Got a call today from a colleague. We had prepared his parents' estate plan and handled his father's estate administration when he died. He said his financial advisor was recommending his mother have two accounts - her own account and a usufruct account. Whoa!!!
If Mom sells stock over which she has a usufruct, she will have converted a nonconsumable (stock) to a consumable (cash). She then becomes the owner of ALL the cash but her estate will have a debt to the naked owners of this cash. If that cash is then used to purchase stock or mutual funds, those assets will be owned 100% by the surviving spouse - as far as the IRS is concerned for federal estate tax purposes.
Example. When Dad died, they owned 200 shares of ExxonMobil stock. Mom now owns 100 shares and has the usufruct of 100 shares. Mom later sells all 200 shares for $20,000. NO MATTER WHAT MOM DOES WITH THAT CASH, HER ESTATE OWES THE NAKED OWNERS $10,000 AT HER DEATH. If Mom buys Wal-Mart stock with that $20,000 and it grows to $50,000 (or decreases in value to $5,000), then all of the Wal-mart stock will be included in Mom's estate, but her estate will be entitled to a $10,000 deduction on the usufructuary accounting filed with the federal estate tax return within nine months of her death.
If Mom sells and buys and sells in a usufruct account, it can become an accounting nightmare. Sound confusing? It is.
Question:
Uncle leaves a usufruct to maternal niece, with naked ownership left to paternal niece. Usufructuary lives in house for approximately 10 years. Naked owner wrongfully pays property taxes the first 5 years, then gets reimbursement from usufructuary. Naked owner pays homeowner's insurance. Then, hurricanes Katrina and Rita hit. House is significantly damaged. City assesses damage at more than 51%. Usufructuary wants house repaired, but has no money. Naked owner has no money to repair house either. Insurance money obtained by naked owner after the floods are used to gut the house, mold remediation, seal the windows, and fix a gapping hole in the roof. Son of usufructuary, who is an attorney, threatens to file a declaratory judgement to compel naked owner to repair the house so his mother can "return home". Insurance company cancels liability insurance on house because of damaged condition. City of New Orleans offers to demolish the house free of charge. Naked owner, in a telephone conversation, makes usufructuary aware of City's offer. Usufructuary does not object, and says, "Maybe that is best and a new house can be built from the ground with Road Home Funds". Naked owner authoizes the demolition. Then, son of usufructuary, who is an attorney, says demolition was wrong because usufructuary did not give express consent. Who wins in a legal action?
Posted by: Henderson | April 22, 2008 at 04:57 PM