In Estate
Estate planning – lifetime gift with usufruct

Forward-looking asset management includes estate planning. If assets are inherited on death or given away during the donor’s lifetime, inheritance or gift taxes are incurred. It is possible to reduce the tax burden by making a gift during your lifetime, with a usufruct.

December 24, 2021

Inherited wealth in Switzerland has risen steadily over the past 20 years. In 2020, 95 billion Swiss francs were inherited in this country. If «a brother» in the city of Bern were to inherit this wealth, over 14 billion Swiss francs would be subject to inheritance tax. Of course, the online tax calculation is hypothetical, but it provides a reasonable estimate. If nothing else, it shows that inheritance tax is an aspect of estate planning that should not be neglected.

A gift – with/without usufruct

Estate planning is not necessarily the same as inheritance. Estate planning can also include a lifetime gift – or a lifetime gift with a usufruct.  

What is a usufruct? Simply described, a usufruct (Art. 745 ff. ZGB) is a right that can be created on movable property, on real estate, on rights or on an estate. However, the recipient of the usufruct («usufructuary») is not the owner of the property.

The usufructuary may use the property and keep the income from it – but may not diminish the property. In the case of real estate, for example, the usufructuary may occupy the property subject to the usufruct or rent it out. The rental income belongs to the usufructuary, but he may neither sell nor give away the house nor convert it nor encumber it with mortgages.

The owner of the property can only dispose of it freely (again) after the death of the usufructuary, as the property is encumbered with a life-long usufruct. By law, the usufruct lasts for a maximum of 100 years.

From a tax point of view, no inheritance tax is payable on a lifetime gift whether or not the gift is subject to a usufruct, but gift tax is payable.

Significant tax advantage

The decision to grant a usufruct on property makes a considerable difference from a tax point of view. The following example shows how significant the tax savings can be in the case of a lifetime gift with a usufruct.

Let us continue with the example of real estate. A property in the canton of Zurich has a market value of 4 million Swiss francs, and the annual market rent is 130,000 Swiss francs. The current owner is 60 years old. He is to transfer this property during his lifetime to his partner, who has been living with him in the same household for more than five years. The duration of cohabitation (Art. 21 lit. e ESchG) is relevant to the tax allowance (deductible or not).

The gift of the property will be subject to a usufruct of the annual market rent. This will be granted to the current owner when the gift is made to his partner (after which the owner becomes the «usufructuary» and his partner becomes the property owner). The capitalization factor for a 60-year-old usufructuary is 18.11 (Zürcher Steuerbuch Nr. 502.1, August 2020), with a capitalization interest rate of 3 percent – which gives a capitalized value of the usufruct of 2,354,300 Swiss francs. According to the tax calculator, the gift tax (state and municipal taxes) amounts to 1,422,000 Swiss francs. It should be noted that only the amount stated on the tax invoice is decisive for the actual tax payment. Online calculations are considered provisional.

Usufruct does not trigger real estate gains tax

For the calculation of gift tax, the usufruct is valued using the capitalized amount. In the case of a usufruct over real property, a) a public deed and b) an entry in the land register is required. The granting of a usufruct does not trigger real estate gains tax (GGSt).  

In Switzerland, the federal government does not levy inheritance or gift tax. However, inheritance and gift tax are levied at cantonal level by all cantons except Schwyz. The approach for calculating inheritance and gift tax is otherwise identical in all cantons.

Early planning, external expertise

Regardless of this, the younger the usufructuary, the higher the capitalized value of the usufruct. The higher the capitalized value of the usufruct, the bigger the tax savings. This is illustrated in the example given above (see table): the capitalized value of the usufruct and the tax allowance are deducted from the market value of the gift. Using canton Zurich as an example, the gift tax allowance is CHF 50,000 (to cohabiting partners), CHF 15,000 (to siblings) and CHF 200,000 (to parents), and this gives the taxable value. This value is decisive for the calculation of the gift tax payable.

