Transferring assets to children or other family members is an important life decision that can have long-term legal and financial consequences. In such cases, people most often choose between a gift agreement and a transfer agreement, but there are significant differences between the two. The right choice depends on the family situation, the type of assets, and the goals the transferor wishes to achieve.
What is a gift contract?
A gift contract or gift deed is a legal transaction through which a donor transfers their property to a donee free of charge. It is most commonly used to transfer real estate, cash, or other property among family members.
Its main characteristics are:
- transfer of property without consideration,
- no consent from other heirs is required,
- in certain cases, a gift may be included in the heir’s share of the estate after the donor’s death,
- in certain cases, other heirs may demand that gifts be set off or assert their right to a compulsory share.
Although a gift contract is often the simplest solution, it can later lead to inheritance disputes when the heirs disagree on the distribution of the estate.
What is a contract of transfer of property during lifetime?
A contract of transfer of property during lifetime is a special contract intended to regulate property relations during the transferor’s lifetime. Through this agreement, the transferor transfers his or her property to his or her descendants; it is essential that all descendants who would otherwise inherit by law consent to the agreement. Such agreement may also include certain obligations on the part of the transferees (for example, the establishment of an easement or the assumption of certain obligations toward the transferor—such as support, an annuity, etc.).
The primary purpose of a such agreement is:
- ureditev dedovanja že za časa življenja,
- preprečevanje prihodnjih sporov med dediči,
- jasna razdelitev družinskega premoženja,
- večja pravna varnost vseh udeležencev.
It is important to note that property transferred by a person through such contract of transfer is not included in the estate and is not taken into account when calculating inheritance shares. If a spouse is not a party to the contract, they retain the right to a compulsory share, as property validly transferred by a contract of transfer of property during lifetime no longer forms part of the estate upon the transferor’s death. If a spouse did not participate in the conclusion of the agreement, their inheritance rights are generally not affected; therefore, under the conditions set forth by law, they may still assert their right to a reserved share after the transferor’s death.
If any of the descendants objects to the transfer and distribution, those portions of the estate that were transferred to the other descendants are considered gifts and are treated as such after the decedent’s death.
Since all legal heirs of the first order of succession are parties to the transfer of property during lifetime agreement, the likelihood of subsequent disputes is significantly reduced.
When is a gift contract more appropriate?
A gift contract is particularly suitable when an individual wishes to gift a specific piece of real estate to one of their children, transfer a smaller portion of their assets, gift property to a person who is not their heir, or carry out a quick and relatively simple transfer of ownership.
In such cases, the process is usually less complicated, but it is advisable to also consider the future implications under inheritance la
When is a contract of transfer of property during lifetime the better choice?
A contract of transfer of property during lifetime is often more appropriate when a significant portion of assets is being transferred, the transferor has several children, wishes to settle the inheritance in advance, wants to reduce the likelihood of future disputes among heirs, or when a family business or farm is being transferred.
Such an agreement allows for a more thoughtful and long-term arrangement of property relations.
Taxes and taxation
When deciding between a gift contract and a contract of transfer of property during lifetime, it is also important to consider the tax implications. Although both contracts are intended for the transfer of property without consideration, taxation is assessed in accordance with applicable tax regulations and depends primarily on the family relationship between the transferor and the recipient of the property.
Taxation of a gift contract
Gifts may be subject to inheritance and gift tax. However, the law provides for significant exemptions. If the donor gives property to a person in the first order of succession (for example, a child, an adopted child, a spouse, or a domestic partner who is legally equivalent to a spouse), such a gift is generally exempt from inheritance and gift tax.
If the recipient is a more distant relative or a person who is not related to the donor, a tax liability may arise. The amount of tax depends on the order of succession in which the recipient is classified and on the value of the property received.
Regardless of any potential tax exemption, the transfer of property must be reported to the competent tax authority in cases specified by law.
Taxation of a contract of transfer of property during lifetime
The transfer of property under a transfer agreement is also subject to tax treatment. If the transfer agreement is validly concluded in accordance with the provisions of the law, the transfer of property is, as a rule, exempt from inheritance and gift tax.
Since a contract of transfer of property during lifetime is intended to regulate property relations between the transferor and their descendants during the transferor’s lifetime, it serves as an important tool for planning the transfer of assets and reducing the likelihood of future inheritance disputes. Nevertheless, before concluding such an agreement, it is advisable to verify whether all legal conditions for its validity are met in the specific case and to assess the potential tax implications of the transfer.
What about capital gains tax?
In the case of a transfer of real estate without consideration based on a gift or conveyance agreement, the issue of capital gains tax may also arise. The tax liability depends on the specific circumstances of the transfer and the applicable tax regulations. Since this is an area where the tax treatment can be influenced by the method of transfer, the type of property, and other circumstances, it is advisable to verify any potential capital gains tax liabilities before entering into a contract.
If you gift real estate to a spouse or child, even under a deed of transfer, tax payment may be deferred. This means that no tax is due at the time of the gift. The tax liability arises only when the recipient sells the real estate or otherwise disposes of it. When calculating the tax, the value and the date on which the donor acquired the capital are taken into account, not those of the recipient.
Conclusion
A gift agreement and a transfer agreement share a common goal—the transfer of property—but differ in their purpose and legal effects. While a gift agreement is suitable for simpler transfers, a transfer agreement allows for a comprehensive arrangement of family property relations and often reduces the likelihood of future inheritance disputes.
Since every family situation is different, it is advisable to seek legal advice before making a decision and to choose a solution that best suits your wishes while ensuring legal certainty for all parties involved.
For legal advice, please contact our mediator Barbara Pečenik at bpecenik@bazarealestate.com.
Sources
- Obligacijski zakonik, IV. Chapter: Darilna pogodba
- Obligacijski zakonik, V. Chapter: Pogodba o izročitvi in razdelitvi premožejna (izročilna pogodba)
- Zakon o davku na dediščine in darila (ZDDD)
- eDavki
