Quick Summary
- In the case of a gift, a donation is made without corresponding consideration. In contrast, an advance withdrawal is a payment of the future inheritance share.
- If descendants receive an allowance, it is assumed that this should be subject to the equalization obligation. Even after exemption from the equalization obligation, the gift is still subject to reduction.
- Gifts to spouses and heirs other than descendants are subject to reduction if they were made less than 5 years before the deceased’s death.
- A gift or advance withdrawal of an inheritance can result in tax advantages: The donors reduce their taxable income (particularly advantageous with progressive tax rates). Cohabiting partners in particular can transfer assets without the burden of inheritance tax.
- If the purchase price does not correspond to the market value, it may be possible to speak of a mixed gift, in which case the gifted portion must be taxed. Please also note the cantonal regulations.
What is a gift?
“Gift” is a legal term and should not be confused with the colloquial term “present”. According to the law, a gift is an inter vivos donation by which someone enriches another person from their own assets without receiving anything in return. In other words, the following conditions must be met for a gift to be considered a gift in the legal sense:
- A person is enriched (recipient).
- From the assets of another (the donor)
- The donee wishes to receive a gift (intention to receive a gift)
- The donor must want to make a gift (intention to make a gift)
Enrichment can take the form of an increase in assets, i.e. the donee receives assets, or a reduction in liabilities, i.e. the donee is relieved of debts.
There are various forms of gift(more on the different forms of gift). Advance inheritance is also referred to as a special form of gift.
Can I give away as much as I want?
In principle, future testators may dispose of their assets as they wish. They have no obligation to leave anything to their descendants (children, grandchildren, etc.). However, the gift may have consequences for the recipient after the donor’s death.
This is where we come to the equalization obligation. The equalization obligation means that an heir must allow an allocation to be offset against her inheritance share and receive less (or nothing) from the inheritance(more on the equalization obligation). According to the law, descendants must always offset gifts they received during the deceased’s lifetime at the time of the division of the estate (unless they are merely occasional gifts). Spouses and other heirs, on the other hand, only have to settle the estate if the testator has expressly instructed them to do so.
An example: Mrs. Meier gives her son and her girlfriend CHF 10,000 each. In her will, she has named her girlfriend as heir to 10% of her estate. She is silent on the obligation to compensate both of them. On her death, the son must have the gift deducted from his inheritance by law, whereas the girlfriend does not.
If parents want their descendants to receive a gift (advance withdrawal without the obligation to equalize) without having to offset it against their inheritance share later on, they can explicitly exempt them from the obligation to equalize in their disposition of property upon death. Please note, however, that gifts to heirs who are not protected by a compulsory portion that were made less than 5 years before the deceased’s death are subject to reduction. Likewise, parents can only exempt their descendants from the obligation to equalize within the scope of the free quota, as the compulsory portion of the other heirs may not be undermined. If the gift to a descendant violates compulsory portions, the gift is also subject to reduction. If an action for reduction was successful, the donee must pay the heirs of the compulsory portion what they have received in excess. This can put the donee in financial difficulties.
What is an advance withdrawal?
In the case of an advance withdrawal, part of the future inheritance is paid out to a prospective heir. Although the advance beneficiary of the inheritance does not have to pay anything in return, this advance withdrawal is offset against his or her share of the inheritance in the event of death. The fact that the advance beneficiary agrees to waive part of his inheritance entitlement later (as he has already received it) could be regarded as consideration. For this reason, it only makes sense to designate the advance inheritance as a gift if it does not have to be offset against the inheritance share (see below on the equalization obligation). Conversely, a gift to a future heir could be described as an advance withdrawal without an equalization obligation.
What is the maximum size of the advance withdrawal?
In principle, future testators are also free to decide the size of their advance inheritance withdrawals. However, both the future testator and the beneficiary may suffer disadvantages if the advance withdrawal is too large.
Advance beneficiaries must compensate for what they have received. And if the advance withdrawal violates a compulsory portion, the advance withdrawal is subject to an action for reduction.
The future testator may also not receive any social benefits due to the advance inheritance, as this may be offset against her assets and therefore the threshold for supplementary benefits and the like may not be reached. Read more about advance inheritance withdrawals and the risks for the parties involved here.
Advantages and disadvantages of advance withdrawals / gifts to future heirs?
Gifts and advance inheritance payments are generally subject to tax. However, descendants (children, grandchildren, etc.) and spouses/registered partners are exempt from tax on gifts in most cantons. However, this does not apply to all cantons: one exception, for example, is the canton of Appenzell Innerrhoden, which provides for a gift tax for descendants.
A gift can also be profitable for other heirs. In particular cohabiting partners are subject to inheritance tax in most cantons, unlike descendants. It may therefore be worth making a gift or an advance withdrawal of inheritance instead of letting the partner inherit. It is best to spread the gift over several years in order to benefit several times from gift tax allowances. In this way, a large gift that is divided into smaller sums each year can be completely tax-free. However, there are cantons, such as Bern, that only grant the same person the tax-free amount once in a certain period of time.
There are also tax advantages for the donors. By making an advance inheritance or a gift, donating parents can reduce their taxable assets. This can be particularly worthwhile with progressive tax rates.
Would you like to know what the tax situation is like in your canton? Register here for our free initial consultation with a lawyer.
What is a mixed gift?
So-called mixed gifts must also be taken into account when making donations to future heirs. In the case of a mixed gift, the gift and purchase are combined. This means that although the parties agree on a consideration for the gift, this consideration does not correspond to the actual value of the gift.
An example: A mother sells her car, which has a market value of CHF 40,000, to her son. However, they agree on a purchase price of only CHF 5,000. The difference of CHF 35,000 constitutes a gift from the mother to the son.
In the case of mixed gifts by parents, descendants run the risk of having received an advance inheritance without realizing it. They must compensate for the gifted portion of the mixed gift on the death of the parent concerned, as it is subject to the obligation to compensate. It is therefore important to be aware of the market value. The parent can then, if they so wish, exempt the descendant from the equalization obligation for the gifted portion. At this point, please note the cantonal regulations and practices as to when the gifted portion must be taxed. In the canton of St. Gallen, for example, a disparity of 25% or more between the market value and the agreed purchase price is considered a mixed gift.
If the mixed gift concerns the spouse or an heir who is not a descendant , there is generally no need for compensation, as is the case with normal gifts. However, it may be possible to bring an action to reduce the amount if the gift was made less than five years ago and violates the compulsory portions of statutory heirs.
Can the claim for compensation be time-barred?
Anyone who receives an advance inheritance as a descendant is subject to the equalization obligation. The remaining heirs are accordingly entitled to compensation. There is no limitation period for the equalization claim in the case of a gift or advance withdrawal of inheritance before the division of the estate.
However, according to the general rule of the Code of Obligations (Art. 127 CO), the enforceability of claims by legal action expires 10 years after they arise (i.e. 10 years after the death of the testator). It is therefore not advisable to deliberately wait a long time before claiming compensation.
In the case of a gift, i.e. an advance withdrawal of inheritance without an equalization obligation, the question does not arise anyway.