What Happens if a Minor Inherits Money in Wisconsin?

What Happens if a Minor Inherits Money in Wisconsin?

When an individual dies, their assets are distributed to their beneficiaries through a variety of procedures depending on their estate planning choices. The most common beneficiaries of an estate are either a surviving spouse or the adult children of older parents. However, occasionally a minor becomes the beneficiary of some or all of the assets from a deceased individual. This typically happens if a grandparent dies and leaves assets to a minor grandchild or if the parents of young children both die before their children become adults. Because a minor lacks the legal authority to manage their own assets, they cannot take direct control of the inheritance. Instead, an adult or other third-party needs to take control of the assets until they are old enough to take over. There are three main ways a minor can inherit property: (1) directly, (2) by trust, or (3) under either a Uniform Transfers to Minors Act (UTMA) account or a Uniform Gift to Minors Act (UGMA) account. Each option creates different outcomes for how the assets are managed and when the beneficiary ultimately takes control.

Before exploring what happens to assets left to a minor, it makes sense to first define “minor.” Legally, a minor is an individual who, by reason of their age, is considered legally incapacitated and thus prevented from making certain decisions that someone with full legal capacity would be entitled to make for themselves. While sometimes restrictive, the laws are intended to be for the minor’s own good – to protect them from their own bad decisions or from third parties seeking to take advantage of their inexperience. For the same reason we would not allow a child to accrue credit card debt in their name or get a tattoo, we do not allow children to take full control over large sums of inherited money. Depending on the state, the “age of majority,” or the age where an individual ceases to be considered a minor, is between 18 and 21. Some states grant certain rights at 18 while reserving others until later ages. In Wisconsin, the age of majority is 18 for almost all purposes, but age 21 for purposes of UTMA and UGMA accounts.

Anyone 18 years of age or older who is a direct recipient of inherited property will receive it outright and have full control to spend, save, or invest it as they wish. Examples of direct bequests are being named in a will or beneficiary designation, or by the default inheritance rules created by Wisconsin law if the deceased died without a will. If the beneficiary is instead under 18 years old, they will not be entitled to take control over that property until they reach the age of majority. Instead, a guardian is appointed by a court to control that property on their behalf. This person is often the same as the guardian named to look after the minor, but the legal roles are distinct. The “guardian of the estate/property” looks after the money the minor is entitled to, and the “guardian of the person” is empowered to make the decisions relating more directly to the minor’s life, such as educational and healthcare choices. If the deceased had a will and the recipient is their minor child, they hopefully named the individual(s) they wanted to serve in these roles. If not, the court will appoint someone in its discretion. If the minor beneficiary is living with their parents, the parents will almost always be named as guardian unless the court has a good reason not to. If the parents are divorced, typically the parent with primary custody will be given the guardianship. The guardian of the estate has control of the money and can access it to use for the minor’s care until they turn 18. Once the beneficiary ceases to be a minor, they gain full control over the remaining funds – if any are left.

Certain reporting requirements and oversight procedures are in place, but this role is still rife with the opportunity for abuse. While some cases of guardians misusing the minor’s funds are clear, things are often more nuanced – especially if the guardian of the estate and the person are the same. It is important that the guardian appointed be an honest and competent individual who will carefully guard the minor’s assets against neglect, poor investment choices or abuse (from themselves or third-parties). For their own protection, guardians should carefully document their management of the money as lawsuits for mismanagement or misuse are not uncommon when a beneficiary turns 18 and discovers their inheritance has already been spent. In some cases, it may be beneficial to arrange for the guardian of the estate and of the person to be separate people. While this can complicate things and can lead to conflict between the two guardians, the extra level of oversight and separation often results in a more conservative use of the funds, making them more likely to be retained for the minor once they turn 18.

Many consider 18 too young to be given free reign over large amounts of assets. Even middle-class people can pass on substantial sums after life insurance policies are paid out and their material assets, like their home, are sold. Receiving several hundred thousand dollars, let alone millions, can provide benefits that last a lifetime if managed properly. Unfortunately, most inheritances are completely spent within a few years with minimal lasting benefit. Developmental and behavioral scientists largely agree that decision making abilities are not fully matured until at least age 25, a full seven years later than when a minor recipient of a direct bequest will receive and be able to spend an inheritance.

