UPDATE on transfer of assets to the next generation - duty to support relatives in old age

UPDATE on transfer of assets to the next generation - duty to support relatives in old age
UPDATE on transfer of assets to the next generation - duty to support relatives in old age. The federal social security law (ELG) was revised as of 1 January 2021 and some important parameters have changed.

Introduction

Costs associated with illness and long-term nursing care in old age may well exceed the pension income and savings of certain individuals. The question arises as to who must pay for these expenses? Is it the social security system, the relatives or both? What if the person who is in financial need voluntarily gave away significant assets in previous years?

Under social security law, the key issues revolve around the so-called supplementary benefits to the AHV/IV (Ergänzungsleistungen) or abbreviated the "EL".

Also, statutory provisions of marriage and family law come into play: marriage law provides for maintenance obligations between the spouses and family law includes a duty of financial support of the children towards their parents (Verwandtenunterstützungspflicht). In this newsletter we will show how these provisions interact and what individuals should bear in mind with respect to potential future duties of familial financial support.

Supplementary benefits to AHV-IV "EL"

The aim of the supplementary benefits is to secure the living standards of people who receive an AHV- or IV-pension but cannot financially support themselves. The EL covers the gap between the necessary expenditures (housing and food costs, medical care, nursing care, etc.) and the eligible income (AHV/IV pensions, assets, etc.).

In the latest reform several parameters of the calculation were amended:

• the costs for housing were increased to mirror the development of the housing market since the last reform.

• the thresholds for free assets were reduced (including voluntary waived assets).

• a transitional period of three years applies (until 1 January 2024), before current EL benefits will be reduced.

Importantly, the law introduces a new duty for the heirs to repay EL benefits received by a person in the 10 years prior to their death.

A practical example

Anton and Bea are married and have one child. They live in a traditional role distribution: Bea looks after the child and Anton earns an annual income of CHF 250,000. Bea's father passed away; her mother needs constant medical care and must move to a nursing home. The pension income of Bea's mother is not sufficient to cover her expenditures. In 2017 she voluntarily gave away part of her assets to Bea. Do Anton and Bea have to support Bea's mother financially or does the mother receive EL contributions?

Supplementary benefits and voluntary waiver of assets

The EL supports people whose pensions and income do not cover their minimum cost of living. According to the calculation mechanism outlined in Art. 9(1) ELG, the annual supplementary benefit corresponds to the amount by which the recognized expenses listed in Art 10 ELG (living requirements, rent, extraction costs, etc.) exceed the chargeable income as defined Art 11 ELG. Further, a person is not entitled to EL benefits if the net assets exceed certain limits (as example, the limit for a single person is CHF 100'000, Art. 9 a ELG).

In general, only income and assets which the EL beneficiary can fully dispose of are considered for the calculation mechanism. However, this calculation mechanism is amended by the voluntary waiver, now stipulated in Art. 11 a ELG, based on which certain income and assets are added that have been waived voluntarily. A voluntary waiver is understood as a disposal of assets which was made without a legal obligation or compelling reason or without equivalent consideration (Art. 11 a (2) ELG).

Gifts, pre-inheritance contributions or the sale of goods below market value (less than 90% of the market value) are usually deemed as such voluntary waivers of assets.

Additionally, it is also considered as voluntary waiver if a person spent more than 10% of his/her total assets annually, without a compelling reason, after the person was entitled to a pension or - if the person receives an AHV old-age pension – also in the ten years before the retirement. If the assets do not exceed CHF 100'000 then the voluntary waiver only concerns spending of more than CHF 10'000 per year.

The extent of the waiver is determined by the market value of the asset at the time of disposal. Subsequent increases in value are irrelevant. A depreciation is calculated on the amount of waived assets of CHF 10,000 starting the second year after the waiver. There is no statute of limitations with respect to voluntary waivers.

Waived assets are treated like actual assets. Hence, they are added to the calculation of a person's assets.

The thresholds for free and waived assets have been reduced in the latest revision of ELG. The new legislation allows for a "free" asset in the amount of CHF 30'000 (instead of CHF 37,500) for single persons and CHF 50'000 (prior CHF 60,000) for married couples, meaning that this is the bottom line.

