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POD, TOD--what are these arcane terms bandied about by bankers, brokers, and estate planners?

As noted elsewhere in this issue (see "Estate Planning for the rest of Us," page 520 ff), POD stands for "payable on death" and TOD stands for "transfer on death."

The terms derive from 205 ILCS 625/1 et seq, the Illinois Trust and Payable on Death Accounts Act, and 815 ILCS 10/0.01 et seq, the Uniform ToD Security registration Act. Both permit property to be held in the name of one or more persons with a designated beneficiary to receive the property immediately upon the death of a sole owner or the last to die of all multiple owners.

It couldn't be easier

POD and TOD beneficiary designations, like joint tenancy and living trusts, are another tool for avoiding probate of property. It couldn't be easier to set up a bank or brokerage account, or a security registration, in POD or TOD status: bank and brokerage clerks understand what they are and, lawyers report, sometimes even suggest them to their clients. Those clerks will also happily help clients set up or convert their accounts at no cost to include POD or TOD beneficiaries.

Unlike joint tenancy, the designation of a POD or TOD beneficiary has no effect on ownership until the owner's death. 815 ILCS 10/6. Under the Trust and Payable on Death Accounts Act, any holder may at any time cancel or change the designation of beneficiary without the knowledge or consent of the other holders or the beneficiaries. 205 ILCS 625/4(a). Under the Uniform TOD Security registration Act, the sole owner or all currently surviving owners of a security may cancel or change the property's registration in beneficiary form at any time without the beneficiary's knowledge or consent. 815 ILCS 10/6.

The Trust and Payable on Death Accounts Act applies to bank, savings and loan, and credit union accounts. 205 ILCS 625/2. The Uniform TOD Security registration Act applies to securities and security accounts, both of which the statute defines.

Real estate? Some say yes ...

What about real estate? Could it be possible to convey real property into TOD beneficiary status under the latter statute? Some lawyers, including Paul Meints of Bloomington and Kurt Horberg of Cambridge, believe that it is.

For Meints and Horberg, it's simple and clear. They parse the statute to support their position: 815 ILCS 10/3 provides in relevant part that "[a] security may be registered in beneficiary form if the form is authorized by this or a similar statute of the state of organization of the issuer...." 815 ILCS 10/1(9), in turn, defines "security" as "a share, participation, or other interest in property...."

And 815 ILCS 10/1(6) defines "property" to include "both real and personal property or any interest therein and means anything that may be the subject of ownership." The latter expansive definition, then, means that any property, including homes and farmland, may be held with a TOD beneficiary designation, in Meints's and Horberg's opinion.

Meints and Horberg have both employed TOD designations with success in the common scenario in which an aging husband and wife of modest means wish to protect their jointly held home from creditors and have it pass to their children outside of probate upon the demise of the second of the spouses to die. Meints often prefers the technique to, say, conveying the property to the desired beneficiaries while reserving a life estate, because "[a] life estate will not exempt [the remainder property] from the husband's and wife's creditors' claims. Furthermore, husband and wife would then have to get their children's permission to sell the property."

Using a TOD beneficiary designation bypasses probate, vests the home's ownership in the children immediately upon the death of the second of the parents to die, yet leaves the husband and wife with the option of being able to sell their house (or change the beneficiary designation) during their lifetimes, should their circumstances change.

Horberg says he's even used TOD beneficiary designations with success in Medicaid planning. Here's how it worked in one of his cases: Dad and Mom owned their home in joint tenancy. Their other assets were valued at less than the approximately $101,000 spousal impoverishment allowance for Medicaid purposes. Dad's failing health required him to enter a nursing home. Horberg oversaw Dad's and Mom's conveying their home from joint tenancy to Mom, TOD to their children, per stirpes.

Dad eventually died in the nursing home. On Mom's death, as planned, the home's ownership vested immediately in the children, outside of probate, and the children ended up selling the home and dividing the proceeds. The Illinois Department of health Care and Family Services, which administers Medicaid approval and payment in this state, did not thereafter pursue Mom's interest in the residence for reimbursement.

... some say "not so fast"

Meints cautions that not all lawyers and not all title companies agree with him and Horberg that the Uniform TOD Security registration statute permits holding real estate with a TOD beneficiary designation. Those disagreeing opine that the statute applies, as its title suggests, only to securities in the traditional sense of the word, which may include shares in land trusts but not simple ownership of real property.

Where a title company balks at issuing a policy to TOD beneficiaries, Meints says that he has overcome the objection by providing an affidavit from the beneficiaries to hold the title company harmless from any claims against the grantor's estate.

Meints adds, "I always add a paragraph to my deed as to the grantor's intent." He specifically references the Uniform TOD statute and states that the transfer is intended to be a nonprobate transfer. Additionally, he provides in the deed that any lender, title insurance company, or other entity is discharged from all claims if it relies in good faith on the TOD deed and the transfer on the survivor's death to the TOD beneficiaries.

Horberg summarizes his view of using TOD as an estate planning tool: "The Illinois Uniform TOD Security registration Act provides an effective method for the transfer of title to interests in real and personal property to designated beneficiaries selected by the owner. 'Defined terms' are nothing new under the law. The statute clearly defines 'Security' and 'Property' to include both real and personal property or interest therein."

Helen W. Gunnarsson is an attorney and writer in Highland Park. She can be reached at <gunnarssonhg@comcast. net>.