The solution to this problem lies in not making a “direct” bequest. Instead, a trust, created for the benefit of the individual, is named as the beneficiary. Trusts are extremely flexible tools that can be used to meet a variety of estate planning objectives, but among the most common use for them is to delay the time when a beneficiary will receive control over inherited assets. In short, a trust is a legal arrangement, made either during life or as part of a will, which creates a separate legal entity, the trust, to hold assets. The person in charge of managing the trust is the “trustee,” and the trustee manages the assets on behalf of the “beneficiary.”

Because trusts are so flexible, trying to answer: “What happens if a minor inherits money under trust?” can only really be answered with “Whatever the trust says happens.” However, in a typical trust for a young beneficiary, the trust will hold onto the money until a set age reached by the beneficiary, often 25 or 30 or pay out fractions of the trust funds every few years until all funds are paid out. At that age, the beneficiary is given the funds and the trust, now empty, terminates. However, many trusts also contain provisions that if the beneficiary is suffering from drug, alcohol or gambling addictions or if the money is likely to go to a creditor if distributed, the trustee can hold onto the funds until it is safe to distribute them.

During the term of the trust, the trustee is usually instructed to make the money available to take care of the beneficiary’s “health, education, maintenance and support.” Much like a guardianship or custodial account for a minor, these funds will be available to pay for medical bills, room and board, tuition etc. If drafted properly, keeping the money in trust can help keep the inheritance safe from the beneficiary’s own recklessness, as well as from creditors or divorcing spouses, until they are hopefully old and wise enough to avoid these mistakes and manage the money on their own. When large sums of money are at play, some people view the creditor protections offered by trusts as so beneficial that the payout age is either much later in life or write their trusts to exist for the entire length of the beneficiary’s life, with a variety of options for how the remainder is paid out after their death.

The final type of inheritance a minor may receive are funds under UTMA or UGMA designations. The two types of accounts have some differences, mainly relating to investment options and tax implications, but for the broad overview offered here, they can be used interchangeably. Under these Acts, someone writing a will can specify the minor as the beneficiary of the assets to be managed under UTMA and name a custodian to manage the inheritance up until a listed age or age 21 in Wisconsin, whichever is sooner. For example, a will might state “To my nephew John Doe, I leave a specific bequest of $10,000 to his mother, Jane Doe, as custodian for John Doe, under Wisconsin Uniform Transfers to Minors Act to age 21.” While not offering all of the flexibility and options for longer retention periods available using trust funds, using these types of accounts are a simple and cheap way to address the control of funds intended for minor beneficiaries. If assets are left to a minor and the deceased did not name a custodian in the estate plan, in Wisconsin, the person handling the estate (either the executor of the will or the trustee of the trust) can create a UTMA account but it must end at age 18 and if the assets exceed $10,000, then the supervising court must approve it.

When choosing which of these methods are appropriate for your estate planning, there are a number of factors to consider, including: the likelihood of assets passing to a minor, the amount of money involved, and the character and maturity of the potential beneficiary, as well as their parents or guardians who may take control over the money. An estate planning attorney can help you determine the best option for your situation and to correctly implement those choices as part of your estate plan.

 

What Does “Sound Mind” Mean When Writing a Will?

What Does “Sound Mind” Mean When Writing a Will?

A last will and testament, along with other important estate planning documents, records a person’s decisions regarding the disposition of their property upon their death. Once you turn 18, you can write and amend your estate planning at any point during your life, so long as you have a “sound mind” at the time you execute the documents.

Like most states, Wisconsin’s laws on the mental capacity required to make and amend estate planning documents find their basis in the English common law. The exact language is found in Wisconsin Statute Section 853.01, which states that “Any person of sound mind 18 years of age or older may make and revoke a will.” While the age requirement is straightforward, the exact requirements of having a “sound mind” are less obvious.

