USING USUFRUCTS IN ESTATE PLANNING – BY DON ALLAWAY AND LORRAINE FISHER
1. Estate Planning considerations
One of the major considerations in effective estate planning involves minimising estate duty payable and for this purpose the provisions of section 4 of the Estate Duty Act No.45 of 1955 (“the Act”), which provide the legislative framework for valuing a deceased estate, are utilised.
It is possible to reduce the estate of a first dying spouse by utilising the deductions offered by section 4(q) of the Act, as discussed below. The advantage of bequeathing assets to a surviving spouse is not that estate duty is reduced, but that it is deferred. Where a couple do estate planning, they should therefore assess the effect of the estate plan with reference to the estates of both parties. Common sense dictates against saving estate duty in the estate of the first dying by bequeathing everything to the surviving spouse, if this would create an estate duty problem for the surviving spouse. This is especially so because such a course of action can create other problems for the surviving spouse and the children of her/his marriage to the first dying (the deceased).
2.1 Broadly speaking, the value of an estate is calculated as being the “total value of all property” as determined in accordance with the provisions of the Act, less the deductions set out in section 4 of the Act. These deductions include funeral expenses, debts of the deceased, administration and other costs and expenses, donations made to recognised public benefit organisations and tax exempt institutions, and bequests and legacies made to a surviving spouse. The last-mentioned of these deductions is made in terms of Section 4(q), which we examine below.
2.2 Section 4A allows a deduction of R1 500 000. Each person who dies is entitled to an abatement of R1,500 000 and therefore one of the simplest estate plans is to bequeath a minimum of R1,500 000 to one’s children in equal shares to be administered in a testamentary trust. A limited period usufruct in favour of the surviving spouse should then be considered over the residue of the estate, which will have the added benefit that there will be no property to value in the surviving spouse’ estate (assuming that he/she outlives the usufruct period).
3. Section 4(m)
3.1 Usufructs are Included in the “property” of a person, and the value of a usufruct is calculated in accordance with Tables set out in accordance with the Act. These tables set out the life expectancy of males and females as at their age next birthday, as well as the present value of R1-00 per annum for life, capitalised at 6% over such life expectancy.
3.2 Section 4(m) allows a deduction of the value of a usufruct (or other like interest), where:3.2.1 such usufruct was created by the predeceased spouse of the deceased; and3.2.2 the property over which the deceased enjoyed such usufruct formed part of the estate of the predeceased spouse; and;3.2.3 no deduction was allowable in terms of section 4(q).
4. Section 4(q)
The amount deductible from the value of a person’s estate in terms of section 4(q) is the total value of property (which includes a usufruct – see paragraph 3.1 above) bequeathed to a surviving spouse, less any amount which such surviving spouse is required in terms of the will to dispose of to any other person or trust. No deduction is allowed where the property in question is bequeathed to a trust for the benefit of the surviving spouse where the trustees have a discretion to allocate such property to persons other than the surviving spouse. It is for this reason that we provide that 100% of the income must go to the surviving spouse for a specified period.
5. The use of the limited usufruct
The mechanics of this are as follows:
5.1 The testator gives to his spouse a usufruct of limited duration over certain assets. The duration of the usufruct would be stipulated to be slightly less than the life expectancy of his spouse (determined with reference to the tables in the Estate Duty Act 45 of 1955) and his will should then be updated from time to time in order to "push forward" the termination date of this usufruct as his spouse gets older. The testator would nominate the persons who will acquire the bare dominium or ownership in the assets, for example his children.
5.2 The usufruct granted to a spouse qualifies for deduction in terms of section 4 (q) of the Act which allows for a deduction of the value of property bequeathed to a surviving spouse (in this case the value of the usufruct would be determined in accordance with the tables already mentioned) and therefore this minimises the estate duty payable by reducing the value of the testator’s estate. The value of the usufruct is in this way “transferred” or “added back” to the estate of the surviving spouse.
5.3 Where the testator has granted a usufruct over the residue for a limited term to the surviving spouse, a financial benefit can be obtained if the surviving spouse outlives the usufruct, which is why the period of the usufruct should be set as being slightly less than the spouse’s life expectancy. This is because in such case there will be no “add back” of the value of a usufruct, in her/his estate, as the usufruct will have terminated before she dies. The full benefit of this device is only enjoyed if the surviving spouse outlives the term of the usufruct. If not, there is still a benefit but on a declining scale, depending on how long he/she lives. If she dies while the usufruct over the residue is in existence, the surviving spouse is no worse off (and probably better off) than had the residue been bequeathed to her and left by her to the children.
5.4 Furthermore in cases where the surviving spouse is appointed as a Trustee of a testamentary trust, it is important to ensure that he/she does not control the trust, in other words he/she has to be in a position where he/she can be outvoted and (if he/she is a beneficiary of the Trust) where he/she can rely on his/her co-Trustees to provide the necessary income for his/her needs after the limited usufruct (of 100% of the assets) expires. These provisions are a consequence of sections 3(3)(d) and 3(5)(b) of the Act which will deem the Trust Property to be the property of the surviving spouse if he/she was competent to dispose of the trust assets for his/her own benefit or for the benefit of his/her estate or could revoke or vary the provisions of the trust for his/her own benefit or for the benefit of his/her estate.
5.5 If the spouse dies before the period of the usufruct is up, the last-dying spouse will be liable for the estate duty on the value of the usufruct for the period remaining, which would be on a declining scale. It should be borne in mind that in the usual course, those who enjoy good health care and a reasonably healthy lifestyle are likely to outlive the life expectancy estimates set out in the table, which takes into account all peoples of South Africa.
6.1 Testator has assets to the value of R20 000 000. If he leaves these assets to his spouse, there is no estate duty payable by Testator (section 4(q)).
6.2 Spouse dies, with these R20 000 000 of assets in her estate. In other words, the R20 000 000 has now been “added back” to her estate for estate duty purposes. Unless she has subsequently remarried and has bequeathed these assets to her new husband (availing herself of the S.4(q) deduction again), her estate will be liable for estate duty on (at least) R18 500 000 (i.e. the amount in excess if R1 500 000).
6.3 If however Testator has assets to the value of R20 000 000 over which he gives his spouse a limited usufruct based on her life expectancy, the R20 000 000 in his estate will be reduced by the value of the usufruct.
6.4 Assume that this value is R18 000 000. If the spouse dies shortly after Testator, this R18 000 000 will be “added back” to her estate in that it will be included in her estate as an asset. The value of the usufruct will reduce for as long as the period of the usufruct endures. If the spouse outlives the life expectancy estimate, the value of the usufruct will have reduced to zero and as such there is no “add back” in the spouses estate, since the usufruct would have ceased.
7. Conclusion and Caveat
As set out above, the use of a limited usufruct from a legal perspective, certainly has benefits where the surrounding factors favour a usufruct. In all cases, we recommend that persons contemplating the use of this device obtain specific financial advice in relation to their own particular circumstances in order to ascertain whether the use of the device will be advantageous to them.