Passing on the Family Home: A Growing Trend in Estate Planning
Many people are unaware that it’s possible to transfer a property to their children without paying taxes. A notary explains how to do it, and the conditions that apply.
Can you pass on a property without selling it, without giving up the income it generates, and significantly reduce the tax burden for your children? French law says yes. Property ownership isn’t always a single, unified right. The law allows for a division: on one side, the right to use the property and receive income; on the other, the right to dispose of it – to transfer, donate, or sell it. This is known as the separation of ownership.
The Power of ‘Démembrement de Propriété’
A parent can donate the bare ownership (nue-propriété) of an apartment to their children today, while retaining the usufruct (usufruit). They continue to live in it or collect the rent. The children become owners, but for the future. When the parent passes away, the usufruct automatically disappears, and they inherit full ownership without additional inheritance taxes.
Once considered a complex technique, this approach is now recognized as a powerful estate planning tool, provided the rules and timing are understood.
Maximizing Tax Abatements
“Donating bare ownership is, from a tax perspective, the premier French tool for transferring wealth,” explains Jérôme Poltorak, a notary specializing in international estate planning. Still, understanding the nuances is crucial.
The value of the bare ownership is determined based on the value of the full ownership, according to a tax bracket dependent on the donor’s age. If a donor is 75 years old, the bare ownership is worth 70% of the property’s value; at 82, it’s 80%. Tax abatements apply to this transferred value: €100,000 per parent and child, and €31,865 for a donation to a grandchild. These abatements are individual, cumulative for a couple, and renewable every fifteen years, significantly reducing the tax impact of the transfer. The usufruct expires upon the parents’ death without further taxation.
Timing is Everything: Age and Asset Considerations
The value of the usufruct varies significantly with the donor’s age. The younger the donor, the smaller the proportion of the property’s value represented by the bare ownership. “The larger the estate, the earlier you should start,” advises Poltorak.
At 40, bare ownership represents only 20% of the property’s value. Caution is advised when the estate is limited. If a donor sells the property at an advanced age, the value of their usufruct may be low, limiting the proceeds of the sale and complicating potential relocation. “Conflicts with children can arise in such situations,” he notes.
An Irreversible Decision
Donating property is an irreversible act. A child can block the sale of a property, even if the parent needs to move into assisted living or relocate, resulting in significant costs. Careful consideration of one’s overall situation is essential before making a donation.
It’s not just about tax optimization; it’s about lifestyle choices and maintaining a desired level of comfort. Undervaluation of properties can as well lead to scrutiny from tax authorities.
Protecting Your Partner
Protecting a spouse or partner is another key consideration, ensuring they aren’t disadvantaged by transfers to children. This is particularly important in blended families.
In France, the legal right to a reserved portion of the estate for children remains strong. Donations between spouses, coupled with a will, can allow the surviving spouse to retain the usufruct of the primary residence, temporarily or for life, while preserving the children’s inheritance rights.
The Role of a Notary
Professional advice is invaluable, and often essential. For slight monetary gifts, a simple Cerfa form may suffice for French tax residents. However, for property transfers, a notary is legally required to establish the property’s value and ensure the transaction is properly documented.
The notary also provides guidance on maximizing abatements and choosing the optimal timing. They ensure proper archiving of documents for the long term.
Specific Rules for Non-Residents
Special attention is needed for individuals not residing in France for tax purposes. The applicable rules differ.
A particular challenge arises for residents of Anglo-Saxon countries, where the concept of bare ownership doesn’t exist. “It’s crucial to avoid double taxation: once in France on the bare ownership donation, and again abroad when full ownership is transferred,” warns Poltorak.
Frequently Asked Questions
- What is ‘démembrement de propriété’? It’s the legal separation of ownership rights, dividing the right to use a property (usufruct) from the right to own it (bare ownership).
- Is this strategy suitable for everyone? Not necessarily. It depends on your age, the value of your estate, and your personal circumstances.
- Can I reverse a donation of bare ownership? No, donations are generally irreversible.
- What is the role of a notary in this process? A notary is legally required to establish the property’s value, draft the necessary documents, and provide expert advice.
Pro Tip: Start planning early! The younger you are when you start transferring assets, the greater the potential tax benefits.
Did you know? The tax abatements available for donations can be renewed every fifteen years, allowing for ongoing estate planning.
Considering your estate planning options? Find a notary near you to discuss your specific situation and explore the benefits of ‘démembrement de propriété’.
