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Home , Estate (law), Life estate, Ownership, Real property, Usufruct

43 OUTILS CONTRACTUELS - - - -

a usufructa arrangement created, is a of the bare gene rally is treated as made. This gift may be subject U.S. to gift , but the value ofthe gift be may limited the valueto of property bare the interest. - What is the nature of the right of the bare owner? The “naked” or “bare” remainderman a to (equivalent owner a commonin ) is the the Upon property. the of owner legal usufructuary’s usufructua death, the ry’sinterest is automatically transfer red the bare to property owner who then owns the property full. in How- and when is it taxed? If the usufructuary is a U.S. , then the value of property subject a to arrangementgenerally included is thein usufructuary’s for U.S. estate tax purposes if the usufructuary was the onewho created the usufruct and gave the bare . In that property bare gene the case, owner rally receivesa tax basis the in property ------hile are a com mon succession-planning tool in ,like there is little U.S. law addressing the LE DÉMEMBREMENT DE PROPRIÉTÉ EST UN OUTIL UN OUTIL EST LE DÉMEMBREMENT DE PROPRIÉTÉ EN PATRIMONIALE TRADITIONNEL DE TRANSMISSION QUELLES EN SONT LES IMPLICATIONS DROIT FRANÇAIS. ? LE PRÉSENT À L’ÉTRANGER FISCALES NOTAMMENT AUX EXPOSE LES CONSÉQUENCES FISCALES ARTICLE D’UN DÉMEMBREMENT DE PROPRIÉTÉ RÉALISÉ ETATS-UNIS EN FRANCE. taxation of usufructs. Only the of , which follows reco civil law, gnizes a usufruct. No other U.S. state recognizes usufructs. So how does the treat such usufruct arran gements? This article will examine the usufruct, how the United States it, and how the rules apply practice. in - What are the rights of the usufruc tuary? The usufructuary has right the useto the property and isentitled to income from the property. The usufruc tuary’s interest is generally a similar to under . - How and when is it taxed? The tax treatmentusufruct a of arrange ment depends on the facts and cir cumstances each of arrangement. A usufructuary typically is taxed on the When property. the by earned income ORGANISER SON PATRIMOINE FAMILIAL PATRIMOINE SON ORGANISER WHAT’S A USUFRUCT? WHAT’S FROM THE UNITED STATES FROM THE

THE SOMEWHAT CONVULUTED VIEW CONVULUTED THE SOMEWHAT BASHA & EMERY, EMERY, & OF A COMMON FRENCH PLANNING TOOL FRENCH PLANNING A COMMON OF OF USUFRUCTS OF MCDERMOTT WILL MCDERMOTT ATTORNEY AT LAW , DC. WASHINGTON, LEIGH-ALEXANDRA U.S. TAX TREATMENT OUTILS CONTRACTUELS 44 [1] Treas. Reg. § 301.7701-4. 301.7701-4. § Reg. Treas. [1] [2] This is because an interest in a a in interest an because is This [2] “specified foreign financial ” is is asset” financial foreign “specified reportable on a Form 8938 if any any if 8938 Form a on reportable income, gains, losses, deductions, deductions, losses, gains, income, credits, gross proceeds, or or proceeds, gross credits, distributions from holding or disposing disposing or holding from distributions of the asset are or would be required required be would or are asset the of to be reported, included, or otherwise otherwise or included, reported, be to reflected on the taxpayer’s tax income taxpayer’s the on reflected return. Treas. Reg. § 1.6038D-2(b)(1). 1.6038D-2(b)(1). § Reg. Treas. return. tion with respect to its must have been have been must stock to its respect with tion by corpora the usufruct the of term the during paid any dividends stock, on imposed usufruct this of case in the addition, In remaindermen. wereto thereafter enjoyed the property by the terminated all and rightswithusufruct respect the death, usufructuary’s the Upon property. obligated to intact the preserve underlying was usufructuary the but lifetime, tuary’s during to the the usufruct usufruc subject of enjoyment and to the entitled was law, Dutch usufructuary the Under ended. period until usufruct the stock underlying the of owner the considered was usufruct aNether of ausufructuary that concluded IRS the in 8748043, PLR example, For to such entity.with respect obligations reporting or tax income to U.S. ject sub be may not such cumstances, cir the on depending therefore, and income, in the interest have no entity in an interest bare obligations. Generally, individuals holding a reporting tax income U.S. or tax income U.S. to may subject be not arrangement usufruct in the bare holding individuals the entities, in non-U.S. interests owns