Today I wanted to explore an estate planning case study. What happens if the seller dies during a real estate purchase? Though this is not a common event, I have had clients who have undergone such scenarios, so it does happen.
Here is the scenario:
Jim and Pam were looking to buy their first house (in Scranton, of course). They have both recently been promoted at their jobs as well as welcomed their first child. It was time for them to do some “adulting” and purchase their first home. Toby, recently divorced, decided that he wants to pursue a new life, preferably somewhere sunny, and put his modest, Craftsman style house on the market. Jim and Pam knew it was perfect the second they walked into it. They made an offer on the spot, which Toby happily accepted. They had the purchase and sale agreement drawn up and signed, Jim and Pam found financing, and they set the closing date for 2 months in the future.
Unfortunately, 3 weeks before closing, Toby had a heart attack and passed away. Jim and Pam were worried; what would happen with the purchase of their house?
What is going to happen? First, we should take a look at equitable and legal title/ownership.
Equitable title is the right to legal title in a piece of property, held by the person with equitable title. Legal title is the actual possession and ownership of the property. At the time of Toby’s death, Jim and Pam had equitable title, they possessed the right to the legal title. Therefore, Toby (who still has legal title until closing) was bound to do nothing to infringe on the property interest Jim and Pam acquired (Toby would be prohibited from taking out a mortgage on the property, etc). Equitable title turns into legal title upon closing, since legal title is transferred upon the last payment (accomplished at closing).
Upon the death of Toby, the legal title will then “vest” (be given) to the executor or personal representative of the estate of the decedent (the person who died, in this case Toby) because the property is now owned by the estate of the decedent. Since closing is 3 weeks off, the personal representative of Toby’s estate will take legal title, and the contract binds him or her to proceed with the sale of the property to Jim and Pam. Therefore, Jim and Pam have nothing to fear, they will still be able to purchase their starter home.
It is worth noting a few things as well. First, even if Toby’s children had wanted to receive the house as their inheritance (even if allowed by the will), they will be unable to do so. The contract made by Toby and Jim and Pam takes precedence over their claims to the property. However, the proceeds of the sale will be distributed to them, according to the terms of the will, or the rules of intestate succession if Toby had no will (which is unlikely, since Toby worked in HR and could be counted on to have his ducks in a row). Second, many real estate and contract laws can come into play in this situation. We have not touched on those, so bear that in mind. There are many moving parts to a deal like this, but these are the basics of how this situation relates to the estate planning and probate process. Finally, there often is a waiting period before the personal representative can sign documents for the sale of real property of the estate. Therefore, it could very well be that the closing might be postponed, depending on when the closing date is. However, this will not invalidate the transaction.
Eifert Law Firm
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