For example: In 2017, the mother of Bea, single AHV retiree, gave Bea an amount of CHF 250'000 (while having total net assets of 300'000). Three years later, the retiree finds herself in financial need and requests EL. The gift to her daughter is considered a voluntary waiver of assets because it exceeded the threshold of 10% of the net assets which can be spent per year (voluntary waiver of CHF 220'000). An amount of CHF 190'000 will be accounted for (depreciation of CHF 10,000 in the years 2018, 2019 and 2020). The free amount of CHF 30'000 for single persons will be deducted, so that eligible (hypothetical) assets of CHF 160'000 remain. Consequently, (because of hypothetical assets in the amount of CHF 160'000) the retiree is not entitled to EL.

So, will the relatives have to support her financially?

Duty of financial support for relatives

The duty of financial support for relatives is subsidiary to EL. The obligation applies in ascending and descending lines (children-parents-grandparents) and is governed by the Art 328 and 329 SCC. Parents are primarily obliged to support their children and vice versa. However, neither siblings, stepparents and stepchildren, nor persons further related by marriage have such a duty.

Anyone in financial need is entitled to familial support. According to case law, a person is in financial need if he or she is no longer able to pay for necessary expenses meaning food, clothing, housing, medical care and medicines in case of illness.

Pursuant to Art 328(1) SCC only relatives who live in advantageous financial conditions have a duty of financial support. Based on case law, people living in advantageous conditions can lead a prosperous life. The determining criteria are the taxable income and asset consumption (Vermögensverzehr) in each case, considering also appropriate savings for retirement and old age. There is a considerable discretion for the courts to determine the financial conditions of the relatives, depending on the circumstances of each case. As a guideline, the duty to financially support relatives may apply if the income is higher than the following rates (see also SKOS guidelines):

• Single parent: CHF 120'000

• Married persons: CHF 180,000

• Supplement per child: CHF 20,000

The following amounts are deducted from the taxable assets:

• Single: CHF 250'000

• Married persons: CHF 500,000

• Supplement per child: CHF 40,000

If a surplus remains between the prosperous standard of living and the income after these deductions, half of that amount may be claimed by the public authorities to financially support a relative in need.

Application to the initial example

What do these regulations mean for the family of Anton and Bea? As mentioned above, the mother of Bea cannot afford her care and nursing costs, and would thus be dependent on EL. However, she is not entitled to EL benefits due to the voluntary waiver of assets (see above). The competent authorities will then determine whether any financial support is owed by the relatives. Do Anton and Bea have to support the mother/mother-in-law financially?

According to the SKOS guidelines, Anton and Bea's financial support is calculated as follows:

Comments: 1) The child supplement applies only to minors or children in education; 2) As son-in-law, Anton is not affected by the familial duty since this obligation only applies to persons in descending line. However, due to the marriage of Anton and Bea, half of the surplus income is treated as a contribution to the free disposal of Bea (Art. 164 SCC); as a result, the financial support is halved (only the share of Bea is considered in the calculation) but will most likely have to be paid out of the income of Anton in the end. 3) The asset consumption per year depends on the age of the relatives (i.e. if the relative's age is between 41-50, the asset consumptions is 1/40 per year).

As per the above calculation, Bea may have to financially support her mother with about CHF 1,400 per month.

New repayment duties of heirs

The latest revision of the ELG also introduced a new duty to the heirs: After the death of an EL recipient, the heirs must reimburse the EL received in the last ten years if the estate exceeds the amount of CHF 40'000 (para. 16a ELG).. If a married couple receives EL, the heir's obligation to reimburse only arises upon the death of the other spouse. The statute of limitation comes into effect one year after the authority gained knowledge of the claim for recovery, latest 10 years after the payment of the EL benefits (para. 16 b ELG).  

Outlook and commentary

The EL system faces two challenges: Demographic developments and legislatory reforms. For many years the proportion of elderly people, the rising life expectancy and the increasing need for medical and nursing care have strained the budgets for supplementary benefits to AHV/IV. The EL reform which entered into force on 1 January 2021 was therefore long overdue. The new law tightens the prerequisites for EL contributions and decreases the allowances for free assets. It remains to be seen whether these changes are sufficient to achieve the goal of the reform.

As previously (see our last article on this topic), there is no scope for transferring assets to the next generation and reverting to social security systems in case of (financial) need in old age. Retirees should keep in mind that assets donated or passed to younger generations can be deemed as a voluntary waiver without a statute of limitations. Relatives living in prosperous financial circumstances might have to contribute to the expenses of care and nursing of their parents.