tuary usufruc the if purposes, tax U.S. for a trust or (e.g., estate) alife co-ownership of aform as treated is a usufruct whether of Regardless ruling. letter the in those to similar powers have administrative not did usufructuary the if purposes tax income for atrust as ausufruct treat not would IRS the that possible atrustee). is of It to role lar the (simi to usufruct the subject assets over the powers administrative had rights, usufruct his to in addition usufructuary, the ruling, the In purposes. tax U.S. for trust a as classified was ausufruct that concluded IRS the 9121035, PLR in example, For purposes. tax income for trust a as ausufruct (PLRs) characterized it in which rulings letter private issued has (the “IRS”) theNevertheless, Internal Revenue Service rules applied or in .” chancery ordinary the under beneficiaries the for it ving conser or protecting of purpose the for perty take to pro whereby declaration arrange “an by vivos inter by an or will as either created ment defined is trust ordinary An trust. ordinary an , treasury U.S. separate fiduciary or title owner, or under the no is there because co-ownership), of form (or estate alife as treated may be A usufruct usufructuary. the of estate in the inclusion no is there because over basis acarry- receives owner property bare the then the usufruct, created than the usufructuary other someone If death. usufructuary’s the of time the at property the of to value the equal APPLICABLE U.S. TAX TREATMENT OF USUFRUCTS OF TREATMENT TAX U.S. APPLICABLE [1] [1] ------entitled to liquidation rights interestwhere the holder is bare property Assets) Foreign – especially ment of Specified (State 8938 Form IRS on reportable is likely ownership bare doubt, from free not although addition, In position. take a contrary would however, IRS the possible, that is It rules. CFC the of purposes time for such during stock corporate the of owner the as treated was during term, the usufruct’s the usufructuary income ’s in the interest percent a100 had usufructuary the because that soned rea IRS The recognized. be not will interest proportionate person’s a U.S. decreases cially artifi that arrangement any but corporation, the of income in the interest person’s to such generally will be determined with reference portionate interest in corporation a non-U.S. pro Aperson’s case. in each circumstances and facts the all on based made be corporation person’s proportionate interest in a non-U.S. a of determination the that provide generally rules rules. These foreign corporation (“CFC”) controlled States United the applying for arrangement to the usufruct subject of stock the remaindermen was treated as the owner or usufructuary the whether analyzed PLR The to remaindermen. the paid be could dividends no and to usufructuary the paid to be taxed at death. Thus, the appreciated appreciated the Thus, death. at taxed to be estate usufructuary’s in the included is nothing “poof” and evaporates interest usufruct the death, donor.the subsequent At donor’s the of age the on based reduced is paid be will tax typically are gift French which on gift the of value the that perspective a French from fits ownership to the generation. next The bene nue the propriété giving and interest usufruct or ausufruit retaining client the ves invol often plan succession French A typical appreciation of the property. post-death the on only tax to income subject be will remainderman the therefore and nated elimi may be any built-in property in the gain planning, proper With death. decedent’s the of date the on property the of value fair to the equal property in the basis an tax income receives property such of the general, In purposes. tax U.S. for ror’s estate in the transfe arrangement to the usufruct transferred property the of value the include to may apply rule this to others, interests der remain the of agift makes and himself for rest inte a usufruct establishes a person If death. at estate donor’s in the included is property such of value the and retained as treated is trust the by to transferred property the to atrust, red retains transfer interests certain in property aperson if rules, tax estate U.S. the Under APPLICATION OF RULES IN PRACTICE IN RULES OF APPLICATION [2] . or bare ------45 OUTILS CONTRACTUELS - - - - interest interest vanishes at . Based on Mother’s age, she gets interest and pays French gift tax on 3.5 usufruit priété million Euros. Mother