Inheritance in Switzerland: A Financial Guide

Be careful about debts

Many people only think about money when thinking about an inheritance, but they do not think about debts. Debts are an inheritance just like money. The entire net worth is part of the inheritance (the positive and the negative parts).

So, if the deceased estate is negative, you will inherit debt only.

In some cases, the debt is tied to an asset. In most cases, this is a mortgage. Again, you cannot choose to get the real estate piece without getting the mortgage.

When you receive the information about the inheritance, you will not yet know how much you are due. If you want a better idea, you can request access to the tax inventory, which is made for each individual’s death. Since you are a legal heir, you could also directly contact banks to know the value of the accounts. But this requires significant effort and may be incomplete as well. If you want to be more sure, you can request a public inventory. You have 30 days after you receive the notice to request that.

When relying on the tax inventory, we need to be careful about hidden reserves. This is the difference between the tax value and the market value. For real estate, the difference can be huge.

Another important factor is when you discover assets that were not declared by the deceased. In this case, heirs are not liable for tax evasion. However, heirs must declare this to the tax authorities. And the tax authorities will charge back the taxes for the last three years.

So, if the debts are higher than the assets, are you forced to pay these debts? No. You can refuse the inheritance, something known as repudiation. In this case, you refuse it entirely; you cannot be picky on the assets you choose and refuse. You need to be careful that you only have 3 months to repudiate an inheritance, from the time you officially became aware of the death.

If all heirs refuse the inheritance, the state will act as a liquidator in a personal bankruptcy proceeding. In this case, all assets will be seized (really all, including physical) and liquidated. The proceedings will be used to pay the creditors. If there is any money, it should not go to the state but back to the heirs, who will be contacted again. Repudiating an inheritance is risk-free if all heirs repudiate it, but not if any heir sticks to it.

Do not forget about inheritance tax

If you are receiving an inheritance, you will be subject to the inheritance tax.

In Switzerland, there is no federal inheritance, so it means the rules depend on each canton. This is unfortunate because it means you need to check the rules for your canton. And you also need to remember to do that when you move from one canton to another.

The most traditional inheritance is from parents to children or grandchildren (direct descendants). In this case, all cantons allow such inheritance to be tax-free. However, some cantons have a limit. For instance, in Vaud, the inheritance is only tax-free below one million CHF.

If you do not fall in this standard category, inheritance tax can be very costly. In fact, it can easily go to 40% and sometimes even 50%. We will run some examples in the next section.

These days, fewer and fewer couples get married. This means that many couples live together for a long time and are unmarried. Unfortunately, this also means that if one of them dies, they will very likely have to pay inheritance tax. If both own half of their common estate, 25% of the total estate could be wiped by inheritance in the worst case (50% inheritance tax on the 50% deceased partner’s estate). This can be disastrous in some cases. Therefore, unmarried  couples should be careful about that.

As far as I know, only Valais recognizes the case of unmarried and unregistered couples as a special tax-free inheritance tax. And Obwald and Schwyz do not levy any inheritance tax, making it fine for them (and everybody else) to inherit.

Since the taxes come later than the inheritance, you need to be careful about not spending it all if you will be taxed. Many people use their inheritance to improve their financial situation. But they often forget about the tax. And if they use it all, they will be in trouble once the 40% tax bill comes in.

What to do with the money?

Now, let’s assume you have inherited some money without debt, and you have paid the inheritance tax (if any). What should we do with the money?

If you are already financially well off, this should not matter much since you will simply have more money. You can continue to invest this extra money as you would any other recurring amount. In general, it is better to use lump sum investing than dollar-cost averaging.

If your financial situation is not that great, you should probably use this money to improve it. First, if you have debts on your own, it is very likely a good idea to start by paying off your debts. If you have multiple ones, you should start with the one with the highest interest rate.

On the other hand, if you have a mortgage, it is probably not the best option to pay it off unless you fall into one of two situations. First, if you have a high-interest mortgage (3%+), it could be interesting, but these days, the mortgages are usually lower than that. Second, if you are close to retirement and may not be able to keep your mortgage, it could be great to amortize it so that you can keep the mortgage in retirement.

If you have no debt, the next step would be to complete your emergency fund if it is not done already. It is generally a good idea to keep some money for emergencies (or at least a good line of credit).

After that, if you have no debts and an emergency fund, you are in a great situation. The best option is then to invest the money. If you can reduce your taxes by doing so, it could be even more beneficial. Depending on your age and situation, you have a few options:

1. Complete your 3a. If you have not done so regularly, you may even be able to buy back into your third pillar.
2. Complete your second pillar. If you have not many years left to retirement and have a significant income, it could be interesting to save on taxes.
3. Invest in the stock market. Outside the second and third pillars, the best way is to invest in the stock market. If you are already investing, you know what to do. And if you do not, here is how to start investing in the stock market.

Another thing worth considering is investing in your property if you are a homeowner. If you have been delaying some maintenance work, it could be a good idea to use that inheritance money to do it now. And if you can deduct it from taxes, it is all the better. Be careful that we may not be able to deduct renovations after the removal of the imputed rental value.

Finally, you should consider some fun expenses as well. As long as your financial situation is already good and you get extra money, you should be able to spend it. Ideally, you should not spend it all, but spending a portion of it to improve your quality of life could be good if you can afford it. The only thing you need to be careful of is upkeep costs. If you buy an expensive new car, you will get an expensive car insurance, for instance. Or if you buy a new pool, you will get extra power and water usage. And in both cases, you will incur standard maintenance costs as well.

Overall, I believe an inheritance should be used to improve one’s financial situation.

Conclusion

Overall, inheritance is not as easy as it sounds. You may well inherit debt that you have not seen coming. And if you inherit a positive amount of money, you might also have to pay inheritance tax. The resulting increase in your net worth will also be subject to the annual wealth tax in the future. So, it is important to think properly before accepting an inheritance.

If you are lucky and get a positive amount of money and have factored in the inheritance tax, you should then think about what to do with the money. There are many ways to use that money, from repaying your own debts to investing extra money into the stock market.

Overall, getting a good inheritance is a good thing for your finances, but you need to handle it well.

What about you? What would you do if you received an inheritance?