What is a usufruct, and should you leave one?

A man remarries late in life. He wants his second wife to be able to stay in the house, and he wants the house to go to the children of his first marriage in the end. Somebody tells him about a usufruct, and it sounds like the answer.

It is an answer. Whether it is a good one depends on things the will drafter rarely asks about, and the people who find out are the widow and the children, in the same house, for the next twenty years.

What a usufruct is

A usufruct is a limited real right. It gives the holder, the usufructuary, the right to use property and to take its fruits, meaning its income and produce, for a period, usually the rest of their life. Ownership of the property belongs to somebody else, the holder of the bare dominium, who owns it subject to the usufruct and will own it outright when the usufruct ends.

Applied to a house, the usufructuary may live in it or let it and keep the rent. The bare dominium holder owns it and can do almost nothing with it until the usufructuary dies.

The commonest form in a will is exactly the one above: the family home to the children, subject to a lifelong usufruct in favour of the surviving spouse. It also appears over farms, over investment portfolios, and occasionally over whole estates.

Our guide on testamentary trusts covers the main alternative, and the comparison at the end of this page is the decision most testators should actually be making.

What the usufructuary can and cannot do

Can: live in the property, let it and keep the rent, farm it and keep the crop, hold the investments and take the income.

Must: maintain the property in the condition received, fair wear and tear excepted, pay the ordinary running costs, and generally act as a careful owner would.

Cannot: sell the property, bond it, fundamentally alter it, consume the capital of an investment portfolio, or leave it to anybody in their own will. When the usufructuary dies, the right dies with them.

That maintenance obligation is the first source of trouble. A widow of eighty on a pension is responsible for the roof of a house she does not own, for the benefit of stepchildren who will inherit it. The will rarely says who pays for the roof, and the law's default answer is that ordinary maintenance is hers.

What the bare dominium holder actually has

An asset they cannot use, cannot easily sell, cannot occupy, and cannot borrow against on any sensible terms, for an unknown period that may be decades.

A bare dominium can in theory be sold, but the market for a house that comes with an elderly occupant entitled to remain for life is thin and the price reflects it. In practice the children wait.

Waiting is where the second source of trouble lies. A usufructuary who lives to ninety-five has held the house for thirty years. The children are themselves in their sixties when they finally inherit, having watched their inheritance decline in condition because the person maintaining it could not afford to, and having been unable to help their own children with it in the meantime.

The estate duty treatment

This is the part that surprises people, because they assume a usufruct is a tax-efficient device. It can be, and it can also be the opposite.

On the testator's death. The property is in the estate at its full value. The Estate Duty Act then values the usufruct by taking 12% of the fair market value of the property as its annual value, and capitalising that over the life expectancy of the usufructuary according to the prescribed tables, or over the fixed period if the usufruct is for a term shorter than life. The bare dominium is worth the balance.

Where the usufruct goes to a surviving spouse, its value qualifies for the spousal deduction and attracts no duty. The bare dominium going to the children does attract duty, subject to the abatement. Our guide on how estate duty is calculated and the executor fees and estate duty calculator set out the mechanics.

On the usufructuary's death. The usufruct ends, and the bare dominium holder becomes full owner. But section 3(2)(a) of the Act includes the usufruct in the usufructuary's estate for estate duty purposes, and section 5(1)(b) values it as the benefit that passes when it ends: 12% of the property's value at that date, capitalised over the life expectancy of the person who next becomes entitled to the use, usually the bare dominium holder, not over the usufructuary's own. If that holder is a trust or company, the period is 50 years. Where the bare dominium holder becomes full owner, a proviso caps the figure at the property's market value at that date less what the bare dominium was worth when the usufruct was created. With adult children or a trust taking over, the result is most of the property's value. The children, who receive the full property, are usually the ones who bear that duty.

So the same house can be taxed in part on the first death and again on the second, and the second bite falls on the people who were supposed to be protected. The 12% rule also produces odd results: where a property could not reasonably yield 12%, the Commissioner may fix a lower annual value, but that has to be argued for.

