An advancement or a gift − which one is the preferred choice?
Unfortunately, in each of our lives there comes a time when we need to start asking ourselves, how do we want to distribute our wealth after we are gone. However, sometimes, it might be wise to distribute your fortune to those most dear to you while you are still around.
Once it’s time to start thinking about the answers to these questions, you want to consider the legal, and especially the tax consequences of your decision. For example, you might want to donate some money to your relatives. The manner in which the donation is executed can have a very significant impact on the legal status of the recipient and possible other beneficiaries of the donator and the total of inheritance taxes due. It is because of this that it is very important to ensure, that the donation arrangement is executed in a way, that is in accordance with the will and the purpose of the parties.
Advancement − what is it all about?
Advancement is a gift, given to a beneficiary by the decedent while still alive, that is taken into consideration during the final division of the estate. The advancement is a part of the beneficiary’s final and total inheritance.
Specifying that a donation is intended to be part of a beneficiary’s inheritance may be necessary in the event of uneven transfer of wealth to heirs during the decedent’s lifetime. In case the donator, at the time of the donation, does not specify the legal nature of a donation as an advancement, the heirs would be placed in an unequal position as the donation would not be taken into account as part of the beneficiary’s final and total inheritance.
A gift can be characterised as an advancement with, for example, a deed of donation. Unless the deed does not stipulate that a donation is to be held as an advancement, said legal nature of the donation can be established through legal presumptions. Usually, this happens when the decedent has more than one beneficiary, and only some have received gifts of significant monetary value. In the case of non-direct heirs, a donation is presumed as an advancement only when the circumstances of the donation as a whole indicate that this has been the purpose. The decedent might or might not have intended to favour only some of those who are closest in relation to him or her, but if this intention was not expressed clearly and in correct form, the decedent’s intentions might not be fulfilled.
The taxation of an advancement
The person receiving the advancement is liable to pay the gift tax on the received advancement. Take notice that as the tax is levied in accordance with the gift tax provisions, the amount of the tax paid is the same, regardless of whether the donation is considered to be a gift or an advancement.
Provided that the recipient goes on to inherit the donator, the received advancement will be computationally added into the heritage and the inheritance tax shall then be levied based on the full amount. However, the aforementioned gift tax levied from the advancement is now deducted from the total amount.
Planning is essential
Although the gift tax paid in the past on the advancement is taken into account as a deduction of the total inheritance tax, due to the progressive nature of inheritance taxation, one ends up paying more taxes. As a result, it is often advisable to draw up a deed of donation to stipulate, that the donation is not to be characterised as an advancement.
However, one needs to be careful, in order not to routinely include a term concerning advancements into a deed. If the decedent donates significant assets during lifetime, such as business assets, to the direct heirs, it is important to consider whether questions regarding the equal treatment of heirs should be considered at the same time.
If the decedent wishes to treat the heirs equally, but the equal transfer of assets does not take place during lifetime, the decedent may order the donations to be seen as advancement, or equality can also be taken into account in a testament regarding the remaining wealth of the decedent.
Deeds of donation and testaments are a crucial part of comprehensive wealth planning, and should be drawn up with caution, preferably with the help of a professional tax advisor.