To begin with, it should be noted that the capacity to make estate planning decisions, also known as “testamentary capacity,” is a distinct analysis from other types of capacity related questions. Someone may no longer be capable of living on their own due to mental decline but still may have the capacity to make or amend their estate planning. Even being under the legal guardianship of another does not itself prove the person lacked testamentary capacity.

Unfortunately, a clear and simple test is impossible because mental capacity exists on a multi-dimensional spectrum, while the legal analysis requires a “yes” or “no” answer. Borrowing from the common law tradition, Wisconsin cases have established a three-part test to determine on a case by case basis whether someone was of sound mind at the time of a document’s execution:

(1) The person executing the estate planning documents, also known as the “testator” must understand the nature and extent of his or her estate. This does not require an exact knowledge of investment allocation or dollar signs, but generally the testator should be able to roughly identify what assets they own and about how much they are worth.

(2) The testator must understand who the “natural objects of his or her bounty” are. Unlike some countries, in the United States adult children are not legally entitled to inherit anything from their parents, and subject to a number of limitations, spouses are not legally entitled to inherit from one another either. However, this test requires that at the time the testator made the estate planning decisions, they at least understood which individuals would be expected to receive their estate, usually this means the testator’s spouse or children.

(3) The testator must be able to form a rational conclusion on the selection of beneficiaries and the disposition of the estate. This requirement roughly translates to at least a basic understanding of the facts regarding their family situation and the effect of the estate planning documents. The testator is not required to have a detailed understanding of all of the exact workings of their estate planning documents so long as they basically understand the end-result.

In short, the requirements boil down to: you need to know roughly what you have, who would be expected to receive it and how the estate documents you are signing will affect where things go.

Because the bar for testamentary capacity is somewhat low, applying the three-part test sometimes leads to results where a court finds the testator had a sound mind but where the lay person would probably not think so. A good example of this is the rule for persons suffering from “insane delusions.” If a testator believes all manner of conspiracy theories and holds absurd opinions on matters, but understands their estate, the natural objects of their bounty, and the general effect of the plan they are signing, they likely have proper capacity and a sound mind for estate planning purposes. There is some room for challenge if the insane delusion “materially affected” the disposition because it can be argued the insane delusion impacted their ability to meet the prongs of the test, but even then, these challenges are difficult as courts are usually reluctant to weigh in on whether a belief is “insane” or not. The line between eccentricity and insanity is a difficult one to draw. A now infamous 1947 case is an often-cited cautionary tale of a court extending its analysis past strict legal questions as several male judges weighed in on whether a woman was “insane” for disliking men and giving her fortune to a women’s charity. Needless to say, the case has not aged well.

As an example of an insane delusion “materially affecting” the disposition, consider the following. If a parent disinherited you and also believes aliens have infiltrated our society, then the decision will likely stand if the three factors of the test are met. In contrast, if a parent disinherited you because they believe you are an alien who infiltrated our society, then you may have an argument to challenge the will because the insane delusion affected the ability of the parent to rationally select beneficiaries under the third factor of the test.

The three-factor test is analyzed at the time the document is executed, and it is possible that someone may lack capacity one day and have it the next. It is common for people suffering from certain types of cognitive decline to have good days and bad days. While this type of situation poses certain evidentiary hurdles if a challenge is brought, there is nothing inherently invalid about documents executed during a period where the signor temporarily has a sound mind. This is sometimes referred to as a “lucid period,” and in these situations it is usually wise to take extra care to record the evidence of capacity at the time of document execution. This is especially true if someone in the family is going to be upset with their treatment under the plan, as it increases the odds of a legal challenge.

Even if a testator has a “sound mind” as defined in the three-part test, a will, or portion of a will, may be challenged if an individual exercised “undue influence” over the testator to secure a benefit for themselves. Undue influence is beyond the scope of this article, but generally refers to a situation where someone has improperly applied their influence to get someone to change their estate planning to benefit themselves. One of the requirements for an undue influence claim is that the testator was “vulnerable” to undue influence, usually meaning some level of cognitive impairment, but not to the level of lacking a sound mind for estate planning purposes.

