When the gift outlives the donor

Planning what happens to our assets after we die is not a simple topic. Many people are aware of the possibility of making a will or concluding an inheritance contract, but Czech law also offers another interesting tool - gifting on death. This institute, regulated by Act No. 89/2012 Coll., Civil Code (§ 2063 and § 1594(2)), makes it possible to transfer property to close persons in an elegant and understandable way. In this article, we will explain what a gift on death entails, what are the conditions for its validity, how it differs from a will and a contract of inheritance, how it is practically used for real estate, money or cars, what tax implications it has, and what common mistakes to watch out for. The aim is to provide expert information in an easy-to-understand way and to help you decide how best to deal with your assets in case you are not here one day. Remember - the right course of action can save your family worry and ensure that your wishes are carried out.

Author of article: ARROWS (JUDr. Kateřina Müllerová, office@arws.cz, +420 245 007 740)

What is a death grant?

A gift on death is a special type of gift agreement that is only triggered when the donor dies. In other words, the donor enters into a contract with the donee during his or her lifetime, promising to give the donee a certain gift (property), but with effects deferred until the moment of death. The donee accepts the gift, but only becomes de facto owner if the donor dies and the donee survives him.

This is an exception to the general rule that one cannot contract with effects after death. The new Civil Code (in force since 2014) has reintroduced it into our legal system - it has historically functioned similarly in Austrian law. Thanks to the death grant, you can now agree with a specific person who will receive your house, car or savings, for example, without losing these assets during your lifetime. During your lifetime, you remain the owner of the property and generally continue to use it; only on your death does the donee become certain that the property will pass to him.

Example. He therefore draws up a deed of gift to his grandson in the event of his death. The grandson immediately knows of his grandfather's intention and agrees to it. Once Mr. Nový dies, the grandson will become the owner of the collection at the moment of his grandfather's death. He does not have to wait for lengthy inheritance proceedings regarding these paintings - the paintings will not be part of the estate because they have passed directly to the grandson by gift.

A gift on death therefore works in a similar way to a will, but it is a contract (a bilateral legal act) between the donor and the donee. In this way, the donor can provide specific property for a specific person in advance. Importantly, compared to a will, such an arrangement is difficult to revoke (it cannot be changed unilaterally). On the other hand, it requires the fulfilment of several legal conditions, which we will discuss below.

Conditions for the validity of a gift on death

In order to be valid and effective, a deed of gift on death must comply with certain requirements laid down by law. The Civil Code in § 2063 lists these key conditions:

• Survival condition precedent: The contract must expressly provide that the donee will survive the donor. This phrase is crucial - without it, it would be an ordinary gift (or the contract would be interpreted as merely a bequest in the context of an inheritance). Typically, the contract contains language such as "This contract is made on the condition precedent that the donee survive the donor." This is what "triggers" the gift only upon the donor's death.
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• Acceptance by the donee: The donee must accept the gift - which usually means that both parties sign the contract. It is therefore truly a contract, not a unilateral declaration by the donor. The donee should know what he or she is accepting (e.g. a specific property, car, sum of money) and agree to it. The mere signing of the contract by the donee fulfils this requirement.

• Waiver of the right to revoke the gift: The donor must expressly waive the right to revoke the gift in the contract. Not to worry - this does not preclude later revocation of the gift for compelling reasons (ingratitude, hardship, etc.); rather, it is an assurance that the gift cannot be arbitrarily withdrawn. This waiver is important to distinguish a gift on death from a simple bequest in a will (a bequest can be revoked easily by revoking or revoking a will, whereas a gift agreement is binding on both parties).

• Written form: The contract must be in writing. As a rule, a classic gift deed containing the above-mentioned elements is drawn up.

• Deed of waiver of right of revocation: the law also says that the donor must give the donee a deed stating that he has waived the right to revoke the gift. Basically, what he means is that the donee must receive written acknowledgement of this arrangement (usually he will receive one signed original of the gift agreement). If the donor just verbally stated "I waive my right to revoke", this would not be enough - everything must be documented in writing.

If any of the above conditions are missing, the gift on death is not valid in its entirety.

Summary of conditions: A gift on death agreement must have precise terms. The best way to do this is to have a professional prepare the contract to ensure that it contains everything you need. This is the only way to be sure that your intentions will actually be valid. If you don't meet the conditions, you risk invalidity or complications - and the donee may end up getting nothing.

When to choose a will and when to make a gift on death?

A will is better if you want maximum freedom and complexity - you designate the entire estate, you can name alternate heirs in case someone passes away, etc. It is a unilateral legal act that you can revoke at any time. A gift on death is useful if you want to pass on a specific item to a specific person with certainty and in advance (the person knows about it and you can discuss it with them), and you don't want the item to be divided between heirs. Often the two tools can be combined. The best solution always depends on the circumstances - so consider consulting with a lawyer to choose the right combination of tools.

