Inheritance Matters. How does a donation agreement differ from a lifetime care agreement?

Sometimes, seniors wish to settle their inheritance matters and transfer their property to one of their children, grandchildren, or even an unrelated individual such as a friend or neighbor while they are still alive. According to Polish law, there are two ways to carry out such a transaction: a gift contract and a life tenancy agreement. Both contracts are regulated by the Civil Code. Małgorzata Rosińska, the Head of the Legal Department at DOM Mortgage Fund, discusses the differences between these options, as well as the advantages and disadvantages of each.

A gift contract (regulated in Art. 888 and following of the Civil Code) is one of the most commonly chosen solutions when a senior wants to transfer their flat or house to a family member or an unrelated person. A gift involves a free transfer of property by the owner to the beneficiary. Importantly, any person can serve as a donor or beneficiary. For the gift contract to be valid, it must be made in the form of a notarial deed. It is noteworthy that such a contract entails not only privileges but also obligations. For example, if the donor falls on hard times after signing the gift contract and transferring their assets, the beneficiary will be obliged to support the donor, and their financial assistance must match the value of the previously given gift. The beneficiary can only be relieved from this duty by returning the gift or providing a sum equivalent to its value.

What are the pros and cons of a gift contract?

The advantage of this arrangement is certainly its quick procedure. Signing a gift contract requires a visit to a notary, making a notarial deed, and making appropriate entries in the land and mortgage register. Unlike a life tenancy agreement, a gift contract does not include mutual performance, meaning that the senior who transfers, for example, a flat to a grandchild does not require anything in return (e.g., care or a monthly annuity). This can be beneficial for both parties if there is trust between them. However, after making a donation, the senior loses the ownership of the flat and therefore the right to live in it. In case of misunderstandings, the senior may find themselves in an uncomfortable situation. It must be stressed that revoking a gift is only possible under exceptional circumstances (e.g., if the beneficiary shows gross ingratitude towards the donor). Such action must be proven in court, which can be complicated and time-consuming. Lastly, it’s worth noting that a gift in favor of an heir is generally included in the so-called inheritance, unless the testator’s declaration or circumstances indicate that the gift was given with an exemption from the obligation to include it. This means that the benefiting grandchild might receive a smaller inheritance from the donor later.

A life tenancy agreement has more applications

A life tenancy agreement (regulated in Art. 908 and following of the Civil Code) is the second option that a senior may consider. Under this agreement, the property owner (e.g., a house or apartment) can transfer it to a specific person or institution in exchange for financial maintenance (lifelong upkeep) or care. Mortgage funds often use life tenancy agreements, guaranteeing seniors a fixed monthly payment in return for transfer of property ownership. Similarly, a senior could sign such an agreement with a grandchild, with the agreement being lifelong care for the senior (including providing food, clothing, light, electricity, heating, and nursing in sickness). Remember that a life tenancy agreement must be made in the form of a notarial deed. Whereas in a gift contract, only the donor (senior) has obligations, in a life tenancy agreement, both parties have obligations, including the property buyer.

Advantages and disadvantages of a life tenancy agreement

One of the biggest advantages of a life tenancy agreement is better protection of the senior’s interests. Why? Because it obligates the purchaser of the property to provide the tenant for life with housing, food, care or other services outlined in the contract. In the case of life tenancy agreements between mortgage funds and seniors, the buyer is obliged to pay monthly cash benefits, and the contract also includes a personal easement of residence. Under this arrangement, the senior can be confident they will have the right to live in their flat for life. A disadvantage of the life tenancy agreement (regardless of whether the pensioner signs it with an institution or a private individual) is that they lose the right to the property, much like with a gift contract.

It’s also worth considering the drawbacks of a life tenancy agreement from the perspective of the buyer, such as a grandchild. Such a person commits to providing services to the senior, taking care of them, nursing them, etc. For a private individual, upholding these obligations for several or even dozens of years can be a major challenge, and even a burden, both emotionally and financially.