Advance inheritance – What should be considered when paying out an inheritance during one’s lifetime?

An advance withdrawal is the early payment of part of the inheritance. It is made voluntarily by the testator to one or more future heirs. Advance withdrawals are considered a special form of gift. Testators usually use this instrument to support children or other close relatives. This can involve monetary or material assets. For example, a house can also be transferred early. Particular attention should be paid to the basic equalisation obligation that exists in the case of an advance inheritance.

Swiss inheritance law is regulated in Part Three of the Swiss Civil Code (ZGB). The statutory provisions on succession apply if there is no will or if it is invalid (e.g. due to formal errors). Regulations such as the compulsory portion must be observed in all cases.

The equalisation obligation states that the assets gifted as part of an advance inheritance must be equalised upon the death of the deceased. The law regulates this in Article 626 of the Swiss Civil Code. If an heir has already received a financial advance inheritance during her parents’ lifetime, she will receive a smaller amount than the other heirs upon inheritance.

This equalisation obligation can be suspended at the deceased’s request. In this case, the beneficiary is not obliged to repay and the inheritance is divided equally among all heirs. The waiver must be recorded in writing. One exception is the compulsory portion, which must always be paid out.

Ultimately, the equalisation obligation is only relevant if there are several heirs. In these cases, a clear regulation is particularly important in order to avoid possible inheritance disputes. The omission of the equalisation obligation can lead to the other heirs feeling unequally treated. After all, one person receives a larger and more valuable inheritance than the others.

In some cases, the equalisation obligation can lead to problems or financial difficulties. This is particularly the case if the inheritance share is less than the advance withdrawal. In this case, the heir must pay the difference to the other beneficiaries in order to achieve an equal distribution of the inheritance. The calculation is based on the value at the time of inheritance and not at the time of the advance withdrawal (Article 630 of the Swiss Civil Code). If it is a financial gift, the nominal value is used. Interest or inflation-related fluctuations are not taken into account. In this case, the heir knows exactly what they will receive.

If, on the other hand, the advance inheritance is a property or a tangible asset, the current value at the time of inheritance is taken into account. If the value of a property has risen, the beneficiary may have to pay a large additional amount. The testator can counteract this by setting a fixed price for the house, land or property in the will.

Calculation example for equalisation

Assume the deceased has two children, a son and a daughter. The deceased’s son receives an advance inheritance of CHF 300,000. On his death, the deceased leaves assets totalling CHF 600,000, which are to be divided between the two children. To determine the total amount, the assets are offset against the advance inheritance:

CHF 300,000 + 600,000 = CHF 900,000.

This amount is now divided by the number of heirs:

900,000 / 2 = 450,000 CHF.

The daughter thus receives her full inheritance share of CHF 450,000, while the advance withdrawal is deducted from the son’s inheritance share:

CHF 450,000 – 300,000 = CHF 150,000.

An advance inheritance can be made informally. The law does not require this to be in writing – as long as it concerns financial assets. If the advance inheritance involves a property, a flat or a plot of land, a written contract is mandatory. This must be publicly notarised by a notary. Even if a verbal agreement would suffice in many cases, it is advisable to record this in writing. In this way, you create clear conditions and can prevent disputes.

An advance inheritance can bring advantages for both the heirs and the testator. This allows the beneficiaries to benefit from their parents’ assets while they are still alive. Many parents want to support their children and therefore use this form of gift. For example, the offspring can purchase a home or set up their own business without having to take out a loan with high interest rates.

In the event of inheritance, the advance withdrawal reduces the amount paid out, but also the tax payable on it. Inheritance tax is generally based on the amount of the inherited assets. Inheritance and gift tax rates vary from canton to canton. In many cases, gift tax is somewhat lower and associated with higher tax-free amounts. Testators can reduce their taxes by making an advance inheritance. This usually involves money that is only held in a person’s bank account and is not utilised. If this money becomes the property of the heir, the taxes that the deceased had to pay on the money up to that point are of course also cancelled. It is therefore a good way of reducing the tax burden.

Difference to a gift

Like an advance inheritance, a gift is final, but must be recorded in writing (Article 243 CO). In the case of a gift, however, there is generally no obligation to equalise. An advance inheritance can therefore create clear and above all fair conditions. Unless otherwise agreed, all heirs receive the same shares in the event of an advance inheritance.

Another form of gift is the mixed gift. It is particularly suitable if the parental home is to be transferred to a descendant. In this case, a purchase price is set which is usually lower than the actual value of the property.

However, gifts can be contested in accordance with Article 494 Paragraph 3 of the Swiss Civil Code if they are incompatible with the obligations arising from the inheritance contract in that they reduce the inheritance law benefits or have not been expressly reserved in the inheritance contract.

Tax Aspects of Advance Inheritance

Advance inheritance is a special form of gift. Therefore, gift tax must also be paid. This is usually linked to inheritance tax and is regulated by the cantonal inheritance and gift tax laws (ESchG). The recipient generally pays the tax. The law of the canton in which the gift is made applies. The amount of tax can vary depending on the canton, the amount, and the degree of relationship. In many cantons, spouses and direct descendants are exempt from tax, e.g., in Bern and Aargau. In other cantons, descendants are granted tax allowances, such as in Lucerne. No tax is due up to an amount of CHF 100,000, and above that, 1% to 2% is payable.

Tips for testators

Before you decide to make an advance inheritance, you should be clear about its finality. Once made, an advance inheritance cannot be reclaimed. Therefore, only make it if you have built up sufficient reserves for yourself. If you become dependent on support in old age and want to apply for supplementary benefits, for example, the transferred advance inheritance counts as a waiver of assets. This reduces your chances of receiving support and may require you to apply for social assistance.

If you want to support your descendants, there are various alternatives. An interest-free loan, for example, has the advantage that you can reclaim it if necessary. You even have the option of converting the loan into a gift or an advance inheritance later. This must be documented in writing and taken into account in your next tax return.