4 The many faces of usufruct

a l a i n - l a u r e n t v e r b e k e , b a r t v e r d i c k t a n d d i r k - j a n m a a s l a n d

1. Usufruct in tax and estate planning

The various national reports demonstrate that the institution of usufruct has always been and still is a popular legal mechanism that offers a broad range of options that can be employed in many diverse situations. It is, however, not merely its application that is manifold. The concept itself is not as unequivocal as it appears at first glance. The area of continental estate planning in particular, reveals several nuances of the concept of usufruct.

1.1. Transferring assets yet retaining control and income

Estate planning is a complex process aimed at organising and transferring an estate to one’s partner, the next generation, or to charity.1 Transfers can be made after death, but also during the transferor’s lifetime. Most people prefer to retain (at least indirect) control over their estate and gain income therefrom for as long as they live. In Anglo-American jurisdictions, trusts are the obvious device for realising such aspirations. Continental jurisdictions lack this tradition, although foundations and other trust-like vehicles have become increasingly popular in recent years.

In several civil law jurisdictions, gifts and donations function as typical estate planning tools. They allow the transfer of assets during a person’s lifetime to the next generation, while still retaining some control over the assets and income therefrom through several modalities and conditions. This can be in the interest of the donor who needs the income to maintain a certain standard of living. The donor may also wish to retain substantial direct or indirect control and management

1 See in general Verbeke, Buyssens and Derycke, Handboek Estate Planning.

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over the donated assets. This can serve the interests of both the donor and the beneficiary. For example, the managerial expertise of the donor may allow the assets to be put to their most efficient use. This allows the donor to realise his aspiration of managing the property, while the beneficiary is protected against unwise management and can in fact reap the benefits of skilful management.

In most jurisdictions, there are no real tax incentives to donate. Generally, donation and inheritance tax (estate duty) are treated alike,2 and in several European jurisdictions, inheritance and donation tax between spouses and children have been abolished or the rates of taxation have been reduced substantially.3 In Belgium, gifts and donations are very popular for tax reasons. It is possible to donate goods to a partner, children or even third parties without being taxed or at least with substantially reduced rates of taxation (except for real estate located in Belgium). Donations of movables, if registered in Belgium, are taxed at 3 per cent for spouses, certain cohabitants and children and 7 per cent for others, while inheritance taxes go up to 27 per cent for spouses, certain cohabitants and children and 65 per cent for others.4 Since 1 January 2012, donations of shares are taxed in Flanders at 0 per cent subject to certain conditions (Flemish Registration Tax Code, art. 140bis). Donations not registered in Belgium are not taxed and will also not incur inheritance tax if the donor dies more than three or seven years respectively after the donation was made (Inheritance Tax Code, art. 7).

In spite of the identical treatment of inheritance and donation tax in the Netherlands (10 per cent (up to EUR 115,708) to 20 per cent (for anything over EUR 115,709) to children), one can reduce inheritance tax5 by making staggered donations or gifts during one’s lifetime. Parents can donate assets up to a value of EUR 115,708 to each child annually at a rate of 10 per cent.6 A similar technique is permitted under

2E.g. the Netherlands (Dutch Gift and Inheritance Tax Code, art. 24) and France (General Tax Code, art. 777).

3E.g. Denmark: no inheritance or gift tax between spouses, 15 per cent to children; France: no inheritance tax between spouses; Italy: 4 per cent on the net value exceeding 1 million euro per beneficiary; Luxemburg: up to maximum 5 per cent inheritance tax or death duties and maximum 4.8 per cent between spouses and direct heirs; the Netherlands: spouses exempted up to 600,000 euro; Portugal: no inheritance nor gift taxes between spouses and direct line; Spain: regional regulations with huge exemptions between spouses and direct line; Switzerland: cantonal regulations with no taxation between spouses and in most cantons also for direct line (see www.ibfd.org).

4On inheritance taxes, see Verbeke and Van Zantbeek, ‘Succession Law’, pp. 68–78.

5 See above for exemptions. 6 Successiewet 1956 (Dutch Inheritance Tax Code), art. 24.