When a loved one passes away, complex financial and legal issues often arise. What constitutes the estate? Who receives what and at what value? How can conflicts be avoided?
According to estimates, the annual inheritance and gift volume in Switzerland is approximately CHF 95 billion, with a substantial portion consisting of real estate. However, transferring property ownership can be particularly challenging, including disagreements among heirs regarding the fate of often indivisible properties, lack of liquidity to compensate departing heirs, and determining market value for consideration in the division of the estate. Therefore, careful estate planning involving specialists is crucial.
As Senior Wealth Planner at Bank Julius Baer, Nathalie Eser Wolfer provides guidance to private clients on all matters related to estate planning. Julius Baer Real Estate asked her the following questions on this topic:
What are the key considerations when inheriting real estate?
Upon the death of the testator, real estate, along with other estate assets, is transferred to the heirs as joint owners. The joint owners form a ‘community of heirs’ where unanimous decision making is required. Furthermore, they bear collective liability for all estate-related debts.
Given the difficulty in dividing real estate, it is advisable to consider allocating a specific property to one heir, thereby avoiding the need for the community of heirs to reach an agreement. Such a division provision should be included in a last will and testament.
Why are real estate assets in estates particularly challenging?
Real estate assets often hold emotional significance, making them more than just financial investments in an estate. When a property is not retained by the community of heirs, either due to impracticality or unfeasibility, the issue of who assumes ownership and at what attributed value arises, assuming no prior division arrangement exists. The property’s market value, ideally assessed by an impartial expert, serves as the primary determinant. Moreover, latent capital gains tax, which is typically postponed until the property’s sale, must also be factored in.
Should the property’s value surpass the inheriting heir’s allocated share, they must provide adequate compensation to the remaining co-heirs. Failure to reach an agreement may lead to the forced sale of the property, followed by the distribution of the proceeds. If no agreement can be reached, any heir can file a lawsuit for division, although such proceedings are usually time-consuming and costly.
How could conflicts among heirs be avoided or minimised?
The key to preventing or minimising conflicts among heirs lies in implementing a well-planned succession strategy, supplemented by a division provision. The most successful outcomes are achieved when all stakeholders are engaged in the planning process, allowing for the consensual establishment of division provisions and attribution values. To ensure the legitimacy of these arrangements, they must be formally documented in a last will or inheritance contract. Inheritance contracts enable the creation of binding agreements that can only be amended or terminated with the unanimous consent of all parties involved. Importantly, compulsory shares may not necessarily apply if all participating parties agree.
In contrast, a last will represents a unilateral declaration that can be modified or revoked by the testator. For married individuals, marital property rights must also be considered, as they offer additional planning options, particularly for securing the interests of the surviving spouse.
Lifetime real estate gifts to descendants
Transferring real estate to beneficiaries during one’s lifetime is a common practice. This approach enables parents to distribute their assets, including properties, to their descendants while still alive. However, gifting a property to a descendant is considered an advancement of inheritance, meaning the recipient must offset the property’s market value at the time of the donor’s death against their inheritance share. To circumvent this outcome, parents must clearly label the gift as ‘not subject to offsetting’. Crucially, this designation must respect the compulsory shares of the other children; otherwise, they may assert their claims through litigation.
Complications arise when parents transfer assets to their descendants at below-market conditions (so-called gift below market value). Without an exemption from offsetting, the quota method applies. This means that the gift is offset only up to the corresponding quota, based on its value at the time of death.
When transferring ownership of the family home to their descendants, parents often reserve the right of usufruct or right of residency for themselves. As usufructuary, they have the right to use the property personally or receive rental income from it. In return, they are generally responsible for covering ordinary maintenance costs, managing the property, and paying interest on mortgages. Additionally, the property is attributed to them for tax purposes. However, the owner is liable for expenses related to major repairs or renovations necessary for maintaining the property. Since the usufructuary is not the owner, they cannot encumber or sell the property without the owner’s consent.
On the other hand, the right of residency is a personal right granting the holder the privilege of residing in a building or part of it. Unlike usufruct, this right is non-transferable. The holder of the right of residency is only responsible for maintenance costs and declaring the imputed rent as income.
Notably, reserving a right of usufruct or right of residency when transferring property to descendants can significantly impact the property’s valuation for inheritance purposes. Consequently, it is recommended that individuals seeking to establish such arrangements consult with specialised professionals to ensure that their plans are properly executed.