those cases in which the heirship is uncertain or contested, a probate proceeding may he necessary to obtain an order declaring heirship ILCS5/4 13; Barnett v. Barnett, 284 Ill ILCS 5/7-5, Sternberg v. St. Louis Union Trust Co., 394 Ill. 462; Plenderleith v. Edwards, 328 Ill See, however, Eckland v. Jankowski, 407 Ill. 263, holding an innocent purchaser from the heirs, relying on a probate proceedings adjudicating the deceased died intestate, was protected from the devisees claiming under a subsequently discovered will by his reliance on the public record. 27 A classic example of a will construction suit is O Connell v. Gaffney, 23 Ill. 2d 611, wherein the Illinois Supreme Court reversed the Appellate Court and held that the share of a predeceased brother under the legacy to be paid in equal shares to my two brothers, James Gaffney and Edward Gaffney lapsed as the clause did not create a class gift and was to be distributed to the parties taking under the residuary clause of the will ILCS 5/2 2, which defines those parents eligible to inherit and provides for an unpaid child support offset. See Estate of Hicks, 174 Ill.2d 433 holding section 2(d), which then permitted only the maternal side to inherit from an intestate illegitimate without spouse or descendants, unconstitutional. The heirs of illegitimates have changed over time ILCS 5/ ILCS 5/2-4. The law as to adopted children has changed over time ILCS 5/2-6.2 and ILCS 5/ ILCS 5/ ILCS ILCS 5/ ILCS 5/ ILCS 75/1 et. seq ILCS 80/1 et seq., effective 6/1/14, authorizing same sex marriages, may make civil unions rare

27 Avoidance of Probate in Vesting Title Where the Decedent Left a Will If the decedent dies testate, probate proceedings may be necessary to vest the legatees with title. Until there is an order admitting the will to probate, title remains in the heirs subject to the rights of the legatees to perfect their title by having the will admitted. This does not necessarily mean that the will must be admitted to probate in every instance. Often, the heirs and legatees are the same parties and take the same share of the decedent s real estate under the laws of intestacy or the terms of the will. In such a case, probate proceedings will not change the title. Alternatively, if the heirs and legatees are different parties or take different shares, and the heirs are all competent adults, title can be confirmed in the legatees by conveyances of record from all the heirs. If all the heirs and legatees deed to a third party by warranty deed, the deeds should be effective to convey after acquired title in case the will is subsequently admitted to probate. 39 Even in those cases where it is necessary to have the will admitted to probate in Illinois, full probate proceedings may be avoided by simply having the will admitted to probate without having a personal representative appointed 40 or by the use of Summary Administration. 41 Summary Administration provides for the admission of the will to probate, the entry of an order declaring heirship, and the transfer of personal (but not real) property to the legatees without liability on the part of the transferor. Under both procedures the will is subject to the customary will contest items discussed later. Neither procedure shortens the period in which a claimant against the estate may enforce his lien against the real estate since a personal representative is not appointed. 42 The petition of Summary Administration does, however, make representations regarding possible state estate and federal estate tax. An order admitting the will to probate in any county in Illinois vests title in the legatees in all counties in Illinois. However, if the will has been probated in a county other than where the property is located, the legatees are advised to place third parties on constructive notice of their rights under the will by recording an authenticated copy of the will and the order admitting it to probate in the county where the real estate is located. 43 This recording procedure can also be utilized to place third parties on constructive notice of legatees rights to have the will admitted in Illinois where a will already has been admitted in a state other than Illinois. Conditions of Title Affecting All Estates In addition to establishing title in the heirs or legatees, the lawyer must concern himself in any estate with claims against the estate of the decedent, possible federal estate tax and possible state estate tax, as well as the rights of any personal representative that may be appointed. In addition, where a parent takes from a child as an heir, legatee, beneficiary, survivor, appointee or in any other capacity (other than joint tenancy), if the parent did not support the decedent child or 39 A warranty deed per 765 ILCS 5/9 conveys after acquired title. An unmodified quit claim deed, per 765 ILCS 5/10 does not convey after acquired title ILCS 5/ ILCS 5/9-8 and ILCS 5/ ILCS 5/33; See Lewis v. Barnhart, 145 U.S. 56, holding no constructive notice was imparted by a recorded will that failed to comply with the statute.

28 abandoned the decedent child, the parent s interest may be reduced. A purchaser of property is protected from the effects of that reduction unless a certified copy of a court determination of the amount of reduction is recorded prior to the purchase. 44 Claims against the estate of the decedent attach as liens against the real estate in favor of a creditor of the deceased. 45 A creditor enforces his lien by timely filing a claim in a pending probate proceeding with either the probate court or the personal representative of the decedent, or both. If the name and address of the claimant is known or reasonably ascertainable to the personal representative, the personal representative must mail or serve notice of the probate estate to the claimant. The claimant has three months from such mailing or personal service to file his claim. If the name and address of the claimant is not known or reasonably ascertainable to the representative, the claimant has six months after issuance of letters of office to the personal representative within which to file a claim, or if publication of the notice of the estate is late, within 6 months of publication. In any event, claims not otherwise barred will be barred upon the expiration of 2 years from the date of death. If the heirs or legatees do not have a personal representative appointed, a creditor may have one appointed within the applicable claims period. 46 A sale of real estate by the court appointed personal representative will divest the lien of the creditor on the real estate since the sale substitutes the sale proceeds for the real estate in the estate. 47 Federal estate tax constitutes a lien against the real estate of the decedent. The federal estate tax is a tax upon the right to transmit property at death. 48 Any tax due is a secret lien upon all assets of the estate, enforceable against subsequent purchasers without notice. 49 Generally, the lien for any unpaid tax exists for a period of ten years from the date of death of the decedent or until the tax is paid in full. 50 Where an estate includes a closely owned business, the time for payment of the tax may be extended to a maximum of 15 years. 51 Additionally, if a qualified farm or real estate used in a trade or business is involved, a reduction for federal estate tax purposes in the valuation of the real estate is allowed. That reduction can be recaptured in whole ILCS 5/ ILCS 5/18-1 to deals with claims against the estate ILCS 5/9-3(j) ILCS 20-15, and U.S.C.A., par A discussion of federal estate tax is beyond the scope of this pamphlet. The taxable estate can include such non-probated items as insurance proceeds and gifts in excess of the annual exclusion. The applicable exclusion amount per 26 U.S.CA was $625,000 for decedents dying in 1998, $625,000 for decedents dying in 1999, $675,000 for decedents dying in 2000 and 2001, $1,000,000 for decedents dying during 2002 and 2003, $1,500,000 for decedents dying during 2004 and 2005, $2,000,000 for decedents dying during 2006, 2007 and 2008, $3,500,000 for decedents dying during 2009, unlimited for decedents dying in 2010, $5,000,000 for decedents dying during 2011, $5,120,000 for decedents dying in 2012, $5,250,000 for decedents dying in 2013, $5,340,000 for decedents dying in 2014 and $5,430,000 for decedents dying in Detroit Bank 23 v. United States, 317 U.S U.S.C.A., par U.S.C.A., par