In conclusion, it is worth dealing with estate planning at an early stage. A gift during one's lifetime with a usufruct is an opportunity to plan one’s estate in accordance with one's own wishes. The advantages of this vary depending on the type of asset donated, and the relationship between the donor and recipient of the gift. Last but not least, there are also different cantonal laws. It is therefore advisable to obtain appropriate professional advice.

Do you have any inquiries? Dr. Roderik J.P. Strobl, Relationship Manager Key Clients, will provide you with the information you need.

_

This article is aimed at providing a general overview and summary of the issue. It is non-binding, and does not and should not be taken to constitute legal advice.

No items found.
Read more
You might also be interested in these
Wealth Management
Setting sail again – STEP Alpine Conference 2022!

Interlaken was calling. A delegation of Leo Trust Switzerland participated this year’s STEP Alpine Conference and talked, amongst others, about the impact of the COVID-19 crisis on the private client industry and provided insights to more than 300 participants.

May 23, 2022
Private Clients
Leo Trust special event: online investment fraud - the phenomenon

At Leo Trust’s special event, special investigator of the Kantonspolizei Zürich, Adrian Leuzinger, appeared in front of a «full house». The deputy head of the task force did not, of course, go into the tactical and technical procedures of the police, but nevertheless revealed a great deal.

April 1, 2022
Wealth Management
Flat-rate taxation? Lump-sum? Switzerland is calling!

Switzerland's flat-rate taxation is an attractive tax model for wealthy foreign individuals. The approved flat-rate taxation, also called «lump-sum», «golden visa» or «tax ruling», is at the same time a residence permit. But beware: Requirements, handling, assessment bases etc. can vary from canton to canton. Moreover, not every canton offers this tax model.

April 10, 2022
Wealth Management
Whom do you trust: human or machine?

Trust is an integral part of customer relationships and services, including digital services. But what are trust factors, what about the charter of trust – and what role plays artificial intelligence?

March 8, 2022
Wealth Management
Sequel: Best Institutional Trust or Fiduciary Company

Didn’t you always want to know what sets Leo Trust apart from its peers? How Leo Trust masters the challenging environment? Be ready for some key insights.

February 9, 2022
Wealth Management
Best Institutional Trust or Fiduciary Company

Thanks to client-centric and trust-based strategy, first-class service quality, committed interdisciplinary teams of trust experts and the optimal position to provide highly complied crypto currency services – Leo Trust Switzerland wins the WealthBriefing Swiss Awards 2022 in the category «Institutional Trust or Fiduciary Company».

February 4, 2022
Crypto Assets
Digital assets – the importance of an agile risk assessment framework

Investors and trustees need a clearer assessment of their investment risks, which calls for new risk assessment models and tax regulations for crypto assets.

January 19, 2022
Wealth Management
A Panama foundation – with a Swiss twist

Panama foundations are popular vehicles for wealth management and asset protection planning, offering considerable flexibility, ease of operation and confidentiality. However, Panama is a grey-listed jurisdiction, which can be off-putting. Leo Trust shows you how you can enjoy the benefits of a Panama foundation without the problems of Panama.

January 7, 2022
Jurisdictions
Upcoming changes to Panama accounting requirements

In 2022, Panama will enforce two new obligations on entities: exclusively asset holding companies will be subject to the requirement to maintain accounting records going back five years, and both «commercial» entities operating outside Panama and exclusively asset holding entities will be obliged to submit annual accounting records to their Resident Agents.

January 5, 2022
Jurisdictions
How Cyprus attracts investment and talent

On 15 October 2021, Cyprus approved the «Strategy for Attracting Businesses for Activities or/and Expansion of their Activities in Cyprus». With various key proposals, this action plan offers significant advantages for investors in Cyprus – and shows how Cyprus is becoming ever more business friendly.

January 3, 2022
Crypto Assets
Crypto assets - review and outlook

Leo Trust’s CEO, Dimitar Jauch, reviews the past year and gazes into the future to predict what the new year promises for our crypto offering.

