Donation of a Sum of Money with a Reservation of Usufruct: Beware of Abuse of Rights

Giving a sum of money subject to a right of usufruct does not result in any transfer of ownership for the donor, who remains in possession of the donated sum. The Committee on Tax Abuse ruled that such a gift was not abusive because it created a claim against the donee’s estate. Explanations by Stéphane Jacquin, Managing Partner and Head of Wealth Engineering at Lazard Frères Gestion.

Article 578 of the Civil Code defines usufruct as the right to enjoy property owned by another person. The usufructuary of real property may therefore occupy it or rent it out to collect rent. The usufructuary of a portfolio of securities receives dividends from stocks and coupon payments from bonds. Some assets do not generate income.
 

This is the case, for example, with a sum of money. To prevent the usufructuary of a sum of money from being deprived of all rights, Article 587 of the Civil Code provides that the usufructuary may use the money but is required to return an equivalent amount to the bare owner at the end of the usufruct—that is, in the case of a life usufruct, upon the usufructuary’s death.

In practical terms, the usufructuary of a sum of money may therefore take possession of it and use it as if he or she were the owner. This is referred to as quasi-usufruct. The obligation to return the funds arising from this use creates a debt in the usufructuary’s estate and, consequently, a claim against the bare owner’s estate, which the bare owner will assert upon the usufructuary’s death. Donating a sum of money with a reservation of usufruct therefore does not result in any immediate relinquishment of ownership for the donor, who remains in possession of the donated sum.

Therefore, one might question the validity of such a gift, since Article 894 of the Civil Code defines a gift as “an act by which the donor currently and irrevocably divests himself of the gifted property in favor of the donee, who accepts it.”
 

It was on this basis that the tax authorities challenged a gift of money, subject to a usufruct, made by a mother to her two sons. In this case, on December 30, 2010, the mother had made a gift of €3,200,000 to her two sons—€1,600,000 to each of them. The mother had reserved the usufruct of the gifted sum for the duration of her life.

Following his death on October 30, 2015, the sum of €3,200,000 was listed as a liability on the estate statement as a restitution debt owed to his two children, who were his sole heirs.
 

The tax authorities rejected this deduction on the grounds of abuse of rights under Article
L64 of the Book of Tax Procedures (LPF). They considered the gift to be fictitious on the grounds that the donor had not relinquished ownership of the property and that, consequently, she did not have the intention to make a gift.
 

The dispute was therefore referred to the Committee on Tax Abuse. In its opinion issued on May 11, the committee noted that Article 587 of the Civil Code establishes that the obligation to return property arises as a consequence of the creation of a quasi-usufruct and held that a gift of money subject to a reservation of usufruct is not necessarily fictitious.
 

However, the Committee on Abuse of Rights noted, based on the evidence provided by the heirs, that the mother held cash assets totaling €2,952,150 as of the date of the gift. The committee concluded that the gift should be considered fictitious to the extent of €247,850, corresponding to the difference between the amount gifted subject to a usufruct (€3,200,000) and the amount of cash available to the donor on the date of the gift (€2,952,150). It is not possible to donate what one does not own. The committee therefore concluded that, with respect to the amount of €247,850, the donation could not result in the recognition of a debt deductible from the estate’s assets.

Finally, the committee held that, pursuant to Article 587 of the Civil Code, the obligation to return property—which requires that, upon the expiration of the usufruct, the bare owner be given “either property of the same quantity and quality, or its estimated value as of the date of restitution,” is to be discharged, when the usufruct terminates upon the death of the usufructuary, from the estate’s total assets. In this regard, the committee noted that gifts made to the grandchildren in May 2013 had left sufficient assets in the donor’s estate to ensure repayment of the €3,200,000 debt and that these gifts had not impaired the obligation to preserve the substance of the sum of money given on December 30, 2010.
 

The committee therefore concluded that, under the circumstances of this case, the administration was justified in applying the abuse-of-rights procedure to reduce the amount of the debt deductible from the estate’s assets by €247,850, based on the quasi-usufruct established by the gift dated December 30, 2010.
 

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

It should be noted, however, that the abuse-of-rights proceeding allows the tax authority to challenge an act on the grounds of fictitiousness—which is the approach taken in this case—but also on the grounds of circumvention of the law. This second aspect of abuse of rights allows the tax authorities to challenge a transaction that is not fictitious but was motivated exclusively—or even primarily—by tax considerations (Articles L64 and L64 A of the LPF).
 

It is not possible to state today that the committee would have taken the same position if a donation of a sum of money subject to a usufruct were challenged on the grounds that it was made primarily or exclusively for tax purposes.
 

Furthermore, it cannot be ruled out that a court, when called upon to rule on a gift of money subject to a usufruct, might take a different approach from that adopted by the Committee on Abuse of Rights.
 

That said, it should be noted that in a transaction involving not a gift of money with a reservation of usufruct, but 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 ruling 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 intention to make a gift, as the donor remained liable to the donees for a claim for restitution equivalent to the proceeds of the sale.