What Is Contingent Interest?

Malcolm Tatum

Contingent interest is a type of potential benefit that will come to pass if certain specific circumstances take place. This interest may be in the form of a potential ownership of a real estate or a business enterprise, or even the potential to receive an object with some sort of value based on certain qualifications being met. Typically, contingent interest focuses on the possibility of receiving something if and when any stipulations connected with the reception are met.

Man climbing a rope
Man climbing a rope

One of the easiest ways to understand how contingent interest may be present is to consider the case of a property owner who wishes to convey that property to a loved one as part of an inheritance. Rather than willing the property to that loved one outright, the owner may place specific stipulations on the transfer of the property. Those stipulations may include requiring that the individual retain ownership of the real estate for a certain amount of time before selling, or that the recipient establish a primary residence on the property. In short, receiving title to the property is contingent on honoring the wishes of the current owner. Failure to do so means that the recipient does not retain any type of interest in the property and cannot lay any claim to it after refusing to honor the terms.

The general concept of contingent interest can be applied in a number of financial settings. With a contingent mortgage arrangement, the financing requires that the debtor comply with certain provisions in order to secure and maintain the financing. As it relates to the transfer of company ownership from one party to another, the proposed recipient may be required to commit to taking specific actions such as agreeing to not close one or more of the company’s facilities for at least one calendar year. Since receipt of the asset or the completion of the business transaction is dependent on compliance, the interest of the recipient or buyer remains contingent on whether or not those requirements are accepted and fulfilled.

While use of contingent interest is often aimed at making sure beneficiaries receive the most benefit from those assets offered to them, there are situations in which the idea is to create conflict or to force a party with some interest in an asset to forfeit his or her claim. For example, a parent who knows that an elder child has no wish to live in his or her hometown may structure a will to require that child live in that town for specified period of time in order to receive an inheritance from the parent’s estate. When the child refuses to do so, he or she no longer has contingent interest in the estate, allowing those assets to be allocated to other beneficiaries named in the last will and testament.

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