Gifting Money: The Usufruct Reserve in Question

The Committee on Tax Abuse was asked to rule on a transaction involving the gift of a sum of money with a reservation of usufruct. Analysis and commentary by experts from the wealth engineering department at Lazard Frères Gestion.
 

In December 2010, a mother made a gift of money to her two children, subject to a right of usufruct. The total amount gifted was 3.2 million euros, or 1.6 million euros for each of the two children.  
 

Following the mother’s death in December 2015, her two children included in the estate’s liabilities a restitution debt of 3.2 M€ related to the quasi-usufruct.
 

In fact, the mother had retained possession of the sum of money given, since the usufructuary of a sum of money enjoys a quasi-usufruct and may retain the sum of money, provided that, at the end of the usufruct, an equivalent sum is returned, in accordance with Article 587 of the Civil Code.
 

The tax authorities rejected this deduction and initiated proceedings for abuse of rights, finding that the gift was fictitious because the donor had not relinquished ownership and, consequently, had no intention to make a gift.
 

In this regard, it should be noted that Article 894 of the Civil Code provides that “a lifetime gift is an act by which the donor currently and irrevocably transfers ownership of the gifted property to the donee, who accepts it.”
 

The Committee on Tax Abuse found, based on the evidence presented to it, that on the date of the gift, the mother held a sum of €2,952,150.
 

He concluded that the deed of gift should be considered fictitious to the extent of €247,850—corresponding to the difference between the amount gifted (€3,200,000) and the amount of money actually held by the donor on the date of the gift (€2,952,150)—and that this deed could not, to the recognition, in that proportion, of a debt deductible from the estate’s assets.
 

The committee therefore concluded that the administration was justified in initiating the abuse-of-rights proceeding only to reduce the amount of the debt deductible from the estate’s assets by €247,850.
 

This opinion from the Committee on Abuse of Rights therefore appears to validate gifts of money subject to a usufruct, provided that the donor possesses the corresponding cash on the date of the gift. 
 

It should be noted, however, that the tax authorities may challenge a transaction on the grounds of an abuse of rights, either because it is fictitious—which is the approach taken by the tax authorities in this case—or because it was motivated exclusively or primarily by tax considerations (Articles L 64 and L 64 A of the Book of Tax Procedures).
 

It cannot be said that the committee would have taken the same position if there had been a challenge based on the ground that the purpose was primarily or exclusively fiscal.
 

Furthermore, it cannot be ruled out that a court called upon to rule on a gift of a sum of money subject to a usufruct may take a different approach from that adopted by the Committee on Abuse of Tax Law.
That said, it should be noted that in a transaction involving—not a gift of a sum of money with a reservation of usufruct—but rather a gift of securities with a reservation of usufruct followed by the sale of the gifted securities and the establishment of a quasi-usufruct on the sale price, the Council of State held, in a decision dated February 10, 2017, that there was no abuse of rights.
 

In this case, the Council of State held that the quasi-usufruct on the sale price did not call into question the donor’s charitable intent, as the donor remained liable to the donees for a claim equivalent to the proceeds of the sale. 

(source: Lazard Frères Gestion)