What is an Advance Inheritance?
An advance inheritance is the early transfer of a portion of an inheritance. In this arrangement, the testator (such as a parent) decides to pass on part of their wealth to an heir during their lifetime. Unlike a gift, an advance inheritance is subject to equalization obligations among the heirs.
Virtually any type of asset can be transferred as part of an advance inheritance: cash, tangible assets, and even real estate, including land, houses, or condominiums.
Why Opt for an Advance Inheritance?
There are various reasons why individuals, such as parents, may choose to transfer part of their wealth to their children during their lifetime. For instance, it could help them purchase a home or start a business without taking out a high-interest loan from a financial institution. The transfer of real estate to a child is another common scenario.
An advance inheritance offers benefits to both the testator and the heirs. For the testator, it can reduce their tax burden by lowering their total wealth. For heirs, who often have limited resources at the time, an advance inheritance can provide the means to start a business or gather sufficient equity for a property purchase.
Important to note: The testator generally has full discretion over their assets, provided the legally protected portions (known as Pflichtteile) are not infringed upon in the event of their death. Additionally, heirs are not entitled to equal treatment during the testator’s lifetime. However, unless explicitly stated otherwise, transfers are presumed to be advance inheritances, which must be equalized among heirs during the division of the estate (more on this below).
Advance Inheritance vs. Gift: The Key Differences
The primary difference between a gift and an advance inheritance lies in the obligation for equalization. If an heir receives assets during the testator's lifetime, this is generally considered an advance inheritance and is subject to equalization unless explicitly declared otherwise by the testator.
This distinction becomes relevant upon the testator's death when the estate is divided among the heirs. Heirs who benefited from an advance inheritance are required to include their early share in the calculation of the total estate. For example:
If Child A received CHF 100,000 during the parent’s lifetime, and no exemption from equalization was declared, and the remaining estate amounts to CHF 200,000, the total estate to be divided is CHF 300,000. In this case, Child A owes Child B CHF 50,000, ensuring an equal distribution of the total inheritance.
It is essential to note that monetary advance inheritances are calculated based on their nominal value at the time of transfer—adjustments for inflation or interest are not made.
The situation becomes more complex when physical assets, such as property, are involved. In such cases, the current market value is used unless a fixed value was agreed upon at the time of transfer. This can be challenging for heirs when real estate is involved, as property prices in Switzerland have nearly doubled over the past 20 years. Consequently, the equalization payment required in the event of inheritance could be substantial.
What Should Be Considered in Advance Inheritances?
In principle, an advance inheritance is straightforward and does not even require a formal agreement—it can be established orally. The exception is real estate, where a notarized transfer is mandatory. Nevertheless, it is advisable to document all forms of advance inheritance in writing to prevent disputes among heirs in the future.
Key consideration: An advance inheritance or gift can never violate the statutory reserved portion of the estate. Unless explicitly classified as a gift, any transfer is presumed to be an advance inheritance subject to equalization.
Both gifts and advance inheritances are generally taxed as gifts during the testator’s lifetime; upon their death, inheritance tax applies instead. However, in most Swiss cantons, close relatives are now exempt from both gift and inheritance taxes.
