A reader would like to know the process of setting up a usufruct over a property owned by her father that she will eventually inherit in terms of his will.
She says the market value of the property is R3-million and that his life expectancy is three to five years.
See the reader’s question here.
In this situation, it is useful to understand what a usufruct is.
This is a legal right created for an asset where someone other than its owner is given the right to use it as well as enjoy profits and advantages of the asset.
In the majority of instances, a usufruct is created in someone’s will. This does not, however, mean it cannot be done outside of a will.
The use and enjoyment is bequeathed to the usufructuary and the remainder (bare dominium) to another person.
Effectively, ownership of the asset is split into two groups of rights.
A typical scenario is where a surviving spouse is granted the usufruct over a residence until her death and the bare dominium is bequeathed to a child, who becomes the full owner after her death.
The value of a usufruct can be calculated using a set formula that includes a predetermined life expectancy for the usufructuary and it is not up to the parties to decide.
The value of the bare dominium is then calculated by using the market value of the property less the value of the usufruct.
So if the reader wants a usufruct to be set up in her favour until her father’s death, upon which she then becomes the owner, the calculation for the usufruct will be based on her life expectancy.
But if she had intended to become the owner of the bare dominium now and her father to remain the usufructuary until his death, his life expectancy will be used to determine the value of the usufruct.
Creating a usufruct in this way brings about another aspect to consider – donations tax.
Whether the reader is to receive the bare dominium or the usufruct, her father could be liable for donations tax if it is done before his death.
One can only donate up to R100 000 per tax year before incurring donations tax of 20 per cent.
When a usufruct is set up in terms of a will, the rules of estate duty will apply.
You can bequeath the first R3.5-million to anyone before incurring estate duty.
The reader should take proper advice before embarking on this course of action due to the potential for incurring donations tax and to determine the extent of the legal ramifications should a usufruct be created.
Depending on her needs, an alternative method of ensuring use and enjoyment of the property may be available to her and her father.
Ask the YourProperty experts a question here.