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Wealth transfer
Is it better to lend, to gift or to bequeath money to your children in advance? We explain the differences and how it works.
Content:
There are several options for financially supporting your own children. We explain the difference between an advance inheritance, gift and interest-free loan, and what to consider in each case. If you are familiar with the exact regulations, you can find the best solution for all parties involved.
Transferring some of your assets to your children during your lifetime can be sensible in many cases. For the most part, your children can make good use of the money at an earlier phase in life rather than only when the inheritance is due. You can, for example, assist them financially when they start a family, help them to buy a home for their young family or start their own business.
There are two basic ways you can provide financial support to future heirs at an early stage:
The transfer of assets cannot be undone. This is the case with an advance on inheritance and with a gift. The second option is to provide the money as a loan. A loan within the family can be interest-free or a modest interest rate can be charged. Careful budget planning beyond the start of retirement can help you better assess how much money you can spare.
An advance inheritance is a popular way of transferring assets during your lifetime. This is a special type of gift. It is designed to avoid putting other heirs at a disadvantage. An advance inheritance is taken into consideration when the estate is divided and deducted from the beneficiary’s share.
If the advance inheritance was in cash assets, the inheritance share will later be reduced by the nominal value at the time of the advance. Interest and inflation are therefore not taken into account. For real estate, the market value at the time of the testator’s death applies, meaning any appreciation is shared. Parents may stipulate in their will that this hotchpot obligation is waived, provided it does not infringe on the compulsory shares of other heirs.
An advance inheritance cannot be reclaimed. When money, real estate or other assets are transferred, these now become the child’s property. If it later emerges that the value of the advance inheritance was greater than the beneficiary’s entitlement, compensatory payments to other heirs may become due.
Recipients of advances on inheritance must pay tax on these as new assets. Furthermore, a gift tax may be due at the time of the advance on inheritance. However, direct descendants are exempt from this in most cantons.
Another way of transferring assets to your own children is through gifting. If the parents specify in their will that they waive the hotchpot obligation towards other heirs, the beneficiaries do not have to account for the asset transfer in the inheritance.
If the gift has a “luxury character,” the hotchpot obligation is waived even without explicit instructions in the will.
If this point is not specified when a gift is made, it is usually subject to a hotchpot obligation. This is particularly true for gifts with an “endowment character.” This includes, for example, free gifts aimed at helping to start a business or secure a person’s livelihood, such as education and training or real estate. If, however, the gift has a “luxury character” – such as a car that is not urgently needed –, the hotchpot obligation does not apply, even if this is not stated in the will.
Like an advance on inheritance, a gift is transferred to the recipient’s assets and cannot be revoked.
If gifts have infringed upon the compulsory shares of other heirs, they may demand the restoration of their compulsory shares when the estate is distributed. This also applies to advances on inheritance where the credited values deviate greatly from the market value, leading to violations of compulsory shares.
Beneficiaries must declare gifts as taxable assets. A one-time gift tax may also apply, although direct family members are exempt in most cantons.
The alternative to advance inheritance and gifting is an interest-free loan from the parents. Depending on the budget, a certain amount of interest can also be agreed. In this case, the assets still legally belong to the parents and they are taxed on them. This may even put the beneficiaries at an advantage in terms of tax, as they can claim the interest-free loan as a debt and thus a reduction in assets.
If the parents die before the loan is repaid, it becomes part of the estate. The money must either be repaid to the community of heirs or directly offset against the inheritance claim of the person who received the loan.
However, the interest-free loan could also be repaid earlier, as the parents, acting as lenders, could terminate it and demand repayment. It is important that the termination options are clearly stated in the loan agreement. This type of financial assistance thus offers more financial freedom than a gift or an advance inheritance.
The free UBS Pension Check gives you a reliable overview of your current financial situation. Based on the results, you can optimize or increase your private retirement savings.
Whether advance inheritance, gift or interest-free loan: if you wish to provide financial support to your children during your lifetime, you should always document your decision in writing. The agreement should make clear to both current parties and other heirs what support was provided during your lifetime. Even though a verbal agreement would suffice, it is important to document the agreement in writing. For a private loan, this includes terms such as – if agreed – interest rate, duration and notice period.
This clearly regulates aspects such as the type of financial support and provisions for compensation obligations. A written, signed contract is usually sufficient. However, the transfer of real estate must additionally be notarized and entered into the land register.
In all considerations of how you can support your children, always consider yourself as well. As you age, expenses will arise that require adequate planning and financial reserves. Therefore, during your lifetime, only transfer assets to your children that you will not need yourself.
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