If a testator lacked a sound mind when they created or changed their estate planning directives, then those decisions, in theory, will not be valid or effective at their death. In practice, the technically invalid documents will be submitted to the court, and, if properly executed, will be presumed valid until an interested party to the estate proceedings formally challenges the documents within the required time frame. If no one raises the issue, the court overseeing the estate will have no way of knowing the validity of the presented documents is in question and will likely approve whatever distributions are called for in them. Claims not timely brought are forfeited, as courts have a legitimate interest in bringing all matters relating to an estate to rest within a reasonable amount of time following the death of the individual.

If you have questions or concerns about testamentary capacity or other estate planning topics, you should discuss them with an estate planning attorney.

 

Is My Contract Enforceable During an Emergency?

Is My Contract Enforceable During an Emergency?

As a result of forced closures and disruptions to supply chains connected with the Covid-19 pandemic, many businesses are facing the reality that they will not be able to complete obligations agreed to in contracts entered into prior to the crisis. This has brought new attention to an often-overlooked portion of contract law: force majeure clauses.

Sometimes referred to as “Act of God” clauses, force majeure provisions lay out the rules for how contract obligations will be affected if defined events outside of the parties’ control hinder their ability to comply with the contract. Typically, when a party fails to comply with the terms of a contract, they are in “breach,” and the non-breaching party may sue them for the damages caused by the breach or other damages laid out in the contract itself. Force majeure literally translates to “superior force” and fittingly is intended to protect a party who cannot complete the terms of the contract because of intervening forces outside of their control. To be effective for this purpose, the clause must be (1) enforceable, (2) successfully triggered, and (3) provide an adequate remedy or alternative.

States vary in the enforceability requirements for force majeure clauses. Some states require certain formalities to be made and vary in how they interpret terms like “unforeseeable.” It is important to make sure you understand how your state interprets any contracts you enter into and which state law will be used when settling disputes related to the contract. Another aspect of enforceability is whether the procedure for using the provision was properly followed. Some contracts require notices be delivered of the intent to rely on the force majeure clause. Failing to follow the procedure outlined in the contract may result in forfeiting the benefits of the force majeure clause.

To trigger the protections afforded by force majeure provisions, an event described in the clause must occur. Courts tend to use strict contractual analysis when interpreting the clauses, meaning that the exact phrasing in the contract will usually control and courts will be reluctant to read in provisions not explicitly included in the text. Common trigger events include natural disasters like floods, hurricanes and earthquakes, acts of terrorism, war, riots, and publicly declared states of emergency. When the term “Act of God” is used, the commonly accepted definition is any event which may be attributed entirely to nature without human interference. Economic hardship or shifts in the markets are unlikely to trigger a force majeure clause, as these risks are present in every contract and courts typically assume the parties have factored them in when entering into the agreement.

Many of these clauses are already written to expressly include epidemics and pandemics. Even without explicit reference to epidemics or pandemics, it is possible such events may fall under references. For example, a force majeure clause including terms for governmental action or restrictions may allow the clause to trigger not because of the pandemic itself, but because of state and federal actions taken to combat it. It is likely that in years to come, more clauses will be written to explicitly include these triggers to avoid any room for doubt over whether they qualify.

When successfully triggered, a force majeure clause usually will allow for the obligations of the contract to be terminated outright, altered in some way, or delayed. These remedies need to be considered carefully when drafting the clause to ensure the protection provided is a good fit for the subject matter and facts related to the contract. For example, a clause allowing either party to unilaterally terminate the contract when triggered may not be in your best interest if the transaction in the contract is beneficial to you, but you just need more time to complete it. What happens to money paid in advance and how partial performance will be treated are also things to consider when drafting the remedy section of the clause.

