Taxes: Usufruct of a securities account reduces gift tax

When it comes to transferring assets to the next generation, there is always the issue of gift tax. If securities accounts are transferred by way of anticipated succession, a so-called usufructuary account reduces the gift tax for the person receiving the gift.

Usufruct for gifts saves taxes

Especially when real estate is given as a gift by way of anticipated inheritance, one issue arises time and again: gift tax. With real estate in particular, however, it is quite possible and common to reduce the tax burden by assigning a usufruct to the property in favor of the person making the gift.

In the case of a rented property, this may look as follows:

• The property is given as a gift, ownership of the property is transferred to the person receiving the gift and entered in the land register.

• A usufruct is registered – with the result that rental income from the gifted property continues to accrue to the person making the gift.

The usufruct of the rented property effectively reduces the value of the property for the person receiving the gift, partly because they cannot derive any income from the property. The law takes this fact into account and takes the value of the usufruct into account when calculating the gift tax: the usufruct reduces the gift tax burden.

At the same time, the donor secures himself financially in this way and can, for example, continue to use the income from the rental for his own living expenses.

Usufruct of a securities account?

However, the assets to be transferred during your lifetime do not always consist of real estate. It is not uncommon for securities portfolios to be the subject of anticipated succession.

But is usufruct still a viable way to reduce the gift tax burden on the person receiving the gift?

Yes, because usufruct is merely the right to draw the “benefits” from an object (Sections 1030 et seq. BGB). In the case of a gifted custody account, usufruct means that the person making the gift receives the income (in particular dividends/interest) from the custody account, but the person receiving the gift is the owner (holder) of the custody account. Further share price performance is in favor of or at the expense of the new custody account holder. Future capital gains are due to the donee and are therefore not income for the donor.

Such a usufructuary custody account is conceivable for very different asset classes, such as shares and bonds, but also for investments in real estate funds, etc.

Advantages of a usufructuary custody account

Such a usufructuary custody account has various advantages:

• Compared to a gift of real estate, a usufructuary deposit can be transferred to the donee relatively quickly and with little effort.

• As with the gift of a usufructuary property, the donor continues to receive the income and can thus secure his or her financial position.

• Here too, the value of the usufruct reduces the gift tax value and thus the gift tax.

Valuation of a usufructuary deposit

However, determining the value of the custody account and the value of the income – and therefore the value of the usufruct – is not entirely straightforward. This is because the value of the custody account and the value of the income fluctuate.

When it comes to determining the capital value of the custody account, the value of securities in accordance with Section 11 (1) sentence 1 of the Valuation Act (BewG) is based on the date of the gift, i.e. the lowest market value on that date. It is therefore advisable to make a gift of securities accounts at a time when the market value is as low as possible. This simply reduces the taxable value of the securities account.

The extent to which the usufruct reduces the value of the custody account when determining the gift tax is based on Section 14 in conjunction with Section 15 BewG, on the so-called cash value of the usufruct. This is the sum of the income to which the donor is entitled for the remainder of his or her lifetime. As the amount of future income cannot be determined, the annual value is the value that is expected to be achieved in the future through income on an annual average (= forecast).

In order to take into account the statistical remaining life expectancy of the donor, the annual value of the income is multiplied by an age-dependent “capitalization factor” (§ 14 BewG): the shorter the life expectancy, the lower the factor.

Consequently, the younger the donor, the higher the value of the usufruct and the lower the gift tax value for the donee.

Creating clarity with banks and authorities

To avoid confusion with the tax authorities – both with regard to gift tax and income tax! -Income from a usufructuary deposit should ideally be transferred directly to the usufructuary (donor).

To ensure that the bank can issue the tax certificate for the income correctly, an agreement should be made with the bank regarding the usufructuary deposit. This simplifies the tax process considerably. 

Managing unforeseen events

In order to protect against unforeseen events, such as the death of the donee, it is advisable for the donor to seek legal advice when drafting the gift agreement.