Transfer of the parental property to the descendants

Homeownership is virtually unaffordable for young people these days. At the same time, parents who own their own homes hope that their single-family home or apartment will one day be lived in by their children and, accordingly, transferred to them. Such property transfers within the family carry certain risks and must be structured properly.

An important decision in this regard is whether the property should be (partially) gifted or sold at market value. Due to high real estate prices, a gift—at least in part—is often the only option. A (mixed) gift in the legal sense exists as soon as the gifted portion amounts to at least 20% of the property’s market value. It is common for the recipients to assume the existing mortgage debt. In such cases, there is generally a mixed gift, which is treated the same as a gift.

Advantages:

In the case of a (mixed) gift of real estate to descendants, property gains tax can be deferred. In addition, notary fees and land registry fees are lower.

Disadvantages or Risks:

However, there is a significant risk associated with a gift: The gifted assets will be taken into account when the gifting parent(s)’ eligibility for supplemental benefits is assessed at a later date. When determining the value of the gifted assets, they are treated as if they still owned the property, based on its value at the time of the eligibility review. Nevertheless, the gifted assets are reduced by CHF 10,000 for each year that has elapsed since the gift was made.

Example: The parents gift an apartment that had a market value of CHF 500,000 at the time of the gift. Twenty years later, due to an economic upturn, the apartment has a market value of CHF 1 million. After deducting CHF 200,000 (20 years × CHF 10,000), the gifted assets 20 years later amount to CHF 800,000 (CHF 1 million – CHF 200,000). This amount of CHF 800,000 is counted as hypothetical assets for the parents in the entitlement calculation.

As a result, entitlement to supplemental benefits generally does not apply. If the parents do not have sufficient remaining assets, relatives would have to step in to support the parents whose livelihood is at risk, or the only option would be to turn to social services.

Another disadvantage arises in this scenario when the parents wish to treat their children equally. In this case, the beneficiaries are obligated to compensate the other children. Therefore, if at the time of the parents’ estate division there are not sufficient other assets in the estate to compensate the other children, the beneficiaries must compensate the other children from their own assets. In the worst-case scenario, they may have to sell the real estate they received as a gift and compensate the co-heirs from the proceeds.

When selling at market value, it is recommended that the market value of the property be appraised by an expert. Based on this appraised value, the purchase agreement can be drafted for the descendants. It is advisable to have the purchase agreement co-signed by the heirs who are not taking ownership, whereby they confirm—in the spirit of an inheritance agreement—that they agree to the purchase price as the market value and waive their right to compensation for any increase in value up until the time of the division of their parents’ estate.

Advantages:

A fair purchase price and the co-signature of the heirs who are not taking over the property create clarity for the subsequent division of the parents’ or parent’s estate. At the same time, the principle of equal treatment of the heirs is upheld, as this ensures that no advance inheritances or gifts will need to be compensated for later on.

Disadvantage:

The disadvantages of the sale include higher notary fees and land registry fees, as well as the requirement to generally pay real estate gains tax. The latter can be (partially) deferred if the selling parents make a replacement purchase.

A transfer of real estate within a family requires careful planning: ideally, this should include an independent appraisal of the property, clear provisions ensuring equal treatment of the descendants, and the selection of the appropriate transfer model (gift or purchase agreement), taking into account inheritance and tax implications as well as potential effects on claims for supplemental benefits.