Practical uses of gifting on death

How does gift on death work in reality for different types of property? Let's look at some practical situations and examples:

Real estate (house, apartment, land)

A gift of real estate on death is a fairly common case - typically a parent wants to ensure that the family home goes to one particular child upon his or her death. You will draw up a written agreement (recommended by a professional) and include everything you need. However, you don't enter anything in the Land Registry yet - the transfer of ownership will only take place after the death of the donor, and only then can you apply for entry.

After the death of the donor, the situation will be as follows: The donor will only become the owner of the property by registration in the Land Registry, which will be carried out by the competent land registry office. The donor can submit the application for registration as soon as he/she has the gift deed and the death certificate of the donor. But there is a catch - the Land Registry cannot register the change of ownership until it is clear who the heirs of the deceased are. Therefore, the circle of heirs must first be clarified during the inheritance procedure at the notary's office (even though the specific property will not be divided among them, the legal successors of the deceased must be known for the purposes of the administrative procedure at the Land Registry).

The practice has gradually settled down that the cadastral office allows to file a petition for entry even before the completion of the inheritance proceedings - the deceased donor is still listed as the owner in the petition (because he is still registered in the cadastre) with a note that his heirs, who are not yet known, enter the proceedings. The cadastre itself then requests information from the notary or the court as to who the heirs are. Once it receives confirmation (for example, a final decision on inheritance or a notary's notification of heirs), it proceeds with the registration procedure and transfers ownership to the donee with effect from the date of the application (which was the day after death). Although it sounds technically complicated, the result is that the donee gets the house, he just has to wait for the formalities. The property formally belongs to the estate during the proceedings, so no one (not even the donee) can dispose of it until the proceedings are completed - but it is already clear that it will eventually go to the donee.

Practical tip: Because a gift on death cannot be registered as a transfer in advance in the Land Registry, the donor may be worried that he or she will change his or her mind later and sell the property to someone else. If you want to give the donee more security, you can include in the gift agreement a prohibition on alienation and encumbrance of the property for the lifetime of the donor (typically the donor will undertake not to sell or mortgage the property without the donee's consent). This prohibition can be registered in the Land Registry immediately. This avoids the possibility of the donor later transferring the property to someone else behind the donor's back - and also fulfils the condition of waiving the right to revoke the gift (it is clear that the donor does not intend to change his decision).

Example: Mrs Green owns a cottage in the mountains. She has two daughters, but one of them takes care of the cottage and has been going there for years. Mrs Green enters into a death grant with her - the cottage will pass to this daughter on her mother's death. In the land registry, everything remains in Mrs. Zelena's name for the time being. When Mrs. Zelená dies, the notary in the inheritance proceedings discovers the existence of the deed of gift. The second daughter (who would otherwise inherit half of the cottage according to the law) cannot do anything about it because the contract is valid. The donated daughter files a petition for registration of the title in the Land Registry with the death certificate. The Land Registry will wait for the end of the inheritance proceedings (where it will be confirmed that both daughters are heirs, but the cottage is not divided because it is subject to the gift). The Land Registry then registers the cottage in the name of the gifted daughter. The other daughter inherits her share of the rest of her mother's property (e.g. money, flat in the town) by law or will, but does not get the cottage.

Bank accounts and money

If the subject of the gift is a claim on a financial institution, i.e. in layman's terms, funds deposited in a bank account (or financial products of a similar nature), this would be a gratuitous assignment of the testator's claim on the financial institution. While this is theoretically possible, to the author's knowledge, banks and similar financial institutionsexclude the assignment of claims against other personsin their general terms and conditions. It can also be assumed that, if the bank account (or the rights and obligations under the account agreement) were not part of the decision on the succession, the bank would not allow the donee to dispose of the subject of the gift and the donee would therefore not have easy access to the subject of the gift in the short term.

It is worth noting that banking laws allow for the establishment of a so-called disposition on death account - the bank customer can designate in the account agreement the person to whom the bank will pay the balance (or part thereof) upon his or her death, up to a certain amount. But this is a little different - it's a unilateral arrangement with the bank.

The situation is somewhat simpler if the subject of the gift is cash. Here, the gift agreement becomes effective on the death of the donor and the donor's successors in title, or the person responsible for administering the estate, should release the gift to the donee without further delay.

Cars and movable property

The situation is simplest for items not subject to registration in a public register. Electronics, valuable collections, jewellery - these are all movable items that are not registered in any public list. If you donate them for death, the donee becomes the owner at the moment of the donor's death. Practically, of course, he will have to prove his right. Here again, the deed of gift and the death certificate will serve. Any survivors have no right to prevent the donee from taking possession of the item.

