Tax consequences of inheritance and division of an estate
Workshop on the occasion of the ISIS) seminar on 26 November 2020 entitled "Advance withdrawal, inheritance, division of an estate and execution of a will in tax law".
Case 1 - Transverse gifts
The decedent A. died on 25 March 2018, his last residence being in Zurich. He left his wife B., who was living separately from him in St. Gallen, and two children of full age, C. and D., in Zurich. The estate consists of a property in Zurich and various financial assets. There is neither a will nor a contract of inheritance.
- What is the order of succession?
- The children waive all claims in favour of their mother. What are the tax consequences?
- The children disclaim the inheritance. What are the tax consequences?
On 29 July 2015, the deceased had made a personal will in which he disinherited his wife B. and his child C.. In an oral testamentary disposition of 14 March 2018, recorded by two witnesses, he revoked this will shortly before his death and appointed his cohabiting partner E. as his sole heir.
After the death of A., disputes arose between the wife B., the children C. and D. and the cohabiting partner regarding the settlement of the division of the estate. Several court proceedings were initiated, which sought, among other things, the contestation of the disinheritance in accordance with the first will or the annulment of the oral will, possibly its contestation or the reduction of the share awarded to the cohabiting partner.
Subsequently, an inheritance distribution agreement was concluded with the aim of regulating the mutual rights and obligations of the contracting parties in connection with the estate of the deceased without further judicial clarification of the legal situation. The two children each received an amount of CHF 5 million and the surviving spouse B. received the remainder of the estate for the purpose of satisfying her claims under property and inheritance law. The cohabiting partner E. acknowledged that she was not entitled to any claims under inheritance law in connection with the deceased's estate, but that her position would be settled within the framework of a gift agreement for CHF 5 million to be concluded with the spouse.
- Are the agreements to be taken into account by the tax authorities?
- Who has the taxing authority to levy taxes related to estate settlement?
Case 2 - Intercantonal relations
The deceased died with his last residence in the Canton of Zurich. He was self-employed and left the following assets at his death (after the property settlement):
In his will, the testator appointed his wife and their son as his heirs and stipulated the division of the estate.
The wife is to receive the property in Lausanne and assume the mortgage encumbering it. The tax value at the time of the opening of the inheritance is CHF 900,000 and the mortgage CHF 400,000. The wife is also to take over half of the current account debt (1⁄2 of CHF 40,000). The total share of the net estate is 1⁄2.
The movable assets are allocated to the son. These are financial assets (CHF 200,000) and the business capital (CHF 400,000). He also takes over half of the current account debt (1⁄2 of CHF 40,000) and the other business debts. The total share of the net estate amounts to 1⁄2.
- Who is entitled to tax sovereignty with regard to inheritance tax?
- How is the intercantonal tax differentiation carried out?
- What is the tax burden?
Case 3 - Community of heirs vs. simple partnership
The testator died in 1978. In his will he assigned 3/8 of an office building to his children K1 and K2 and 1/4 to his sister S1. In 1979, the heirs were entered in the land register as joint owners as a result of a community of heirs. The division of the estate was not carried out for the time being. The heirs used and administered the office building jointly.
In 2006, the heirs began a project to completely renovate the office building. In 2008, S1 died at the age of 88. In her will, she had appointed K1 and K2 as her heirs. Half of the office building was allocated to K1 and half to K2. This inheritance was entered in the land register in 2009.
From 2009 to 2012, K1 and K2 carried out the total renovation of the office building. Before completion of the total renovation, they concluded a written "inheritance sharing agreement". In it, they stated that they each had a 50% interest in the property as joint owners as a result of a community of heirs. The office building was assigned to K1 as sole ownership in return for payment to K2. The transfer was executed in the land register.
- Was a community of heirs or a simple partnership dissolved under civil law by means of the "contract on the division of the estate"?
- Does the transfer of the office building to sole ownership result in the assessment of property gains taxes?
Case 4 - The testator as entrepreneur
The decedent is engaged in business until his death as follows:
(a) as a sole proprietor;
(b) in a partnership;
(c) through its incorporated company (public limited company).
He is survived by his wife and two children. There is neither a will nor an inheritance contract. There are hidden reserves on the business assets.
What are the tax consequences of probate?
Case 5 - Pension benefits in the event of death
The deceased died in 2016, his last residence being in the canton of Aargau. His heirs were his three children who resided in Lucerne. After his death, the following insurance benefits were paid to the three children, 1/3 each:
a) Lump-sum benefit from the 2nd pillar pension relationship;
b) Lump-sum benefit from tied pension provision under pillar 3a;
(c) a lump-sum benefit under a pure risk insurance policy;
(d) a lump-sum payment from a mixed life insurance policy.
The testator bequeathed an annuity to the cohabiting partner in his will.
Who has taxing jurisdiction and how are the above benefits taxed?
Case 6 - US securities in the estate
The testator with last residence in the Canton of Zurich is Swiss. He left movable assets with a Swiss bank. He holds US shares worth CHF 1 million in his custody account. His estate totals CHF 10 million.
- When is an estate subject to inheritance tax in Switzerland?
- How does Switzerland prevent double taxation in international inheritance tax situations?
- When do US estate taxes generally apply in the US/Switzerland relationship?
- What is the factual situation in this specific case?