Whether their children are realising their dream of owning their own home, financing their education or becoming self-employed, parents often want to pay some of their future inheritance to their offspring during their lifetime; this is known as a prepayment of inheritance. We explain what this means and what you need to take into account.
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 prepayment of inheritance is anything that a testator gives, during their lifetime, to their legal heirs; this is then offset against their future inheritance.
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’ home 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. The hotchpot duty refers to the legal obligation that the assets transferred to legal heirs as part of a prepayment of inheritance must be accounted for at their value at the time of the testator’s death in order to ensure equal rights for all heirs.
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 increased in value over time, this must also be offset against the early inheritance – which can have serious financial consequences in some cases.
Is it possible to bypass the hotchpot duty?
Yes. As the testator, you can make an explicit declaration that the prepayment of inheritance or any increase in value from when it is transferred 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”. Payments to heirs without hotchpot duty and to third parties are referred to as a gift.
In the case of financial payments by parents to children, a prepayment of inheritance is generally assumed to be subject to hotchpot unless it has been expressly excluded. However, this must not violate the statutory share of the remaining heirs.
Is there an alternative to a prepayment of inheritance or a gift?
Another way of supporting your offspring during your lifetime is by means of a loan. While a prepayment of inheritance or a gift involves transferring assets to the children, a loan remains part of the parents’ assets. The loan and any interest income must be taxed by the parents.
In return, the children can deduct the debt and the interest, if agreed, for tax purposes. If a loan is granted to children and it is to be assumed that it will not (or cannot) be repaid in the future, it would again be accounted for in the same way as a prepayment when the testator dies. Here, too, careful plans must be put in place with regards to hotchpot and potential breaches of statutory shares.
Do I have to pay tax on a prepayment of inheritance?
Prepayments of inheritance and gifts are subject to gift tax. As a rule, the recipient is responsible for declaring these and for settling any taxes due. Cantonal regulations govern the tax rates and regulations on inheritance and gift tax. The canton of residence of the donor is the determining factor with regard to taxation and the place of receipt for tax purposes. However, this does not apply to property ownership, in which case the location of the property is the key factor.
Good news: spouses and offspring are currently exempt from inheritance tax in almost all cantons.
Do I need a contract for a prepayment of inheritance?
In theory, no. Even a verbally agreed transfer of assets is possible from a legal perspective. Nevertheless, it makes sense to record the prepayment of inheritance in writing to provide proof and prevent future inheritance disputes.
One exception is when a property is transferred, in which case a contract officially certified by a notary is required.
What happens if the parent experiences a financial bottleneck in old age?
If a parent who has given away some of their assets suddenly needs financial support in old age, a prepayment of inheritance or a gift can lead to a cancellation or at least a reduction in the supplementary benefits they receive.
Gifts or prepayments of inheritance are counted alongside against the person’s available assets when determining their entitlement to supplementary benefits. However, the further the gifts or prepayments of inheritance are in the past, the less relevant they are when calculating this entitlement. For each year following the transfer of assets, CHF 10 000 is deducted from the total of all gifts or prepayments of inheritance made and is therefore no longer included in the available assets.
Tip: if you are planning a prepayment of inheritance or a gift, you should perform a budget analysis as well as income/wealth planning and take into account certain situations.
Let our experienced experts advise you.
Would you like to be sure that your assets are passed on according to your wishes? Sometimes life just plays out differently than you think. We recommend planning your estate as early as possible.