The death of a loved one is a profoundly challenging time, testing the relationships within the family – between siblings, parents, children, and other relatives. In addition to the grief, the subsequent probate proceedings can intensify emotional turmoil among these family members. Recognizing the difficulty of such situations, many people attempt to arrange their property during their lifetime to spare their loved ones this burden. However, as we know from our practice, though paved with good intentions, this path can sometimes lead to even more complex issues.
You have likely given some thought to who you want to inherit your estate after you pass away (even if you prefer not to, it is appropriate to think about it). We have covered ways to implement your estate plans HERE. But what if you would prefer to transfer property to loved ones during your lifetime, rather than leaving it all for the probate proceedings? When considering this approach, it is important to understand how inheritance laws treat lifetime gifts versus bequests. This brief introduction outlines key inheritance law principles and potential pitfalls of lifetime gifting.
Property settlement is best supported by the principle of legal certainty
Transferring property during one’s lifetime allows the donor to maintain full control over the fate of their assets. They can decide exactly which person will receive which property. After the donor’s passing, the assets are simply preserved, requiring minimal notarial intervention in the succession proceedings. This streamlined solution spares those grieving the unnecessary hassle of succession disputes, giving them space to cope with their loss.
When donating property during one’s lifetime, it is important to consider potential setbacks. A well-crafted contract and open communication with the recipient can help navigate this. Often, parents or grandparents are hesitant to gift property, fearing they will be left without a home. This can be easily avoided – the gift does not have to mean losing a roof over their heads. To secure your position when making such a donation, a lawyer experienced in this area can help establish an easement, lifetime usufruct, apartment easement, or life tenancy). These legal arrangements can provide a solution that works for all parties.
If the donated asset is high-value (such as real estate), it is advisable not to delay the transfer of the ownership. This is critical, as the donor’s mental capacity may become an issue later. It is not uncommon for relatives or potential heirs to challenge a donation (or similar) agreement by alleging the donor lacked mental capacity at the time of the donation. Indeed, if the donor’s mental and volitional capacity is questioned during probate proceedings (in simple terms, whether the father was in his right mind when donating the property), the heirs may initiate a time-consuming dispute over whether the donated property is part of the estate (i.e. will be returned into it).
Tax aspect: Should you donate your assets or let your heirs inherit them?
When deciding whether to donate property to loved ones during your lifetime or leave it to the probate proceedings, consider the economic implications of each option. Since 2014, both gift and inheritance taxes have been abolished in the Czech Republic. While heirs do not pay special taxes on inherited property, the same may not apply to donations. Gifts themselves are not taxed, but the recipient must still recognize the benefit as income. Unlike inheritance, which is exempt from income tax, gifts are subject to different rules (see below). However, succession proceedings can also incur costs, such as determining estate value or notary fees, that may place an excessive burden on heirs.
Donations are generally exempt from personal income tax in a few cases, such as gratuitous income from lineal and collateral relatives, cohabitants, or occasional gifts under CZK 50,000 per year from one person. For legal entities, gifts for humanitarian or charitable purposes are also exempt. However, if a donation does not fall under these exempt categories, it may be taxed at 15% or 23% for individuals and 21% for legal entities.
Double collation: compulsory share v. inheritance share
By donating property during the donor’s lifetime, the donor avoids including it in their estate. However, the donated property may still be factored into the succession proceedings through a process called collation. Collation can take two forms: with respect to a compulsory share (for forced heirs, i.e. typically the deceased’s children, and with respect to an inheritance share (for other heirs in the succession proceedings). The donated property or its value may be considered later when calculating the value of property a party to the proceedings is to inherit. In practice, this means the recipient’s inheritance or compulsory share can be reduced by the value of the prior donation (at the time of granting) subject to certain conditions. If the donation value exceeds the heir’s inheritance share, the heir keeps the donation without receiving any additional inheritance.
Collation to an inheritance share or a compulsory share, which ensures a fair distribution of the deceased’s property among heirs, is a crucial element in succession proceedings. The application of collation to an heir’s inheritance or compulsory share aims to prevent one heir’s estate from being unjustifiably enlarged at the expense of others. This collation mechanism seeks to prevent a beneficiary from profiting twice from the testator - once during their lifetime and again after their death. However, these cases can have their own nuances and may be effectively managed by outlining specific rules in the will during the estate planning process.
The solution? Customized
Deciding whether to arrange the estate during one’s lifetime or leave it to be settled through probate proceedings with a notary is a complex issue. Several key factors must be carefully considered, including legal, economic, tax, and personal implications. Arranging the estate during life can provide greater legal certainty for all parties and may prevent future disputes among heirs. Conversely, deferring estate planning until death, typically through a will, allows the testator to use the assets without restrictions and ensure an equitable distribution aligned with their wishes. However, each case has unique circumstances that require individual assessment. Consulting a specialized professional can be crucial in identifying the optimal solution and promoting greater peace of mind, both personally and in terms of family relations.
