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The importance of estate planning: protecting your wealth and loved ones

It is remarkable how many wealth owners have not arranged their succession.

The reasons may be many, but they all lead to the same result: intestate succession takes place without estate planning.

This may not be frightening for some, but it often presents a difficult situation for the beneficiaries. Furthermore, correlated conflicts do not infrequently pose a risk to family wealth.

However, there seems to be a more conscious approach to estate and succession in the past few years. According to the Knight Frank Wealth Report 2021, 60% of UHNWI have reviewed their succession planning, and 48% of family offices have reassessed their attitudes toward succession planning.

Still, there is some work to do, and obviously, the biggest mistake is not doing anything at all.

This blog post will examine various estate planning concepts and scenarios to reveal their importance. Since Swiss law is our core domain of expertise, we will apply it to illustrate some examples.

Legal succession 

 

Without a testamentary disposition, Swiss law focuses exclusively on formal family law relationships. The testator's actual life circumstances, wishes, likes, and dislikes are not considered.

In addition to relatives and the surviving spouse, even the state can be considered if the persons mentioned are absent.

Probate is a long and sometimes expensive process, and it can be avoided with proper estate planning. This allows your assets to pass directly to your beneficiaries rather than through probate courts.

Otherwise, you risk that beneficiaries will not have immediate access to family wealth and will find themselves in a procedure that third parties govern.

No plan is also a plan for those who agree with the above consequences. Looking into the possibilities and options of estate planning at an early stage is advisable for all others.

What estate planning documents do you need?

 

The basis of an estate plan is the inheritance disposition. Here, Swiss law provides for two forms.

On the one hand, there is the testamentary disposition through a will as a unilateral disposition of the testator and, on the other hand, the contract of inheritance as an agreement between the testator and the beneficiaries.

Other forms are not permitted, and strict formal requirements apply to such highly personal dispositions.

The will can be revoked unilaterally at any time and requires the author's capacity of judgment and majority at the time of implementation.

The handwritten will must be handwritten by the testator, bear the exact date, and be signed. A will that is not handwritten must be publicly notarized to be valid.

Inheritance contracts are popular in Switzerland for making arrangements about the future estate, in which the testator either promises a beneficial entitlement or accepts a beneficiary's renunciation.

There are also strict formal requirements, and inheritance contracts can only be amended or canceled under certain conditions.

Planning for incapacity

 

Last wills should also be supplemented with an advance directive and a living will.

With an advance directive, a natural person or legal entity is instructed to act on behalf of the principal in the event of incapacity.

For this purpose, the areas and tasks must be precisely defined to determine the agent's power. This may include providing for the principal, managing the principal's assets, and representing the principal in legal transactions.

In particular, this can ensure the management and preservation of wealth. Details should be comprehensively regulated to ensure that one is prepared for contingencies.

A living will specifies how medical treatment is to be carried out in the event of one's incapacity. Here, too, a trusted person can be named to make any decisions. 

With these primary documents, the most important wishes for your estate can already be regulated.

Estate planning for specific family members

 

When providing for your loved ones, some family members may require more consideration than others.

In particular, guardianship for minor children is an essential issue to clarify. Without your comprehensive guidance and instructions, a court may have to fill the gaps.

The same applies to disabled family members. Estate planning trusts can be the most helpful tools to address specific requirements, implement arrangements that cover various scenarios and guarantee the beneficiaries' financial security.

By avoiding probate and protecting assets, beneficiaries will receive immediate assistance when most needed.

It would be best if you talk with family members and everyone involved in the execution of your estate plan to ensure they understand your desired wishes.

Estate planning for blended families

 

Furthermore, it would help if you planned for changes in the family, such as divorces and remarriage, and new family members.

Such changes may require the amendment of pension fund provisions and insurance policies, updating beneficiary provisions, and designing mechanisms to tackle ongoing developments.

For blended families, estate planning can be particularly complex, as there may be multiple spouses and children from previous relationships to consider.

Without a proper estate plan, these challenges can become even more difficult to manage, leaving loved ones without the financial support they need.

Next to legal considerations, the clarity of your intentions will impact the destiny of the succession process.

While explaining them in a written document may help to avoid disputes, fostering an open discussion during your lifetime may be the best way to ensure the execution of your wishes and prevent conflict between beneficiaries.

Estate planning to reduce taxes

 

In Switzerland, the cantons are responsible for regulating inheritance tax. This tax accrues upon the transfer of wealth upon death to the beneficiaries.

Depending on the canton, it is based on the value of the entire estate or the individual transfer of assets.

Most cantons focus on the individual transfer of assets and tax the beneficiary within the scope of the assets transferred. This way, kinship relationships can be considered, and tax rates can be structured progressively.

The Swiss tax system promotes family wealth preservation through exemptions or reduced tax rates for family members.

Gifts between living persons are also taxed according to the same principles. The canton of Schwyz does not levy gift taxes, and the canton of Lucerne only taxes gifts made by a decedent within the last five years before death.

In Switzerland, tax planning options thus arise within the individual cantons. Since spouses and descendants are often exempt from taxation, many dispositions can also be made during one's lifetime.

The advantage lies in the planning security for all parties involved.

