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Advance inheritance

The basic idea behind an advance inheritance is the principle of equal treatment - i.e. that parents usually want to treat their children equally. Consequently, a valuable gift to a natural heir (a child, grandchild etc.) is treated as an advance, unless expressly stated in for example the gift deed, that this is not the case.

Gifts to close family members can be a part of fulfilling a tax plan or a question of lending a family member a helping hand in time of financial hardship. Despite the reason, an advance is treated as a gift by the tax authorities in most countries. Therefore the advance must be declared to the tax authorities within the given timeframes. Gift tax is payable in normal fashion. The amount of gift tax paid is then deducted when it is time to pay inheritance tax, but since the value of the advance is added to the entire value of the estate, the inheritance tax payable most likely increases due to progressivity.

The value of the advance

The value of the advance is set at the time for the gift. This is often a reason for disputes when it is time to inherit. For example if an heir has received an apartment in Helsinki 1998 for a value of 300 000 €. The same apartment might be worth 500 000 € when it is time to calculate the inheritance share twenty years later - but this is not taken into account. The heirs, that have not received an advance, are given a bigger share of the estate in order to compensate. A worst case scenario is when there is not enough property in the estate to compensate the other heirs. The receiver of the gift is not obligated to return the gift or pay money to the estate if this is the case. A smart move to avoid these kinds of value disputes might be to draw up an agreement between the heirs and connect the value of the gift to the increased market value - like an index.

Advance as a part of tax planning

An advance is often used in situations where parents want to be able to continue using the summer house, but want to start distributing property to the next generation. This is also a smart move tax wise, since this setup is considered to decrease the value of the gift. If the parents are in need of money and cannot just give away property, there is always the possibility to sell property under market value. This is called a gift-like sale in Finnish tax law.

I will write more about gift-like sales and right to use in my blog.

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