What is a Usufruct?
Oxford Languages defines a usufruct as: ‘the right to enjoy the use and advantages of another’s property short of the destruction or waste of its substance’ – in simpler terms a usufruct is the legal right granted to a person in respect of the property of another person.
A usufruct is thus a legal right given by an owner to someone else to use the owner’s property for a limited time – usually a fixed term or a person’s lifetime. While a usufruct allows extensive rights over the asset, it does not transfer the ownership of the asset itself to the usufructuary.
While the usufructuary (the person who holds the usufruct right) can let the property, they are not allowed to sell it or bequeath it to another party.
The usufructuary also has obligations and responsibilities in regard to the property. He/she should ensure that the property is not damaged or altered in any way and at the end of the stipulated period, the usufructuary must hand the property back over to the rightful owner or heirs.
The usufruct must be used for its intended purposes, and the usufructuary is legally bound to act as a diligent owner that may not misuse the property. The usufructuary is also responsible for paying the property rates and general day-to-day costs of maintaining it. He or she is not obliged to do any extensive repairs that result from normal wear and tear of daily use. While there is no obligation for the usufructuary to insure the home against storm, fire, or other such damage, it is advisable and in his/her own interest to do so.
A usufruct comes into existence by means of a legal contract (notarial deed) during the lifetime of the owner of the asset, or in terms of a last will and testament.
Examples of usufruct
A usufruct can be utilised to serve a range of purposes.
Example1: a farmer bequeaths his farm to his son subject to a usufruct of his wife (to make sure she has the means to look after herself). His son becomes the bare dominium (registered) owner of the property but without the right to use or benefit from it until his mother’s death. However, with her consent, she may allow him to use the property as well, on conditions prescribed by her or agreed to between them.
In practice, the mother would let the farm to her son to enable him to farm it as if he is a tenant, for his own profit, and developing it as his eventual asset. The rental he pays to his mother would take care of her financial needs. However, if she wishes, the usufructuary (mother) can live and/or work on the farm herself, or rent it out to another farmer.
On her death or at the lapsing of a shorter specified period, the full ownership vests in the bare dominium owner (son).
Example 2: in his last will & testament a husband leaves his home to his child, subject to a lifelong use to his surviving spouse. On the death of the husband, the bare dominium ownership of the property transfers to the child, and a usufruct is simultaneously registered (in favour of the surviving spouse) against the new title deed.
The surviving spouse may choose to reside in the property or to let the property and collect the rental.
How is the usufruct value calculated?
- The first step is to determine the fair market value of the underlying asset
- Then the annual value of the right must be established,
- Lastly, the annual value of the right is capitalised by discounting the annual amount over a certain period – usually a person’s life expectancy or a fixed period. Special tables A and B has been issued in terms of the Estate Duty Act (Life expectancy tables: Section 29 of the Estate Duty Act 45 of 1955 (Government Notice R1942 of 23 September 1977)
Rather than breaking our brains, let’s rather look at an example and formula:
- Fair market value of property = R6 million,
- Annual value = x 12%,
- Usufruct in favour of male, age next birthday 50 years
6,000,000 x 12% = R720,000 x 7,60201 (as per Life Expectancy table A – Age next birthday 50)
= Usufruct value: 5,473,447.20
What is the Estate Duty implication of a Usufruct?
In short, upon the death of the property owner, the value of the usufruct is determined and this value forms part of deemed assets for estate duty calculations.
For simplicity I will refer to two types of usufructs:
- Commencing usufruct
This usufruct commences at the date of the contract or as per conditions of the will – example: In his will Mr X bequeaths to his first-born grandson, Peter (age next birthday 20 as at date of death of Mr X) a usufruct over the farm which is bequeathed to his son, Adam. The value of the farm is R6 million
Formula for calculating the usufruct value:
Fair Market Value R6,000,000 x 12% = R720,000 x 8,29471 (as per Life Expectancy table A – Age next birthday 20 for Peter)
= Usufruct Value R5,972,191.20 = Value to be included for Estate Duty purposes
For the apportionment of estate duty, the usufructuary will be liable for the estate duty that accrues to the value of the usufruct. Should the usufruct be in favour of a surviving spouse, a section 4q deduction will be allowed.
- Ceasing usufruct
This usufruct ceases at the end of the period of the usufruct, either at the end of the term (i.e., 50 years) or at the date of death of the usufructuary – example: if we use the same example above it would be at the death of the grandson.
In 2021 Adam, 65yrs owns the bare dominium, and Peter, 40yrs, has the usufruct right over the farm. Sadly, Peter passes away unexpectedly and the usufruct now reverts to the bare dominium owner, Adam.
Formula for calculating the usufruct value:
Fair Market Value R8,000,000 x 12% = R960,000 x 6,00726 (as per Life Expectancy table A – Age next birthday for Adam)
= Usufruct Value R5,766,969.60 = Value to be included for Estate Duty purposes
In this case, the apportionment of estate duty falls to the bare dominium owner, Adam, who will be liable for the estate duty that accrues to the value of the usufruct.
A usufruct may be a great estate planning tool, but it is certainly not to be taken lightly. Make sure you speak to a professional for assistance.
And most importantly, understand the estate duty and liquidity implication of a usufruct on death