A big inheritance can change your life, but not necessarily. What needs to change, for sure, is your financial planning. That is why, as soon as you inherit, you should think about your current situation and goals. Ideally, you should seek the help of an independent sparring partner, who is familiar with both finances as well as inheritance and tax issues, who will be able to provide you with comprehensive advice.
As people are getting increasingly older, they tend to inherit later in life. In 1980, two-thirds of all inherited assets in Switzerland went to people under 55. In 2000, this share was a half and in 2020 one third. Thanks to sharply rising stock and property prices, inheritances have risen from 28.5 billion to 95 billion Swiss francs since the turn of the millennium, which is more than the total expenditure of the Federal government. Out of the entire Swiss population, two-thirds have inherited or are expecting an inheritance. According to a study carried out in the Canton of Bern, three-quarters of heirs inherit less than 100,000 francs and one-fifth between 100,000 and 500,000 francs. Only 1.5 percent inherit more than one million Swiss francs. What should you do when you inherit so much money, and how is inheritance going to change your financial planning?
The Many Advantages of Holistic Financial Planning
This depends on your age and wealth. Almost half of all Swiss heirs are aged between 55 and 74. At such an age, most people have already built up their own assets and are financially independent. Nevertheless, a large inheritance can still change your financial situation in the long term. Especially if, in addition to cash, you also inherit properties, equity investments or securities. That is why, before thinking about your family, your financial and personal circumstances and making plans, whether in the short, medium or long term, you should first get an idea of what your inheritance will be. If you inherit while you are still young, you could invest more money and time in your education or training, in a friend’s start-up or even start your own business with the inheritance.
These are the Questions You Should Ask Yourself when Planning
The sensible thing to do is analyze your current situation and plan the target situation with the help of an independent consultant who is aware of your current financial planning and is able to advise you based on a holistic approach. Furthermore, some essential aspects need to be clarified, such as:
- How is the inheritance going to change your wealth structuring?
- Are your wealth and inheritance in line with your risk appetite and tolerance?
- Which inherited assets fit into your wealth structure and which are less suited?
- Would you prefer to change your investment strategy or sell individual assets?
- How is your inheritance going to change your income and wealth taxation?
- Should you invest more or less capital in your house or company after inheriting?
- What is the impact of your inheritance on your pension planning and retirement provisions?
The variety of questions arising shows how valuable a comprehensive analysis can be. Many factors are inter-dependent, thus decisions may have far-reaching consequences. Ultimately, this is a question of balancing risk, return and liquidity, as well as optimizing your tax burden.
Heirs and Tax Implications
Following an inheritance, your wealth and wealth tax burden increase. If you inherit properties, equity investments or securities, your income and income tax burden will increase due to rental income and dividends. Whether and how much you have to pay depends on the degree of kinship and the Canton. The closer you are to the testator, the lower the burden. Spouses are tax-exempt in all Cantons, descendants pay inheritance tax only in Appenzell Innerrhoden (1%), Lucerne (up to 2%), Neuchâtel (3%) and Vaud (up to 3.5%). This is based on the market value of the assets on the date of death, and is collected by the Canton in which the deceased had his last domicile. Exception: properties are taxed in the place of residence.
What Happens if you Share the Inheritance with Others?
the estate based on inheritance regulations. This is normally not an issue, as long as it is just money or securities. However, as soon as the parents’ home or a holiday apartment are included in the estate, things get more difficult. The heirs have the possibility to form a ‘Community of heirs’ and rent or sell the property, sharing the rental income or sale proceeds. However, if someone wants to acquire the property and the house or apartment is worth more than their inheritance claim, they have to buy out the others. Thus, the sensible thing to do for parents and children is to discuss the estate at an early stage and to settle any outstanding issues. This will save the family a lot of work and unnecessary discussions or disputes. Especially when special assets such as a horse or an art collection are part of the estate.
The New Inheritance Law and its Implications
With the revised inheritance law, which will enter into force on 1 January 2023, testators, through their will, can freely dispose of at least half of the estate, as a result of the mandatory quotas being reduced. The mandatory share for descendants is reduced from three quarters to a half of the legal inheritance entitlement, while it is abolished for parents. Thus, in the future, partners or stepchildren without legal entitlement are going to be able to be considered more generously. To this end, upon the submission of divorce papers, spouses are no longer considered legal heirs and lose their entitlement to any inheritance.
“When you inherit, it’s important to review your financial planning. You may want to further diversify your portfolio or take greater risks, generating higher return on investment.”
