It’s National Estate Planning Week (I know you’re as excited about it as we are!) which is a good excuse to bring up a hypothetical scenario: what happens, in terms of estate planning, if either the buyer or seller in a sale of real estate (like a house or land) dies before the closing?
It’s a situation that is fairly improbable, but it can and does happen. Plus, it’s good to explore just in case you ever find yourself dealing with this as the executor of a loved one’s estate.
Let’s say that you’re buying a house and you’ve already executed the contract (a purchase agreement) with the seller. Before the closing date, the seller passed away. What happens to the property? How does it fit into the seller’s estate plan? What is the executor responsible for? It’s easy to see how this can be a complicated conundrum.
Equitable and Legal Title
At this point, after the purchase agreement is drawn up and before the closing, you as the buyer hold an equitable title in the real property (the house). Equitable title is legal parlance meaning here that the buyer has a right to obtain full ownership of a property (or property interest). Equitable title comes with certain rights. For example, the seller can’t sell the property to a third party or subject the property to an encumbrance or a lien that would interfere with the buyer’s property interest.
Legal title, in comparison, is actual ownership of the land. In the period between the sale agreement and the closing, the seller holds the legal title to the property being sold. Legal title transfers to the buyer when the final payment is made (typically this is done at the closing or through an escrow process when the buyer receives the property deed in exchange for the payments made).
Like our hypothetical, if the seller dies during this point in the sales process this legal title in the property is a part of the seller’s estate. That means the seller’s estate can still sell the property (and is contracted to do so), collect the profit from the sale, and then disperse the profits as part of the decedent’s total gross estate to the beneficiaries.
What About the Seller’s Heirs?
The seller’s heirs-at-law and/or estate plan beneficiaries may have expected to inherit the house. But, if the seller entered into a valid contract for sale before they died, the estate’s executor is bound to honor the contract.
Note that sometimes there are required waiting periods where the executor must wait before executing documents for the estate (such as the sale of real estate). So, as the buyer, you can anticipate a reasonable time delay (think 30 days) compared to the schedule set out in the purchase agreement.
Of course, there are many rules of real estate and contract law that come into play, but in terms of property and how it plays into the estate planning process, these are the basics!
Enlist an Estate Planning Attorney to Help Everything Run Smoothly
If you do find yourself in the position of being the executor of a seller’s estate and that seller died in the midst of a real estate sale, don’t hesitate to enlist the expertise of an estate planner to help guide you how to best accommodate and fulfill your fiduciary duties.
On a related point, if you sell your house or purchase a new property, it may necessitate updates to your estate plan! Review your plan and then schedule a free consult to ensure all of your assets are properly accounted for in your plan.
Any questions about your specific estate planning situation? Contact GFLF at gordon@gordonfischerlawfirm.com or by phone,515-371-6077.