For example, gifts can be staggered, changes of domicile can be made, real estate investments can be controlled, and planning vehicles can be used.

We repeat this several times, but early action is crucial for tax planning. Only then can opportunities be exploited and tax rulings obtained from the relevant tax authorities in the event of uncertainty.

Of course, this also applies internationally; only early planning enables long-term solutions that can be adapted over time if necessary. 

Estate planning for business owners

 

Estate planning is essential for business owners because it allows them to plan for the future of their business, determine how their business assets will be distributed upon their death, and protect their wealth.

It also allows business owners to address succession planning, which can help ensure their business continues to operate in the event of death, incapacity, or extended illness.

Furthermore, it can provide exit scenarios if no successors are on the horizon. Also, the business owner's guidance on managing the business in specific situations is essential.

Finally, estate planning can help business owners provide for their families and minimize disputes among family members.

Comprehensive planning will ensure liquidity for paying inheritance taxes, debts, and other expenses, e.g., by establishing a life insurance policy.

Thus, as a business owner, it would be best to work towards precisely defined goals, check your underlying assumptions, and develop a specific estate planning strategy.

With that, you'll cover a variety of scenarios for the benefit of beneficiaries and everyone interested in the business.

With the recent changes in succession law and by lowering compulsory portions, the Swiss lawmaker enables a smoother transfer of family businesses.

In particular, transfers within the family can now benefit one specific family member by assigning the free quota and facilitating the compensation of others.

Such a legal framework allows for preserving family businesses that are a vital part of the economy.

Family businesses are often sold due to a lack of succession planning, conflicts between beneficiaries, and liquidity constraints due to unexpected succession. However, awareness and early planning could avoid such outcomes and preserve and protect family wealth.

Estate planning with real estate

 

Here the crucial question is whether real estate will be transferred according to your intentions.

This requires an understanding of why you own properties. Depending on whether you hold commercial or private properties for investment or personal use, the arrangement must be tailored accordingly.

This includes aligned ownership structuring. A corporate structure may solve many issues and enable straightforward administration and transfer of wealth. Cashflow considerations and evaluations during your lifetime can be considered with specific configurations.

The next step of the assessment focuses on the transfer of wealth. If structured, the interests in a real estate corporation can be held via trusts, foundations, and life insurance policies to plan for a smooth wealth transfer.

While ongoing issues such as administration and financing are handled at the corporate level, the ownership structure enables wealth transfer and, thus, estate planning.

Another crucial element is liquidity planning. Transferring real estate may cause different taxes and tight liquidity scenarios for beneficiaries.

For example, let's consider capital gains taxes and property transfer taxes. Evaluations play an essential role, and beneficiaries should not receive a burden but a benefit.

Life insurance policies can be most helpful in such scenarios to provide liquidity and settle taxes. They can also compensate specific beneficiaries if a principal residence is transferred to other beneficiaries.

For recreational properties, there should be sufficient liquidity to cover administration costs. Also, it's advisable to involve potential beneficiaries in deciding whether the recreational property should be preserved.

Maybe you are the only one interested in it, and structuring it for long-term preservation may only cause discord between the beneficiaries and give them a hard time maintaining a property they don't feel attracted to.

Acting early enough can also have tax benefits. For example, transferring real estate to beneficiaries during your lifetime while maintaining the usufruct of the property can save gift and inheritance taxes.

Either such transfer is wholly exempt, or the property's value can be determined at lower levels by deducting the value of the usufruct. Thus, the earlier the transfer occurs, the higher the deductible value of the usufruct.

In such situations, no further inheritance taxes may be due after your lifetime.

Estate planning for international scenarios

 

In international cases, questions arise regarding authorities' jurisdiction, the applicable law, and the enforcement of any orders.

A fundamental principle under Swiss law is that the last domicile of a testator determines jurisdiction. Furthermore, the doctrine of the unity of the estate is applied, whereby, as an exception, foreign real estate, for example, can lead to the division of the estate.

This opens up two proceedings in different countries, each with separate jurisdiction and applicable law that can lead to different outcomes.

As a rule, Swiss jurisdiction also implies the application of Swiss law. Foreigners domiciled in Switzerland may choose the law of their nationality, but this is subject to specific formal requirements.

These few general provisions alone show how complex international situations can be.

Without appropriate planning, significant disadvantages can arise for beneficiaries. Uncertainties can only be avoided by dealing with the challenges early.

To sum up

 

The importance of estate planning can be revealed by asking, what would happen if I passed away tomorrow? Would my loved ones receive what I want? What would the entire process look like? How would the situation play out from the beneficiaries' point of view?

If such a stress test leaves questions unanswered, it's time to address them before it's too late. As different as the individual situations are, so are the challenges and solutions.

Estate planning is a comprehensive process that considers individual wealth, and in most cases, long-term planning can only be implemented in cooperation with all involved.

Therefore, the essential step is to involve the beneficiaries to ensure that your wishes can be implemented accordingly.

Communication with beneficiaries manages expectations and prevents disputes. Early wealth transfers also provide security and often tax advantages.

The areas outlined above represent individual challenges that are addressed in an overall view.

Of course, legal and tax considerations are important, but above all, your peace of mind and that of your beneficiaries should be the primary consideration.

04-12-2022

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