Transferring your home during your lifetime or upon death?

Inheritance law is often not at the forefront of people’s minds when transferring real estate during their lifetime, but those who take it into account can avoid unpleasant surprises.

If the transfer is made as an advance inheritance (as an offset against a future inheritance share), this advance inheritance must be offset against the actual value on the date of death vis-à-vis the surviving parent and siblings. What does this actually mean? By law, inheritance shares must be calculated as if the property or the interest in the property had been owned by the deceased at the time of death.

If real estate prices have risen since the transfer, it can come as an unpleasant surprise for the new owner, who then has to share a higher proportion of the value with the co-heirs than they received at the time of the transfer. Any improvements and investments made to the property by the new owner with his or her own money can complicate matters.

Is it better to gift money or real estate?

It is therefore important that the testator stipulates in his or her last will how changes in value are to be dealt with, or that the transfer is structured as a purchase. One option is to give the child money to buy the property instead of the property itself, although this option could result in property gains tax being incurred. In addition, the “sale” of the property to the child can also have consequences under inheritance law if the purchase price was set too low.

If all the family members agree, it is advisable to regulate the transfer of the property in a succession contract. This allows any problems to be identified and resolved at an early stage.

If the property, or part of it, is still owned by the owner at the time of death, it will be included in the owner’s estate. Whether and how the owner’s home is bequeathed depends largely on whether the owner has made a clear provision in their last will or succession contract.

In principle, the testator can determine which of his or her heirs should receive a certain asset, but this often does not work if the property is by far the largest asset. If the property exceeds the inheritance share of the person who is to receive it, they will have to pay the (high) difference to the other heirs.

Payment of the difference in installments is possible only if the co-heirs give their consent. Planning in good time can remove some of these obstacles. There are other issues that need to be addressed when assigning real estate to a child. These include the valuation of the property, the selection of an appraiser and the consideration of any property gains tax.

Protecting the surviving spouse

If the family home is not to go to a child, spouses often wish to ensure that the surviving spouse will not have to sell the property in order to pay the children’s share of the inheritance. This can be accomplished, at least with respect to joint descendants, by granting a life interest in the will. The surviving spouse can then live in the property for life or rent it out. This also applies even if the bare ownership has already passed to the descendants.

If the deceased did not leave a last will, the heirs must agree on the division of the property themselves. Only the surviving spouse may have a legal right to acquire the property. Experience shows that there are often disputes about who can acquire the property and at what price in such cases. Settling such matters in advance is therefore strongly recommended, unless it is already clear that the heirs wish to sell the property.

Advice on avoiding complications when dividing matrimonial property

In the case of married testators, the division of matrimonial property must be settled with the surviving spouse before the estate is divided. This is not particularly complicated if both spouses acquired the property in equal shares or if only one spouse financed the property and it is registered only in his or her name in the land register. This division is more complicated if the financing and ownership are different. For example, if e.g. a swimming pool is financed with the wife’s money, but the property is registered in the husband’s name. We recommend that the spouses clearly document payment flows during their lifetimes and regulate the settlement arrangements.

Caution when considering a non-heir

Special care must be taken if a property is to be bequeathed to a third party who is not a direct heir (legatee). In this case, it must be clarified what will happen to any mortgage debt encumbering the property. Without instructions from the testator, these debts will continue to burden the direct heirs, not the legatee.

A father gifts his daughter a property in Zurich worth CHF 3 million, including a mortgage of CHF 2 million, while at the same time retaining the right of usufruct for the rest of his life, which corresponds to a cash value of CHF 400,000. In this example, the gift amounts to only CHF 600,000 (market value of CHF 3 million less liabilities of CHF 2.4 million). In the Canton of Zurich, a gift is deemed to have been made if the disparity between the benefit and the consideration is at least 25 percent of the market value. In our example, the disparity is only 20 percent. This partial gift is therefore likely to trigger a liability for property gains tax in the Canton of Zurich. This tax liability could have been avoided if, for example, the father had retained the mortgage as a third-party pledge. Please note that the treatment of partial legal transactions varies by canton in Switzerland.

Cohabiting couples and spouses are exempt from inheritance and gift tax in the Canton of Graubünden, unlike in the Canton of Zurich. If a vacation property located in the canton of Graubünden is gifted to a partner during his or her lifetime, no gift tax would be due, as only the gift tax laws of the canton of Graubünden apply.

If, on the other hand, the Graubünden property is transferred to the surviving partner as an inheritance or legacy after the death of the partner living in the Canton of Zurich, the Canton of Zurich’s inheritance tax of up to 36 percent will be payable on a pro rata basis. In this instance, a lifetime gift could have saved tax.