When transferring real estate to children, the tax and inheritance consequences must be clarified in detail by a professional fiduciary.
Many parents give part of their assets to their children during their lifetime. For example, transferring real estate to children is one way to ensure clear and stable circumstances at an early stage in their lives. On the other hand, there is the possibility of conflict when parties with different interests are involved. In any case, such a step should be planned very early and very carefully.
Such gifts are a problem in many families. It is important that the heirs do not suffer violations of the duty to act. The Inheritance Act prescribes such compulsory shares for close relatives. “In addition, the tax consequences must be considered.” Several variants are conceivable for the transfer of property to descendants. These are the anticipated succession, the mixed gift with right of residence or usufruct and the sale.
A gift is any inter vivos gift by which someone enriches another person in his or her property without corresponding consideration. In most cantons, taxation is based on the degree of relationship.
A mixed gift is presumed to exist; a mixed gift exists when the parties intentionally set the purchase price of a property below the property’s actual value. It is intended to send the difference to the buyer free of charge. In the case of the transfer of a property to descendants, this may mean that the descendants also assume the mortgage on the property and/or grant the transferor a gratuitous right of abode or usufruct. Anticipated succession is only regulated under civil law and in a rudimentary manner. Ultimately, it is “nothing more than a gift to one or more beneficiaries and is treated like a gift for tax purposes.”
Possibility of family disputes
Such a transfer of property carries a very high risk of disputes between family members. It is important to bring the entire family together for a discussion with an experienced tax advisor who can provide completely neutral advice. Whether the testator wishes it or not, the heirs together form a community of heirs. In addition to the children of a deceased person, this also includes the life partner, who can be the maximum beneficiary, or a residential or beneficial interest in real estate. Since family and financial circumstances vary, an individual assessment of the situation is very important. In any case, this step must be well thought out by the parents.
Help raise a family
A more meaningful gesture would be to give away an unoccupied property, such as a second home, to reduce income and property taxes. This gesture is often made when you own multiple properties to help your children start a family. For those who have multiple children, this provides an opportunity to steer the inheritance in the right direction. Note, however, that such a gift to a child born after the transfer of ownership must be financially compensated. If one of the children takes over the parents’ house and the siblings receive financial compensation for the time being, disputes may arise if the price of the property changes significantly later.
In this case, I therefore recommend specifying in the assignment agreement the extent to which the acquiring child must compensate a beneficiary received as a result of the acquisition of the property in the subsequent inheritance settlement – and, if possible, also regulating this in the family-internal accession agreement. The gift and the increase in value of the property could possibly lead to problems with the compulsory portion of the other family members. It is also very important that the beneficiary be able to afford the property, especially if compensation must be paid to siblings. The most important question is what value should be used for the transfer of assets to the receiving child. It is always advisable to hire a real estate appraiser to evaluate the property.
Difference between cantons
In addition, the tax consequences must be clarified. If a property is sold to a third party – i.e. a non-family member – a property gains tax is due on the property gain. In the canton of Zurich and in many other cantons, this can be postponed if there is an “obviously disproportionate” performance and consideration. In the Canton of Zurich, such a situation exists in particular if there is a difference of at least 25% between the agreed purchase price and the actual market value of the property. The amount of the mortgage assumed by the purchaser and possible considerations such as the right of the parents to occupy the house in whole or in part free of charge or a usufruct of the house must be taken into account. “Ultimately, the IRS decides whether or not the 25 percent is met.”
Disproportionately high costs for nursing homes
Many property owners also want to transfer the property to their children at an early stage in order to be financially “prepared” for a possible later need for care and a stay in a nursing home. Staying in such an apartment is very expensive in Switzerland, and there is a risk that you will have to sell a property in order to afford it. The idea is to transfer the property as soon as possible and keep it in the household, even if you go into a nursing home.
This is not so easy to get around, because it is not clear and indeterminate what might happen in such a situation. Many people assume that they are in a safe area ten years after the transfer of the property, “after all, it depends on the municipality of residence.” It is not advisable to transfer real estate with the thought of possibly entering a nursing home at a later date. The risk of entering a nursing home is often overlooked, and it is wise to always keep this possibility in mind. Most elderly people in Switzerland live in their own homes, with external services provided by nursing homes or hospitals. Early gifts or inheritances and later claims for supplementary benefits (EL), e.g. for the assumption of nursing home costs, are also closely monitored by the authorities.
