Gifts given before death
If the decedent had given gifts in their lifetime to heirs, the values may either be pulled back into the estate or taxed as ordinary gifts.
Should a gift be treated as advancement or just a gift?
Advancement is a gift intended to be taken into consideration after the donor, i.e. decedent, has died and the stage is reached that their estate is distributed. The idea behind advancements (advances on that which the heir would inherit upon the death of the parent) is that the decedent wants to have the estate distributed evenly among the heirs in spite of having given gifts to some of them in his or her lifetime. The point is to not have one heir inherit more than the others. This way, the heir or heirs who had received advancements will inherit a smaller share of the estate when it is distributed — because they were already given something in advance. Care must be taken to ascertain whether the decedent had meant that the gifts given during lifetime should be counted as an advancement against the estate and whether the distributable shares of the recipients should be diminished accordingly.
A gift given to a natural heir may be an advancement
It is the practice of the tax authorities to hold that any gifts given to a child or grandchild are normally advancements. If all the natural heirs receive gifts of equal value or if there is only one child and he or she has been given a gift, the assumption normally made when assessing inheritance tax is that such gifts had not been intended as advancements. To indicate their wish in a specific manner, the decedent may write out a deed of gift stating that the gift is not intended as an advance upon the inheritance.
It is not possible treat a gift as an advancement unless the person receiving it is in the position of an heir at the date of death. If the decedent gave a gift to a non-natural heir, it is not counted as advancement unless the decedent has specifically instructed that the gift must be considered an advancement.
Advancements treated as gifts
When a beneficiary receives an advancement, he or she must pay gift tax on it in the same way as in the case of an ordinary gift. However, what is different is the treatment of the advancement after the donor has died and the stage is reached that the donor's estate is being distributed and inheritance tax assessed. In other words, advancements are subject to gift tax and additionally, they are taken into consideration also after the donor has passed away.
During the assessment of inheritance tax, all the gifts designated as advancements are pulled back into the total value of the estate although a longer time may have elapsed since receipt. The values of the advancements are appraised in accordance with the date when they were received — not by the donor's date of death. After the inclusion of all the advancements, the resulting total estate value is distributed evenly to all heirs. Each heir will then pay inheritance tax separately. If an heir had paid gift tax on an advancement, their inheritance tax is reduced accordingly. However, in cases where the gift tax is greater than the inheritance tax is going to be, the Tax Administration does not give the heir a refund.
Example: Tommi's date of death is 16 April 2015. The net worth of his estate (total assets minus liabilities) equals €120,000. Tommi's three children Liisa, Mikko and Pekka are his heirs. On 22 December 2004, he had given Liisa an advancement of €30,000 in cash. This amount must be added to total assets, making the distributable total reach €150,000 (= €120,000 + €30,000). Now the share of each heir is €50,000 ( = €150,000/3). Each heir will then pay inheritance tax on €50,000. Because Liisa received €30,000 as an advancement and paid gift tax on it, her inheritance tax liability is reduced accordingly.
When the rest of the estate's assets are distributed to the heirs, Liisa's advancement must be taken into consideration and its value deducted from her share. This means that Liisa gets €20,000 ( = €50,000 – €30,000), Mikko gets €50,000 and Pekka also gets €50,000. This way, the distribution of the entire 120,000-euro estate is complete.
However, if the gift Liisa received should not be counted as an advancement against the estate, its value must not be pulled back into the estate value, and it must not be taken into account in tax assessment. In these circumstances, Liisa, Mikko and Pekka would all receive €40,000 each ( = €120,000/3).
Gifts that were received within three years of the decedent's death
Other gifts, i.e. ordinary gifts, not intended as advancements will only affect inheritance taxes if an heir had received such a gift within three years before the decedent's death. If less than three years have elapsed, the value of the gift is to be added to the inheritance intended for this heir, and inheritance tax will be calculated on the total. If the heir had paid gift tax, he or she is entitled to a tax deduction, the paid gift tax being deducted from the inheritance tax. However, in cases where the gift tax is greater than the inheritance tax is going to be, the Tax Administration does not pay out a refund.
Example: Tommi's date of death is 16 April 2015. The net worth of his estate (total assets minus liabilities) equals €120,000. Tommi's three children Liisa, Mikko and Pekka are his heirs. On 19 January 2015, he had given Pekka €15,000 as a gift, which was not intended as an advancement. The share to be inherited by each child is then €40,000 ( = €120,000/3). However, the tax authorities make an adjustment to Pekka's share adding the recent gift to it, which results in €40,000 + €15,000 = €55,000. They assess inheritance tax on this sum total.
In the first tax bracket, inheritance tax on €55,000 in 2015 is €3,350. Pekka had already paid €980 gift tax on his 15,000-euro gift. As a result, he is entitled to a deduction from his inheritance tax: €3,350 – €980 = €2,370. Liisa and Mikko will both pay €1,700 each, which is the first-bracket tax on their inheritance values of €40,000.