will need report to the in United States, but assuming she has her full $11,400,000 exemption amount, she will not U.S. any pay gift tax. As a result, the French gift tax paid will not be credited thein United States. Assume Mother dies 10 years later and the property is worth 8 million Euros. There will be no further French inhe ritance tax as the usufruit the full 8 million Mother’s death. However, Euros comes back her into U.S. taxable estate andtogether with other assets is subject U.S.to estate tax at a rate of 40%. She will not get a credit for the French gift tax paid 10 This years generally earlier. is an unfavo rable result. It solves the French tax problem at a reduced rate, but it does not solvethe U.S. estate tax inclusion issue with no crediting of the gift tax previously paid. That said, there is a positive aspect. When Mother dies, because the full value of the pro perty is includible her in estate, the property will enjoy a full step basis in up the date of to and thereforedeath millionvalue Euros), (8 the daughter a new will have 8 million Euros basis. property the sells shortly after her Daughter If mother’s death for 8 million Euros, she will nopay U.S. given gains tax. However, that itis French her basis under French law will be the 5 million euros value at the of time transfer and she will French pay capital gains tax unless she qualifies for some mother her and she (e.g., exemption other held it for more than 30 Daughter will years). be exposed french to capital gain tax on the difference betweenthe sale price realizedby Daughter of 8 million Euros less the 5 million value at transfer or 3 million Euros. This gain will be exempt from U.S. capital gains tax. Euros. Mother gives propriété the nue herto daughter also a U.S. and citizen retains the a 30% discount on the value pro of the nue - - - value all passes entirely the bare to property owner at the usufructuary’sdeath, typically the usufructuary’s child. theFirstly, concept of a usufruct is little known Thus, thein U.S. the arrangement law. is like ned other to more familiar U.S. concepts either trusta namely, or lifea estate/ interest depending on the characteristics of usufructs French arrangement.the Typically, are treated as life estates and bare property interests as remainder interests. A transfer by the donor a parent) (usually of the bare pro perty ownership interest the donee to (often a child) could give rise U.S. to income, gift and depending requirements tax reporting estate onthe asset question in (shares companya in or real property) and who is making the trans fer as a U.S. (such citizen/domiciliary or a non- U.S. non citizen, U.S. domiciliary (NCND). If the donor is a U.S. residing citizen France in (or a U.S. resident transferring a bare ownership interestFrench in property), the donor will be subjectU.S. to estate tax at theof time death. This is because the United States views the donor asnot relinquishingthe entireproperty but retaining a string, which is the usufruct interest. As such, the United States does not treat the gift as a completedgift but asa gift with a retained interest resulting in the full fair marketvalue of the asset at death being inclu - dible the in U.S. person’s estate and subject to U.S. estate tax. Furthermore, there is no credit for the gift tax paid France to the in earlier year of transfer unless the also paid U.S. gift tax, which would only occur if the lifetime transfers exceeded the exemption amount (currently $11,400,000). Let us look at examples. some Example 1. U.S. person creates and retains usufruct; gift of bare property U.S. person.to U.S.a residing citizen Mother, France, in owns her home France in worth 5 million OUTILS CONTRACTUELS 46 [3] See Treas. Reg. §§ 301.7701-3, -5. -5. 