If a vehicle is donated, pursuant to the provisions of Section 8(2)(a) of Act No 56/2001 Coll., on the conditions of operation of vehicles on the road, it is necessary to change the owner (and usually also the operator) of the vehicle in the road vehicle register within 10 working days of the transfer of ownership, usually in accordance with the provisions of Section 8(1)(a) of the aforementioned Act, on the basis of a joint application by the previous and new owner. The options for the change of registration and the time limits laid down by law for the transfer of ownership will not be applicable in this case. The existing owner, by the nature of the gift on death, can no longer make an application and it is therefore again a question of how to ensure the change of registration in this register. Representation of the donor on the basis of a previously granted power of attorney will not be possible, since the procedural authorisation will be extinguished by the loss of the procedural capacity of the principal (the possibility of negotiating the continuation of the authorisation even after the death of the principal according to Article 448(1) CC only applies to substantive authorisation) (footnote - it is of course possible that the competent administrative authority would be involved). It would therefore probably also be necessary to wait for the determination of the legal successors of the donor or at least the administrator of the estate in the case of registration in the vehicle register. Therefore, it is always advisable to consult a specialist as to which institution is the best for the transfer of a particular item and will ensure the fulfilment of the testator's will without burdening the donee/heirs.

Tax consequences of a gift on death

Taxes are a very important issue. In the Czech Republic, separate inheritance and gift taxes have been abolished since 2014 - however, this does not mean that no levies are payable. The receipt of a gift may be subject to income tax, while the acquisition of property by inheritance is exempt from income tax and only a notary fee is payable. So how does this work out in our comparison?

• Inheritance (by will or by operation of law): If you acquire property by inheritance (either by will or by operation of law), you pay no income tax on this acquisition. According to the Income Tax Act (Section 4a(a) of Act No. 586/1992 Coll.), income from the acquisition of an inheritance is exempt from tax. In practice, this means that whether you inherit money, real estate or a car, the tax office will not charge you tax. Inheritance is therefore very advantageous from a tax point of view, but you must take into account the notary's fee, which is calculated on the day of the notary's tariff.

• Donation on death (valid contract): Although the gift is transferred after the death of the donor, it is legally a gift between two individuals and not an inheritance. The donee thus receives gratuitous income which may be subject to income tax under section 10 of the Income Tax Act. Fortunately, the law remembers the exceptions and exemptions for gifts. Specifically, Section 10(3)(c) of the said Act exempts from income tax gratuitous income acquired from relatives in the direct line (parents, grandparents -> children, grandchildren) or in the collateral line if they are siblings, uncle/aunt, nephew/niece, spouse, registered partner, or persons who have lived in the same household with the donor for at least one year prior to his/her death. In practice, this means that most gifts within the family are exempt - so if a father gives his son a house on his death, the son will not pay tax on it (the income is exempt). But beware of gifts outside the family! For example, if the donee is a good friend to whom the donor is not related and they do not live in the same household, then the donee will have to pay income tax on the value of the gift. For individuals, the tax rate is 15%. So, for example, if a neighbour gifts a cottage to a neighbour on death and they are not related, the gifted neighbour should include the value of the cottage in their tax return as 'other income' and tax it.

Tax summary: For relatives, a gift on death is as tax advantageous as an inheritance - they pay nothing extra to the state. However, for those gifted outside the circle of close relatives, a death gift is less advantageous than a will - for example, bequeathing property to a friend by will is better for tax purposes, whereas gifting the same property to them on death would mean a 15% tax. So if you are considering making a gift to someone who is not a member of your family, consider the implications carefully. It may be preferable to choose another route (a will, a bequest in a will, or perhaps a transfer of property during life with some sort of settlement). Consult a lawyer or tax advisor about tax considerations to avoid unpleasant surprises.

Conclusion: Plan your inheritance with professional help

Estate succession planning is something that pays to think through early and with a cool head. The institution of a gift on death is a great way to pass specific assets directly to the person of your choice and ensure that everything goes according to your wishes. At the same time, we can see that it is a legally more complex act - it must meet the conditions and fit appropriately into the overall scenario (in relation to any will, heirs, etc.).

Not sure how to deal with your assets in the event of your death? We will be happy to help you find the optimal solution. Contact our law firm for a no-obligation consultation - we will discuss your family and property situation and suggest a course of action that will provide legal certainty for you and your loved ones. Whether it's drawing up a will, entering into a gift agreement in the event of death, an inheritance agreement or a combination of the two, we will make sure that the documents are valid and enforceable. This will give you peace of mind that you have done your best for your loved ones and your assets will go to those they are meant to go to, without unnecessary delays and disputes.

Don't leave the fate of your estate to chance - contact us today and together we will plan the future of your estate so that you can look forward with confidence to a future of greater peace of mind and security for you and your loved ones.