Assets How to pass on real estate fairly

Real estate has both financial and sentimental value, which often makes inheritance matters more challenging.

29 Jul 2021 5 min read
People can often feel a strong emotional attachment to a property.

For many families, real estate is a substantial part of their assets. The fact that a property can’t be divided easily makes questions of inheritance a challenge. Aside from the material value, some will also feel a strong emotional bond to a property.

In this article we describe the hurdles you may encounter when passing on real estate and provide tips on how to overcome them.

Passing on real estate: emotions are frequently to the fore

Although a property’s market value may rise or fall over time, it also has personal and sentimental value.

For example: A couple owns a vacation home, a multifamily dwelling which they rent out, and their own home where their children grew up and spent their childhood. How would you divide up these three properties between two children?

Due to strong emotional ties, parents often want their property to stay in the family. But what happens if the children neither need nor want this?

Perhaps they want to build their own home or are about to start a business and could do with some start-up capital.

In addition, owning real estate often involves a lot of administration. Maintenance costs should also not be underestimated. Will an expensive renovation be needed soon? Do existing mortgages need to be taken on? These questions need to be addressed together within the family and openly discussed.

What happens to real estate if no arrangements have been made?

Inheritance rules as laid down by law often do not match a family’s needs and expectations.

For example, if one spouse dies then according to the martial property regime real estate can be counted as part of the estate. The surviving spouse is entitled to one half of the estate, the children to the other. The surviving spouse will often want to continue living in the property as the sole owner. In this case the remaining heirs must either receive other parts of the family’s assets or have their share of the inheritance paid out.

If one party wants their inheritance paid out, the following questions must be addressed:

  • Is there enough liquidity to pay out the inheritance? If there is, can the resulting inheritance taxes be afforded?
  • Should the parent be granted right of usufruct? If yes, how much is this worth? How must it be taxed?
  • Would the continued existence of the community of heirs – without dividing up the estate or paying out one heir’s inheritance – be the better solution?

If a property is passed on several times over the years, the community of heirs will grow without appropriate regulation. This can make it more complicated to manage or sell the property because the decisions need to be unanimous. This is one of the reasons why an inheritance ruling or a transfer while someone is still alive should be considered.

Note the following when transferring real estate while a person is still alive

Transferring real estate while a person is still alive means that the heirs will become the owners of one or more properties early. The following points need to be observed here:

  • If ownership of a property has been transferred as an advance inheritance, the accepted value is the value on the date it is inherited. If the value of the property has changed since then, this leads to compensation claims within the community of heirs.
  • Given that a property cannot be divided up easily, this can lead to insufficient liquidity in the estate. The property in question may thus need to be sold to be able to pay out compulsory shares.
  • If you are considering gifting a property to one of your children, you need to examine its affordability if there is still a mortgage on it. Tax payments and the required liquidity for payouts to coheirs must also be examined.

Listen to the needs of the beneficiaries

We often have strong emotional ties to our properties, and so too do our heirs. That’s why it is advisable to clarify whether transferring a property to one of your children is in line with their wishes, and whether it will lead to conflicts within the family. You can read more in our article “Inheritance: avoiding conflict”.

Take a look at our UBS real estate checklist if you are currently wondering how to divide up your real estate equitably.

Real estate checklist

How to create a stable foundation for real estate inheritance:

  • Property is often the biggest material component of an estate. Inheritance of property thus has a major impact on inheritance planning and the parties involved.
  • Ensure that the heirs’ wishes and expectations regarding the real estate are known and that the existing mortgage is affordable.
  • In case of the advance inheritance of a property, its valuation and any financial settlement should be recorded in writing by the heirs, with all relevant family members involved.
  • Each time a property is inherited without a specific inheritance plan, the community of heirs grows. This makes coordinating property management or a future sale more difficult.
  • When selling an investment property, participants should consider the impact that losing regular rental income will have on the portfolio.

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