All about usufruct and its investment implications

What is usufruct and how does it differ from bare ownership?

Property ownership traditionally comprises three attributes:

• Usus: the right to use the asset
• Fructus: the right to enjoy the fruits (income)
• Abusus: the right to dispose of the asset (sell, gift, destroy)

When property is divided, these attributes are allocated between two holders:

• The usufructuary holds usus and fructus (use and enjoyment of income)
• The bare owner retains abusus (disposition of the property)

This temporary division of rights ends when the usufructuary passes away, at which point the bare owner regains full ownership, combining all attributes.

Usufruct arising from inheritance

Usufruct frequently appears upon a death, particularly under the legal matrimonial regime. Consider a married couple under this regime:

Upon an individual's death, the surviving spouse automatically receives the usufruct of all the deceased's assets, while the children inherit as bare owners. This provision protects the surviving spouse by guaranteeing them income, while preserving the capital for the children who will become full owners upon the surviving parent's death.

Voluntary division as an estate planning tool

During their lifetime, an owner can choose to voluntarily divide their assets. This technique allows for:

• Gradual asset transfer
• Significant reduction in estate tax burdens
• Retention of income until death

Example: A parent can gift the bare ownership of an investment portfolio to their children while retaining the usufruct. Gift taxes will be calculated only on the value of the bare ownership. Upon the usufructuary's death, the children become full owners of the asset without additional inheritance tax.

The notion of "fruits" and its ambiguities

Usufruct is theoretically limited to the “fruits” of an asset, meaning income naturally generated without altering the asset’s substance. In a financial context, this corresponds primarily to stock dividends, bond coupons and real estate rents. Conversely, capital gains and reinvested income are not considered fruits in the traditional legal sense, creating a gray area in modern investments.

The challenge of compound interest investments

A major challenge arises with capitalized investment funds, the core solutions offered by Easyvest. These vehicles automatically reinvest generated income (dividends, interest) instead of distributing it, which:

• Optimizes taxation
• Maximizes the effect of compound interest
• Enhances long-term performance

This practice poses an evident problem for the usufructuary: how to receive the "fruits" from an investment that distributes nothing?

Practical solution: define usufruct as an annuity

To resolve this contradiction, it is essential to define a suitable usufruct arrangement in the deed of division. The most common solution is to:

• Transform usufruct into an annuity: contractually define a percentage of the capital to be periodically paid to the usufructuary
• Set a reasonable rate: generally between 2% and 5% of the portfolio's value, calculated annually
• Include indexing: to maintain the usufructuary’s purchasing power over time

This definition must be established during the initial drafting of the division deed, as any later modification could be considered a new donation subject to taxation.

The essential balance between usufruct and bare ownership

A critical point to consider is the risk of fiscal requalification. If the defined annuity is disproportionate to what a normal usufruct would be, the tax authority might determine that:

• The donation was not genuine
• The donor actually retained full enjoyment of the asset
• Estate taxes should apply to the entire asset at death

The annuity should never be set at a level that "consumes" the entirety of the bare ownership. It must remain proportional to the income an equivalent distribution investment would generate (typically between 2% and 5% of the capital).

Usufruct and inheritance: agreement among heirs

When a portfolio invested in capitalized funds is subject to usufruct from inheritance, the situation can become complex. In the absence of prior arrangements, heirs (usufructuaries and bare owners) can negotiate an agreement defining:

• An annuity equivalent to what the portfolio would produce in distribution
• Payment terms (frequency, calculation, etc.)
• Conditions for portfolio arbitrage

This agreement, formalized in writing, helps avoid future conflicts while respecting the spirit of inheritance law. A notarial deed is not required in this case, unlike the conversion of usufruct on real estate.

Dismemberment accounts at easyvest

Easyvest offers a comprehensive solution for investors wishing to use property division as an estate planning tool:

• Opening of dismemberment accounts: a suitable structure that clearly distinguishes each party's rights
• Personalized calculation of usufruct annuity: our team determines a realistic and fiscally secure rate
• Automated payments: setting up regular transfers to the usufructuary’s account
• Distinct reporting: tailored documents for the usufructuary and the bare owner

This approach allows full enjoyment of the benefits of our long-term capitalized investment strategies while respecting each party's rights and optimizing asset transmission. Do not hesitate to contact our wealth managers to analyze your personal situation and determine if division meets your estate planning goals.