Long live the usufruct!

A use­ful de­vice in the wake of the demise of the dou­ble usufruct?

Finweek English Edition - - Creating Wealth -

THE USUFRUCT is a time-hon­oured de­vice in es­tate plan­ning, which lim­its an es­tate’s ex­po­sure to var­i­ous taxes.

Un­for­tu­nately, in this year’s Bud­get speech then Fi­nance Min­is­ter Trevor Manuel an­nounced that new mea­sures would be in­tro­duced to curb the use of suc­ces­sive (or “dou­ble”) usufructs as a means of re­duc­ing es­tate duty. The new mea­sure has not yet been in­tro­duced

but will prob­a­bly ap­ply ret­ro­spec­tively from the date of the an­nounce­ment, when it’s made.

In or­der to re­duce the ex­po­sure to es­tate duty on the death of the sur­viv­ing spouse, it was com­mon prac­tice to pro­vide for his/her rights of use and en­joy­ment on a prop­erty to first pass, for a short pe­riod, to some­body else, be­fore pass­ing on to the heir or heirs of the first-dy­ing spouse. This is known as dou­ble usufructs and lim­ited the es­tate duty payable by the fi­nal heirs.

The In­come Tax Act states that if the rights of use and en­joy­ment were to pass im­me­di­ately to the chil­dren, the last­dy­ing spouse’s es­tate would be sub­ject to es­tate duty on the value of the rights as de­ter­mined by ref­er­ence to chil­dren’s life ex­pectan­cies. If the rights of use and en­joy­ment pass to a trust for an in­def­i­nite pe­riod, the last-dy­ing spouse’s es­tate will be sub­ject to es­tate duty by ref­er­ence to the full mar­ket value of the prop­erty.

How it ini­tially works is that in­stead of be­queath­ing one’s prop­erty to a sur­viv­ing spouse in a will, be­queath it to the chil­dren, or to a fam­ily trust. The be­quest to the chil­dren or to a trust is, how­ever, sub­ject to your sur­viv­ing spouse hav­ing a usufruct – a right to use and en­joy the prop­erty un­til death. If the prop­erty is a dwelling, the sur­vivor can live in it, or let it, and en­joy the in­come. If the prop­erty con­sists of shares or other in­vest­ments, the sur­vivor will re­ceive the div­i­dends or in­ter­est.

The value of the usufruc­tu­ary rights can be de­ducted

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