Gifts to children during your lifetime are an important measure to reduce the tax burden in the event of an inheritance. The higher your existing assets, the earlier it is advisable to plan and implement such donations.

Mistake 1: Giving the family home to children

Family homes are apartments or houses in which the parents themselves live. It happens that parents give such family homes to their children during their lifetime and grant themselves the lifelong right to live in the family home. This donation uses allowances that children can no longer use in the event of an inheritance. In most cases, the exemption amounts are not sufficient, meaning that gift tax has to be paid during your lifetime.

However, if the parents keep the family home until their death, the family home can be inherited tax-free. Allowances do not have to be claimed. However, the prerequisite is that at least one child moves into the family home and lives there for 10 years.

Mistake 2: Acquired family home transferred to your own children subject to usufruct

If parents have inherited a family home tax-free, they may pass the family home on to their children during their lifetime. They then usually retain a right of residence that allows them to use the property for life. The parents often do not take into account that such a gift will subsequently result in the original tax exemption of the inherited family home no longer being available. However, transfers to children that occur more than 10 years after the inheritance are harmless.

Mistake 3: Grant usufruct for rented properties

Sometimes parents want their children to take care of a rented property before they die. The children should then also receive the rental income themselves. For this purpose, the parents grant the children usufruct of the property.

Such a usufruct means that the children lose the existing depreciation volume on the property. The children have to pay tax on the rental income without being able to offset the depreciation.

Mistake 4: Transferring real estate during your lifetime in exchange for recurring benefits

In some cases, parents transfer rented properties to children and receive a monthly, lifelong payment from them in return. The children can finance the payments from the rental income they receive. The problem here, however, is that the children cannot deduct their payments from their taxes, while the parents have to pay tax on the payments they receive in full.

Mistake 5: Real estate transfer with assumption of liabilities (Part 1)

It happens that parents transfer a property to their children and in return the children assume the liabilities based on the property. For gift tax purposes, the assumption of the liability often does not reduce the retained value of the property. This is the case if the parents continue to repay the liability. The children themselves are usually not able to make the repayment because the parents have secured the rental income through a usufruct. This leads to the unfortunate consequence that the gifted property has to be taxed without deducting the liabilities.

Mistake 6: Real estate transfer with assumption of liabilities (Part 2)

If children actually take over the repayment of the liability after the gift, the liability can be deducted from the gift tax to reduce its value. However, this means that the purchase is classified as a partial-remuneration legal transaction. The consequence of this is that a tax-free sale is not possible 10 years after the gift.

Mistake 7: Waiver of usufruct

If parents have transferred real estate rented to their children free of charge and retained the usufruct, it may happen that they later want to waive the usufruct. Since waiving the usufruct can trigger gift tax again, the children then pay their parents a sum of money. However, such a payment is subject to income tax. This is taxable compensation for lost rental income.