Usufruct

A usufruct is mostly added to a will to ensure that a surviving spouse has a place to stay and is looked after when a spouse dies, but despite such good intentions a usufruct can place a huge financial burden on a surviving spouse and on the heir/s of a deceased estate.

 

A common example of a usufruct is where a husband bequeaths his house to his children, but states in his will that his wife has the right to use the house and the furniture in the house for her lifetime or until she remarries (usufruct). When he dies the house will be transferred to his children who will become the bare dominium owners of the house. A usufruct will at the same time be registered at the Deeds Office against the title deed of the house in favour of his wife (surviving spouse). By creating a usufruct in favour of his wife the estate duty payable by the deceased's estate is reduced, because the usufruct (which has to be valued) passes to a surviving spouse free of estate duty.

Using the above example: The wife (usufructuary) will be responsible for:

- The maintenance of the property in its current state, fair wear and tear excepted.

- Payment of property rates and all services (water, electricity, and other municipal levies).

Although not obliged to it is advisable to insure the property against storm, fire, and other damages as it would be in her best interest to do so.  This can become a financial burden for her if she does not have the means to maintain the property, pay for rates and other municipal services and property insurance premiums. Provision should ideally be made in a will to cover these expenses. A life policy could also be taken out to ensure that there are enough finances for a surviving spouse to cover these expenses. Upon the death of the surviving spouse (usufructuary) the value of the usufruct will be calculated which could be close to the fair market value of the property. This could have serious estate duty consequences for her deceased estate.

 

The children (bare dominium owners) will be responsible for:

- Keeping the property in a habitable state.

- Repairs to the property.

This could become a financial burden for the children if provision is not made in the will to ensure that they have enough finances to pay for expenses related to the property.  Upon the death of the usufructuary the usufruct ceases, and the children will automatically become the full owners of the property. Should the children decide to sell the property at that stage the Capital Gains Tax liability for them could be greater than if they had inherited the full property.

To avoid serious estate duty consequences for a deceased usufructuary, estate planners these days prefer to use Inter vivos trusts to take care of a surviving spouse and children instead of creating a usufruct in a will. This, however, may have its own set of problems as disputes may arise between the trustees and the surviving spouse or heirs. 

An elderly usufructuary could consider selling or donating the usufruct to the bare dominium owner/s during his/her lifetime to avoid a possible high estate duty bill in the future. This may have donations tax, capital gains tax and transfer duty implications. It has, therefore, been suggested that a comparison be made between the estate duty that would become payable and the aggregate of the above three taxes before making such a decision. 

Before adding a usufruct to your will, it is best to consult with a professional tax consultant, financial advisor, or an attorney (specialising in the administration of deceased estates) to fully understand the implications thereof and how it will affect your heirs.