December 31, 2021
In Estate
Estate planning – lifetime gift with usufruct

Forward-looking asset management includes estate planning. If assets are inherited on death or given away during the donor’s lifetime, inheritance or gift taxes are incurred. It is possible to reduce the tax burden by making a gift during your lifetime, with a usufruct.

December 24, 2021
Crypto Assets
Trust structures with crypto assets

Leo Trust is a pioneer in planning and implementing trust structures which incorporate crypto assets. In this interview, Dimitar Jauch, CEO of Leo Trust, talks about the advantages, risks, and costs of such structures. He also answers questions about the complexity and adaptability of these structures – and covers data security, estate planning, speed to market as well as philanthropy.

December 14, 2021
Jurisdictions
Economic Substance & Beneficial Ownership Reporting – UPDATE

Economic Substance Act, Beneficial Onwership Act, possible sanctions, deadlines ... Are you keen on some insights on Bahamas, Belize, B.V.I., Cayman Islands, Marshall Islands and Panama?

April 13, 2022
Engagement
Leo Trust goes polo

Polo sport is interdisciplinary, sophisticated, strategically challenging and racy. On top of that, it is synergizing tradition and innovation. No wonder we were excited to be part of the Patrons Cup.

September 29, 2021
Wealth Management
STEP Private Client Awards – and the winner is …

Congratulations to Accuro Fiduciary, the winner of the STEP Private Client Awards 2021/2022 – category trust company of the year (midsize firm).

September 24, 2021
Private Clients
Trust is Imperative in a Family Office Banking Relationship

What may lead to a loss of trust between Swiss family offices and Swiss financial institutions and how it may be restored.

August 26, 2021
Wealth Management
Leo Trust Switzerland is nominated for trust company of the year

Leo Trust Switzerland has been shortlisted in the category of trust company of the year (midsize firm) in the prestigious STEP Private Client Awards, which highlights excellence among private client advisors in the international trust and financial services industry.

July 9, 2021
Wealth Management
WEBINAR: Wealth Management and Asset Protection in the new Global Tax Environment

In front of around 25 select onsite attendees and 30 online participants, six experts guided the listeners through specific highlights such as state-of-the-art estate planning, asset management with cryptocurrencies, asset protection based on a real life case study with savvy take-aways and the evolution of corporate services in the new global tax environment.

June 22, 2021
Private Clients
SEMINAR: Wealth Planning for Chinese Family - Diversify, Protect & Grow

Leo Trust hosts a wealth planning seminar for Chinese HNWI. Lauren Nan, Relationship Manager Key Clients at Leo Trust, will show how Chinese families in particular can diversify, protect and grow their wealth.

June 18, 2021
Asset Management
Crypto stocks are «coming of age» - and thus attractive for portfolios

Crypto assets are digital equivalents of real assets, technically managed via blockchain or distributed ledger. This class of assets is young, making it correspondingly difficult to forecast its development. But it is already clear today: crypto-assets have a future!

June 11, 2021
Asset Management
Crypto products fit in every basket

Actively Managed Certificates. They are a way to integrate crypto assets into an investment portfolio.

May 12, 2021
Private Clients
Family Offices, Trusts & Co: The future of a traditional business model

Leo Trust Switzerland AG is a globally active financial services provider for 40 years, offering a variety of services for institutional and private clients. However, the business is changing. On the one hand, due to constantly changing regulatory standards and laws; on the other hand, due to digitalisation, globalisation and highly specific client expectations.

November 25, 2020
Private Clients
New impulses for a traditional business model

Leo Trust Switzerland AG is a globally active financial services provider for 40 years; with a broad spectrum of services for institutional and private clients. Since April, the operational management company based in Zurich has been overseen by the 31-year-old CEO Dimitar Jauch. In this interview, he talks about changes in the competitive environment, where and why the digitalisation of the business makes sense, the balance between the tried and tested and change - but above all about why Switzerland has a future as a financial centre.

October 30, 2020