In the absence of an enforceable force majeure clause, there may be other options which allow a breaching party to escape liability for breaking the contract. The common law doctrines of impossibility and frustration of purpose may also provide relief from a contract’s terms in times of unforeseen emergency. While beyond the scope of this article, in short, these defenses to a breach of contract cover situations where an unforeseen event, not reasonably anticipated by the parties, either makes compliance impossible, or results in the original purpose of the contract to be so undermined that the actual objective sought to be gained by the contract actions is no longer possible. Even with the potential availability of these common law doctrines, it is preferable to rely on clear contractual language rather than asserting common law defenses.

If you have questions about how the force majeure clause in your contract will be applied, you should speak with an attorney. You may also want to review your insurance policies for provisions limiting their liability for damages caused by such force majeure events. These limitations are common but may deny you coverage at the time you need it the most. Current events may also serve as a prompt for you to be proactive in preparing for whatever the next disaster may be. If your company contracts do not already contain a force majeure clause, or if you believe it is time the existing language be reviewed with greater attention, an attorney will be able to help your business be better prepared to weather future disruptions.

 

What Happens If I Pass Without a Will?

What Happens If I Pass Without a Will?

“What will happen to my assets when I pass away?” This is the question that brings many clients into their attorney’s office for initial estate planning discussions. Typically, their estate planning attorney will ask questions to learn about their assets, family and wishes. From that information, the attorney will work to craft a plan that best achieves those goals. Many clients make that initial appointment intending only to create a Will, but soon learn that a comprehensive estate plan is about much more than the contents of a Last Will and Testament. In most cases, beneficiary designations, marital property agreements or trusts become important components for the plan. The purpose of this article is to examine what happens if that meeting never occurs and the individual passes without any estate planning done.

As a preliminary matter, it is important to note that most people have at least done some estate planning even if they have never written a Will or met with an attorney. Typically, this comes in the form of a beneficiary designation on financial accounts, life insurance or retirement assets like 401(k)s. Alternatively, some may own property in a form of title which creates rights of survivorship. While these choices may not have been a part of a comprehensive plan, they do represent decisions which have deviated from the “default.” This sort of uncoordinated and piece-meal planning can sometimes cause more harm than good, especially when beneficiary designations are not updated for many years or are not made consistent with other planning documents. For example, a decades old beneficiary designation on an account will control over a newly executed Will unless the designation is updated. For the purpose of this article’s examination of what happens without any estate planning, we assume these designations were left blank and assets are titled such that there are no survivorship rights.

For residents of the State of Wisconsin, the “default” is found in Wisconsin Statute Section 852.01. In a sense, this statute is the state legislature writing a Will for anyone who has not written their own. The distribution pattern written into this section attempts to grasp what most people would have selected in their Will had they written one, or in a beneficiary designation had they made one. As such, the more “traditional” your family structure is, the more likely the default will align with your actual desires as it is based on the “issue.” The term “issue” in this context of estate planning, refers to lineal descendants, typically children and grandchildren and will continue to refer to such throughout this article.

In the absence of any planning to the contrary, if you did not have any children with anyone other than your current spouse, everything will go to the spouse, if they survive you. However, if you have children from another relationship, then your surviving spouse or domestic partner will inherit one-half of your property other than your interest in marital property or property held as tenants in common with the survivor.

If there are issue, then they shall receive in equal shares any shares not inherited by the surviving spouse. If there is not a surviving spouse, then they shall receive the entire amount “per stirpes,” which is Latin for “by branch.” This means that your children each would receive an equal share, but if one of your children predeceased you, their share would instead pass to any children they had which remained alive, split by whatever number of grandchildren descended from that deceased child. If the deceased child left no issue of their own, that “branch” of the family tree has been extinguished, and the other branches assume their share.
If there is no surviving spouse or issue, then the assets pass to the deceased’s parents. If there are no surviving parents, then the shares pass equally to any siblings of the deceased, per stirpes. Here, per stirpes would again mean we would look down the family line of any predeceased siblings for a beneficiary. If no surviving beneficiaries are found at this point, then the assets pass to the grandparents per stirpes.

