An advancement, a gift, or a loan? What you need to know.

Financially support your children during your lifetime

Parents who have more wealth than they need for themselves often wish to pass part of it on to their children during their lifetime. They want to help their children financially in early adulthood when they could really use the funds, for instance, so that they can purchase their own family home or take over the parent's house ahead of time. Often, their savings alone just aren't sufficient.

Generally speaking, there are two options for future heirs to receive part of the estate in advance. Either the money can be transferred permanently and without consideration, which is what happens in the case of an advancement or a gift. Or, the money can be loaned, e.g. as an interest-free loan.

Advancements count toward the inheritance later on

Advancement is probably the most commonly used method of transferring assets during one's lifetime. It is fair when there is more than one child involved. This is because part of the inheritance is advanced without shortchanging the other siblings later on. After the parents pass, an advancement counts toward the inheritance. It is added to the existing estate assets before the division of estate and then deducted from the claim of the heirs concerned.

Cash assets are counted at their nominal value at the time when they were advanced, in other words, without taking into account any interest or loss of purchasing power. For real estate, however, the market value at the time of the testator's passing is used. In other words, if the value of the real estate has increased, this will be factored in accordingly. Nevertheless, the testator can give instructions in their last will for the real estate to be counted at a set value. However, any compulsory portions must not be violated in doing so.

You cannot reclaim an advancement

In the case of an advancement, the funds or property are permanently transferred to the ownership of the child. This transfer cannot be reversed. However, descendants may be required to pay compensation to the other heirs during the division of the estate if their advancement is larger than their claim to the inheritance.

The recipients must then pay taxes on the advancements as new assets. A cantonal gift tax may also be incurred at the time of the advance inheritance, although direct descendants are exempt from this in nearly every canton.

Exempting gifts from the obligation to provide compensation

Instead of an advance inheritance, parents can also give a gift. Unlike with advancements, the recipient does not have to count gifts toward the estate later on. However, the person giving the gift is required to waive the obligation to provide compensation to the other heirs and to stipulate this in writing in their last will.

If there are no specific instructions about the obligation to provide compensation, the recipient will most likely have to have it counted toward the estate as in the case of an advancement. This is always the case if the gift is considered an endowment. One example of this is a contribution without consideration in order to found a company, since this establishes someone's livelihood. Gifts that protect or enhance someone's livelihood are also considered as an endowment by law. Examples include financing for continuing education or real estate. Only if the contribution is considered an indulgence – and is used, for instance, to finance a car that is not urgently needed – is the obligation to provide compensation waived without having to be specified in the last will. As a result, it is highly recommended to state clearly in the last will whether the obligation to provide compensation is waived or not.

Gifts to children cannot be taken back

A gift also becomes the permanent property of the recipient. They cannot be taken back. If compulsory portions of the estate have been violated, they must be compensated for during the division of estate, even if the obligation to provide compensation was waived.

Descendants must declare gifts as new taxable assets. Just as with an advancement, a one-time gift tax may also be incurred. In most cantons, though, direct descendants are exempt from this.

Interest-free loan as an alternative

Instead of permanently transferring part of their assets, parents can also grant an interest-free loan to their children. However, a loan to their descendants should also be documented in writing, just like with a loan to third parties. Verbal agreements lead to problems of evidence. The loan agreement should specifically include the interest rate, terms, and notice periods.

When the parents pass, their claim to the loan is passed on to the heirs. It becomes part of the estate assets. Then, the money either needs to be paid back to the community of heirs or is directly offset against the inheritance claim of the person who received the loan.

Loans can be reclaimed

An interest-free loan can have benefits both parties. Unlike with an advancement or a gift, parents can terminate a loan and reclaim all or part of the funds if they end up needing them later on. With a loan, there may be tax advantages for the children because the money still belongs to their parents. This means that the parents, and not their descendants, have to pay the wealth tax. The children can even declare debt in their tax return, thus reducing their taxable assets.

An advancement, a gift, or an interest-free loan?

No matter which format you choose to transfer your assets, it is important to document any agreements in writing, even if a verbal agreement would theoretically suffice. This is because only a written document provides your descendants with transparency – both now and in the future. If nothing is put down in writing, it may not be clear whether the transfer was a loan, an advancement, or a gift, and whether the parents wanted there to be an obligation to provide compensation.

A signed contract in writing is usually adequate. If real estate is being transferred, though, the contract needs to be notarized and registered in the land records. If you choose provisions that would violate forced heirship law, the only way to legally stipulate these is in an inheritance contract. For instance, if a father gives his house – which is a large part of his assets – to one of his children, this may violate the compulsory portions for the other children. This cannot be contested by anyone who has renounced their compulsory portion in an inheritance contract.

Both sides only benefit with good planning

If you are thinking of passing on money or assets during your lifetime, you should first think about your own needs. You need to carefully consider the amount and type of support you want to provide to your descendants so you can ensure that you have enough assets yourself in old age and can avoid any hardship. Thorough income planning beyond retirement is required before making any transfers. You should also bear in mind that you may incur expenses for healthcare or a nursing home as you get older. If your pension from Old Age and Survivors' Insurance and employee benefits insurance is not enough when combined with the remainder of your savings, you will be reliant on supplementary benefits to pay for any required care.

There is a catch, though. When deciding whether someone is entitled to supplementary benefits, the authorities not only count existing assets but also assets that have already been transferred. This may mean that parents are unable to receive supplementary benefits because they have made an advancement or a gift. In some cases, the children have to cover the costs, which is unpleasant for both parties and can even lead to conflict. With an interest-free loan, however, parents can ask for their money back if they need it.