Anybody considering a usufruct of any size should have the two-death arithmetic done before signing the will, not after the first funeral.

Where the disputes come from

Executors and attorneys see the same fights repeatedly.

Maintenance. Who pays for the roof, the geyser, the boundary wall, the rates arrears. The usufructuary says she cannot afford it; the children say it is her obligation and the house is deteriorating.

Letting. The usufructuary moves to a retirement home and lets the house, keeping the rent. The children object to strangers in the family home and to the wear. She is entitled to do it.

Selling. The usufructuary wants to downsize and cannot sell; the children want to sell and cannot either without her consent. Neither can move without the other, and the negotiation is between a widow and her stepchildren.

Improvements. The usufructuary spends her own money on the property; the children benefit. Or the children want to improve a house they will inherit and the usufructuary refuses access.

The second marriage. The usufructuary remarries and a new spouse moves into the house the children own.

Insolvency and creditors. A usufruct has value and can in some circumstances be attached by the usufructuary's creditors, which is not what the testator had in mind.

None of these is resolved by the will unless the will addresses them, and standard usufruct clauses address none of them.

Doing it properly, if you do it

A usufruct is not wrong in itself. Where it is used, the will should say:

Who pays for what, distinguishing ordinary maintenance, major repairs, rates, insurance and improvements.

Whether the usufructuary may let the property, and on what terms.

What happens if the usufructuary wants to move, for example a mechanism to sell and grant a usufruct over a substitute property or over the proceeds.

Whether the usufruct ends on remarriage or cohabitation, if that is intended.

A dispute mechanism short of the High Court.

The estate duty consequence, understood and accepted, with liquidity in the estate to pay it on both deaths.

The alternatives

Leave the house to the spouse outright. Simplest, no double duty, no bare dominium. The risk is that the spouse leaves it elsewhere, which is a real risk in a blended family and the reason usufructs exist. Our guide on disinheriting a child deals with the related question.

A testamentary trust. The house is held by trustees for the benefit of the spouse for life and then the children. It is more flexible than a usufruct, the trustees can sell and reinvest, the maintenance question can be provided for from trust income, and the duty treatment differs. It costs more to run.

A right of habitation. Narrower than a usufruct: the right to live in the property, without the right to let it or take income. Sometimes closer to what the testator actually meant.

A life policy for the spouse and the house to the children. Separates the two objectives entirely, if the estate can fund it.

Each of these is a different trade-off between protecting the spouse and protecting the children, and the right one depends on the ages involved, the relationship between the spouse and the children, the liquidity of the estate and how long the arrangement is likely to last. Our guide on writing a valid will covers the formalities; this is the substance the formalities carry.

Worked example

This example is illustrative. A man of 70 dies leaving a house worth R3 million. His will leaves the house to his two children from a first marriage, subject to a lifelong usufruct in favour of his second wife, who is 62.

On his death. The usufruct is valued at 12% of R3 million, which is R360 000 a year, capitalised over the life expectancy of a 62-year-old woman under the tables. That produces a substantial figure, most of the property's value, and it passes to the spouse free of estate duty under the spousal deduction. The bare dominium, the remainder, passes to the children and is dutiable subject to the abatement.

For the next twenty-six years the widow lives in the house. The roof is replaced once, at her expense, after an argument. She lets the granny flat to help pay the rates. The children, now in their fifties, visit less.

On her death at 88. The usufruct ends and the children own the house outright, now worth R7 million. The usufruct is included in her estate, valued not over her life expectancy but over that of the children, now in their fifties, and capped at R7 million less what the bare dominium was worth in his estate. That is most of the house's value, and although her own assets are modest, the duty on that value falls to be paid, and it is the children who effectively bear it.

The same house has been partially taxed twice, the widow spent two decades maintaining an asset she did not own, and the children inherited at an age when it no longer changed their lives.

A trust holding the house, with power to sell and reinvest and with income to fund maintenance, would have cost more to run and would have avoided most of that. So would a frank conversation, at 70, about what each party actually needed, which is the step the usufruct clause allowed everybody to skip.