Everything You Need to Know About Donations with a Life Estate
The 2024 Finance Act incorporated a Senate amendment that prohibits the deduction of restitution obligations related to gifts of money when the decedent retained the usufruct. Henceforth, the value of the restitution obligation is subject to estate tax.
The division of ownership involves splitting the full ownership of a property between the bare owner (who holds the property) and the usufructuary (who has the right to use the property and receive income from it). In the context of a gift, the donor may retain the usufruct of the property and transfer bare ownership to their heirs. This arrangement offers tax advantages, as it reduces gift taxes, which are calculated solely on the value of the bare ownership and not on full ownership.
Upon the death of the usufructuary, the bare owners regain full ownership of the property without any formalities. Article 1133 of the General Tax Code (CGI) states: “The reunification of the usufruct with the bare ownership does not give rise to any tax or levy when such reunification occurs upon the expiration of the term set for the usufruct or upon the death of the usufructuary.”
Separation of Ownership and Usufruct: The Case of Monetary Amounts and Consumable Assets
The division of property may involve:
• Real property,
• A portfolio of securities,
• A sum of money or any other consumable asset. This refers to an asset whose use results in its consumption. This is known as quasi-usufruct.
The donation of bare ownership of a sum of money is governed by Article 587 of the General Tax Code. This provision stipulates that the usufructuary may use the sum of money but must return an amount of equal value at the end of the usufruct (generally upon the usufructuary’s death and thus upon the opening of the estate). This obligation to return the funds—which was previously deductible from the quasi-usufructuary’s estate assets—allowed the heir to recover the amounts spent in the form of a tax deduction from the value of the estate (Article 768 of the General Tax Code).
End of the Tax Deduction for Restitution Debt: A Measure to Prevent Abuse
The 2024 Finance Act ends the deductibility of the debt owed to return the estate asset by the quasi-usufructuary. This type of arrangement is considered an abuse for the purpose of tax optimization. The authors of the amendment explain: “While the split sum of money was subject to gift tax only up to the value of the bare ownership at the time of the inter vivos transfer, the deduction of this debt from the estate’s assets for its full amount under full ownership constitutes an inconsistency that must be corrected.”
Key Takeaways
This anti-abuse measure applies to estates opened on or after the enactment of the 2024 Finance Act, which is December 29, 2023.
Furthermore, the donation of a sum of money with a reservation of usufruct cannot be considered a transfer of ownership. Unlike a traditional division of ownership, where the bare owner holds a real right in the donated property, the bare owner of a sum of money holds a claim for restitution against the quasi-usufructuary. The quasi-usufructuary may therefore dispose of and use the sum of money as an owner would, while the bare owner does not hold that sum as such.
Effective immediately, the restitution debt can no longer be deducted from the estate. The new Article 774 bis of the General Tax Code provides for the calculation of transfer taxes based on the value of this restitution debt. To avoid double taxation, the transfer taxes paid at the time the usufruct was initially established may be credited against the estate taxes.