301.7701-3, §§ Reg. Treas. See [3] [4] See Treas. Reg. §§ 301.7701-2(b)(8) §§ Reg. Treas. [4]See (i), -5. -5. (i), to U.S. capital gains tax. gains capital to U.S. exposed be and Father from basis carry-over take will a Daughter Thus, estates. their of in either inclusion no is there because Mother or Father either of death the at in basis step-up However, no be would usufruct. there the create not did she because estate in her sion - inclu no is there dies, Mother When interest. usufruct the retain not did he because estate in his inclusion no is there dies, Father when law, tax U.S. under Daughter. instance, this In to interest property bare the and to Mother the usufruct gives the arrangement, creates to Daughter, interest Father property bare the giving and interest usufruct the retaining arrangement, the creating Mother of instead If usufruct. the creates party Third 3. Example 39320. GCM and 84-139 to similar Rev. to analysis Rul. up pursuant step 1014(b)(1) IRC an get arguably should child the case in law which French of by operation child to adult passes property of sion/ownership posses argue would taxpayer the however in basis, step-up no may argue IRS The sition. dispo the at tax gains capital U.S. increased have to would pay person aU.S. as Daughter allowed, were ). step-up no If ritance inhe and property of (vialaw acombination French local of operation via to daughter the /ownership passes of the property because step-up a basis for argument the port to sup However, guidance IRS is there 1014. IRC under basis in up step a from benefit not does property the that may argue Service nue Reve Internal the situs, non-U.S. is transferred property the and (NCND) domiciliary non-U.S. citizen and anon-U.S. is usufruct the of creator the When differ. may analysis basis in up step However, the non-U.S. are asset and Mother both because apply would issues tax estate or gift U.S. No resident). tax U.S. not is she citizen and aU.S. (she not is person non-U.S. a is Mother 1except in example is facts Same to person. U.S. property bare of gift usufruct; retains and creates person U.S. Non- 2. Example the surviving spouse’s death or until or remar spouse’s death surviving the until half decedent’s in the interest usufruct to a entitled is spouse surviving the spouse, first the of death the at and question in perty pro in the interest 50% adivided has spouse Each regime. marital property community have a marriage their time of the at residents and citizens French are who couple A married to die. spouse first of death at usufruct create regime property community under married Couple 4. Example ------with U.S. connections. planning to any clients property usufruct/bare recommending when cautious be should advisors case, the always not is this While ning problems when dealing with U.S. . plan major pose they can but in France, tool a are valuable succession-planning usufructs above, analysis the from gather can one As ting other treatment other ting elec without purposes tax U.S. for aforeign as treated is generally –which SCI an is entity an such of example An purposes. tax pany as classified aforforeign partnership U.S. bare the com holding in aforeign is interest if property filed be to required be may form Foreign to Certain ) pect (Return With Res of U.S. Persons 8865 - Form return. tax U.S. her with basis annual an on interest property bare person’s U.S. the of and value the reporting require would asset” financial foreign “specified a in is interest property bare the if annually required Assets) Financial (Statement Foreign of Specified 8938 - Form individual). an from if ($100,000 threshold filing the exceeds person anon-U.S. from interest ownership property bare gifted the of value ) Foreign tions with Foreign Trusts of Certain and Receipt Transac Return (Annual Report to 3520 - Form to, limited following: the not are but include, additional U.S. obligations. reporting These may have owner property bare U.S. The Reporting Requirements. estate. gross in the dable - inclu is and property community in the rest inte the reduce not does usufruct the of value the that held and applied (U.S.T.C. 1974) T.C. (62 Estate of In Lepoutre death. upon 84 usufruct the of by creation the reduced not is and estate decedent’s in the includable is share Yes. estate? decedent’s gross The dent’s dece in the included be property community the of value one-half decedent’s the Should domiciliaries. and residents U.S. both they are riage. At the time of the first spouse’s death, corporation for U.S. purposes tax foreign se” a“per as treated is –which SA an is entity an such of example An purposes. tax pany classifiedas a foreigncorporation for U.S. bare the com holding in aforeign is interest if property filed be to required be may form Foreign to Certain )pect (Return With Res of U.S. Persons 5471 - Form – This reporting is required if the the if required is reporting – This , a 1974 tax court decision, the the decision, court , a1974 tax – This reporting could be be could reporting –This [3] .

[4] . – This –This - This - This ------