Whether for vocational training, owning your own home or self-employment: if parents would like to pay out part of their children’s inheritance during their lifetime, this is referred to as prepayment of inheritance. Swiss Life shows exactly what this means and what you should bear in mind.

Prepayment of inheritance: what is it?

If parents want to provide financial support for their offspring, they can pay out part of their inheritance during their lifetime. A good example is the purchase of residential property. If the children lack the financial means to realise their dream of a self-determined life in their own home, a prepayment of inheritance can help. This may also mean that the parents' property or a property is transferred to one of the children during their lifetime.

What should be taken into account in the prepayment of inheritance?

If you are thinking about an inheritance prepayment, you must not neglect your hotchpot duty to ensure equality among all heirs when dividing your estate. Particularly in the case of real estate, it is important to note that in the event of division of the estate, the market value at the time of death applies. If the property has gained in value over time, this must be taken into account for the early inheritance. 

Is it possible to bypass the hotchpot duty?

Yes. As the testator, you can make an explicit declaration that the prepayment of inheritance is not to be included in the estate. But be careful: this must not violate compulsory portions and may quickly lead to disputes among the heirs.

What is the difference between prepayment of inheritance and a gift?

A gift is the “allocation during one’s life of an asset free of charge”. All that the testator allocates to legal heirs during his/her lifetime as part of their future inheritance is referred to as prepayment of inheritance. Payments to heirs without obligatory inheritance-related calculations and to third parties are referred to as a gift. In the case of financial allocations by parents to children, prepayment of inheritance is generally assumed to be subject to hotchpot duty, unless it has been expressly waived. However, this must not violate the statutory share of the remaining heirs.

Is there an alternative to prepayment of inheritance or a gift?

A third way of supporting your offspring during your lifetime is by means of a loan. While prepayment of inheritance or a gift involves transferring money to the children's assets, a loan remains part of the parents’ assets. Therefore, the parents are taxed on the value of the loan plus any interest. The children, on the other hand, can deduct the debt and interest from their taxable assets and income.

Do I have to pay tax on a prepayment of inheritance?

Prepayment of inheritance and gifts are subject to gift tax. The recipient is generally responsible for declaring and settling the amount. Cantonal regulations govern the tax rates and regulations on inheritance and gift tax. The canton of residence of the donor or the testator, with the exception of real estate (law as per location), is the decisive factor for tax treatment and place of withdrawal for tax purposes.

Good news: spouse and offspring are currently exempt from inheritance tax in almost all cantons.

Do I need a contract for a prepayment of inheritance?

Not in principle. Even a verbal agreement is theoretically sufficient. Nevertheless, it makes sense to record the prepayment of inheritance in writing as proof.

Exception: when a property is transferred, a contract officially certified by the notary is mandatory.

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Estate planning

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