Any share that would go to a beneficiary under the age of 18 will be held in a custodial account for their benefit until they reach of the age of 18. This is because minor children are considered incapacitated under the law and cannot manage large sums of money on their own. When the child comes of age, whatever funds are left are turned over to their control.

Finally, if no heirs can be found as close to the deceased as any living descendant of the deceased grandparents, then the property “escheats,” or “goes to,” Wisconsin Statute § 852.01(3) to be added to the state’s school fund. Clients sometimes ask if their property will be taken by the state if they do not have a Will. This is usually what they are referring to and, as you can see, this will only happen if no family can be located out as far as the descendants of the grandparents.

In addition to the rules described above, there are a great number of exceptions and rules for special circumstances which are too numerous to discuss here. For example, someone who murders their spouse is effectively disinherited, and a parent who abandons their child can lose the rights to inherit from that child if they die. There are also rules for how domestic partners inherit from one another.

Those with children from multiple partners, who are in second or third marriages, who have the intent to treat their children differently, or want to provide for someone who is not legally their child, such as a stepchild, often find these default rules vary greatly from how they would want their assets divided. Unfortunately, the court will not hear arguments that the resulting distribution does not match what the deceased would have wanted. The only way to opt-out of the pattern established by the statute is to take affirmative steps during your lifetime.

Assets pass to the appropriate beneficiaries through probate, which is the court supervised process for distributing the assets of one’s estate upon their death and paying their final expenses. A common misconception is that a Will avoids the need for probate, but a Will merely provides alternate instructions for distribution of one’s assets in the probate process. If you have assets in multiple states, it may be necessary to have multiple probates. This is because Wisconsin courts have limited authority to dictate how property in other states transfers. Proper planning can avoid this expensive problem.

A Will also nominates a personal representative to oversee the probate process. In the absence of a nomination, the court will appoint someone to manage the probate process. Often, this is a surviving spouse or a relative who steps up to the responsibility and volunteers to take on the task. Unfortunately, the power the personal representative wields can sometimes attract those who are seeking to abuse the position for personal gain or to go on a power trip. In the absence of a clear direction by you, the court may not be able to tell the difference between these types of people.

Even if your intent matches the default distribution pattern, estate planning can still offer a number of benefits over dying intestate (without a Will). For example, certain types of estate planning can avoid the probate process entirely, saving time and money upon your death. Trust funds are commonly used to prevent beneficiaries under a certain age from gaining direct control of large sums of money. A trustee manages the funds and helps pay for expenses for the beneficiary until they reach the set age and get full rights to the property. Many prefer this option over the possibility that a grandchild would receive a sizeable inheritance upon turning 18, as statistically that money will probably be wasted and gone within a few years. Sometimes, when a beneficiary is known to be irresponsible with money and the problem does not seem likely to improve with age, trusts can hold onto the money for their entire lives.

Outside of what happens to your assets, dying without estate planning could affect who is given guardianship of your minor children. Typically, the Will is where a parent would nominate who would be charged with looking after their children were the parents to die while the children were still minors. In the absence of a nomination, the court system will decide who will take care of them. This likely will be a family member, but the court will have limited information about your child and your family dynamics. Nominating a guardian is often one of the most important reasons clients with minor children schedule an estate planning appointment.

This article only discusses what happens if you pass without an estate plan, but most estate plans will include power of attorney documents, which appoint trusted individuals to make decisions for you in the event you become incapacitated, but remain alive. These documents are critically important, and anyone over the age of 18 should have them in place. If you have questions about power of attorney, inheritance or wish to create an estate plan which distributes your assets on your terms, it may be time to speak with an attorney.

 

Contingency Clauses in Real Estate Contracts

Contingency Clauses in Real Estate Contracts

If you have ever bought or sold real estate, you may be familiar with the contingency clauses contained in these agreements. These clauses offer the option to back out of a sale if certain events occur. The meaning and consequences of these contingencies can be confusing for first-time buyers or sellers. Even those with experience in the field sometimes struggle to grasp the implications of contingency clauses.

