TRUST LAW - Can a usufruct be attached?
by Peter O’Halloran, Head of Tax at BDO Spencer Steward, Gaborone.
'The ownership of the farm can be vested in the son, but the use of the fruits of the farm can be vested in his mother.'
WHAT IS A USUFRUCT?
A usufruct means that while a person may not necessarily own an asset or a piece of property, they do have the right to use its fruits, such as income from rentals.
In times gone by, farmers often used usufructs in their wills. Typically a farm would be bequeathed to a son, but the farmer's widow would enjoy a lifelong usufruct over it. The ownership was therefore vested in the son and the use of the fruits of the farm vested in his mother.
In Roman Dutch law, outright ownership consists of the use of the fruits of a thing. Bare ownership does not include such use The correct legal terms are “usufruct” and "bare dominium" respectively.
The practice of bequeathing usufructs to a spouse is still used today and the usufruct, as an asset, has a value. The S.A. Revenue Service (SARS) staffers and officials at the Master's offices have tables worked out to calculate this value.
A usufruct has a value for estate duty purposes. When a trust bequeaths bare dominium to one party, with a usufruct bequeathed to a spouse the arrangement is beneficial from an estate duty point of view.
If a person dies while in receipt of a usufruct, its value is determined according to the age of the person who'll receive the fruits of the asset when the usufruct ceases
A usufruct usually follows the bare dominium. This means that when it ceases, the enjoyment of the assets falls back to the bare dominium holder. In the. example given above, the son holding the bare dominium would automatically take full ownership once his mother, the usufructuary, passed away.
Enterprising advisors tell clients to place the bare dominium of their fixed properties into trust while retaining the usufruct - dominium is usually the much smaller value, and any rentals would continue to accrue to the usufruct owners.
But the bare dominium transfer is no good as an estate duty mechanism, because the ceasing usufruct is usually worth more when the usufructuary dies, thus increasing estate duty instead of the reverse.
These transfers supposedly afford insolvency protection. Because the transfer duty on the bare dominium alone is so low, transferring it to the trust is cheap.
However, since the usufruct is an asset, an astute creditor can easily demand it if one can lose one's home, surely the usufruct is also open to attachment. So III benefits from a bare dominium transfer?
The taxman gets a little transfer duty. The erstwhile owner gets a little (possibly misplaced) peace of mind, but their tax position remains unchanged, except for the possibility of paying higher estate duty. The only possible benefit I can see is the creditors wishing to attach the usufruct especially while such applications are still uncommon. Essentially, farmers should ins on being properly educated about plans iii these before committing to them.
Farmers Weekly July 2009