To understand real estate contingencies, it is necessary to have a basic understanding of the process in which real estate transactions are completed. When a potential buyer wishes to purchase a residential property, they will present the seller with a signed “Offer to Purchase.” In Wisconsin, the WB-11 form is the standardized contract used for residential real estate sales and serves as a base from which options are chosen. This Offer will contain all of the terms of the transaction and becomes a binding legal contract when signed by the seller. The Offer does not actually transfer the property but rather begins the process, which will culminate in a closing.  At the closing, the documents are signed and the legal title to the property is transferred. Between acceptance of the Offer and the closing, the parties can agree to change the terms using an amendment, but unless both sides agree on a change, the terms in the original signed Offer will control.

The Offer lays out a series of responsibilities and deadlines for each party. These responsibilities generally consist of providing documents, making inspections and coordinating mortgage financing and title insurance. If a party does not timely complete their duties under the Offer, they are in breach of the contract. Depending on the situation, this may allow the other party to retain earnest money, which is the deposit to the seller that represents the buyer’s good faith to purchase, sue for monetary damages, or sue for “specific performance,” meaning they will request a judge to order the breaching party to fulfill their obligations. Often, the legal costs of pursuing these remedies deter the non-breaching party from pursuing them, but the potential for such legal action makes it inadvisable to assume that if something goes wrong, or if you change your mind, you can just walk away from an accepted Offer.

Because key information is sometimes not known when an Offer is accepted, most contracts contain contingencies which state that if specific events occur, then a party has the option to walk away without being in breach. If a contingency is triggered, the party backing out of the deal is not breaking the contract because the contract itself states they would not have to go forward if that event occurred.

Although some types of contingencies benefit the Seller, generally, Sellers prefer Offers with fewer contingencies because contingencies create more opportunities for the deal to fall through, leaving them with the unsold property. Buyers typically want more contingencies as it gives them flexibility if, after the Offer is accepted, something happens that makes them no longer interested in purchasing the property. What contingencies are included can be an important part of negotiations prior to the acceptance of an Offer.

The WB-11 form contains many options for contingencies. Most are preceded by a box which is checked if that contingency is to apply. If the box is not checked, that contingency is not part of the Offer. Outside of the contingencies included as options in the WB-11, additional terms may be added which make the Offer contingent upon other circumstances. With proper drafting, an Offer can be made contingent upon almost anything.

There are too many possible contingencies to describe them all here, but some of the more common contingencies are described below:

Financing Contingency. This contingency is common when the Buyer requires a mortgage to be able to purchase the property. If the Buyer is unable to obtain a mortgage for a set amount and at a set interest rate, and the Seller is not willing to offer them financing on the same terms, then the Buyer can walk away from the deal without being in breach.

Closing of Buyer’s Other Property Contingency: This contingency allows a Buyer who is in the process of selling another property, usually their existing home, to back-out of a deal if the sale of their old property does not close by a certain date. This can be very important to a Buyer; without it they may end up being forced to either breach the contract or own two homes.  Be sure to carefully think through the dates and deadlines between the two transactions when using this contingency. Even if you already have a binding Offer on your old home, consider this contingency in case the deal falls through.

Inspection Contingency: This contingency allows the Buyer to have an inspector examine the property. If they discover a “defect,” as defined by the WB-11, the Buyer may be able to back out of the deal. The seller is typically given the right to “cure” the defect to prevent the sale from falling through. For example, if this contingency is included and an inspector identifies issues with the electrical wiring, the Buyer would have the right to walk away unless the Seller is willing to pay for the issue to be corrected.

Appraisal Contingency:  Under this contingency, the Buyer may hire an appraiser to determine the value of the property. If the appraisal is less than the purchase price, the buyer can back out of the Offer. Appraisals are expensive and take time, so consider whether it is worth the expense and whether there is enough time between acceptance and closing to receive the appraiser’s report.

If you have questions about what contingencies are appropriate for your real estate transaction, how contingencies in an existing sale may interact, or how to draft custom contingency clauses, you should consult with a real estate attorney.

 

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