Advanced Discussion on the Tax Treatment of Usufructs

Planning strategies that split a property into usufruct and bare ownership interests are common in civil law jurisdictions, serving various tax and non-tax goals. However, these divisions can pose challenges in common law jurisdictions, particularly in determining tax implications. When there’s no common law counterpart, authorities often resort to analogies with common law structures. The division could resemble a gift of a future interest, a bequest effective upon the death of the usufruct holder, a foreign trust, or a joint tenancy with survivorship rights. Even thoroughly examining civil law rules,  answers often remain unclear.

When a U.S. citizen or resident owns the usufruct, they are typically taxed on the income generated by the property under the usufruct and have the right to use the asset. For real estate, the individual either resides in the property during their lifetime or is entitled to the rental income, thus liable for tax on that income. In the case of stocks, the individual is entitled to dividends and is taxed on this income. If the stock is sold, the proceeds are generally divided between the usufruct holder and the bare owner under foreign law, with the income/gain divided accordingly. The U.S. status of the usufruct holder may also have tax implications for the bare owner if they are also a U.S. person. For instance, a U.S. usufruct holder may trigger controlled foreign corporation status for a foreign company. In most cases, a U.S. person’s ownership of a usufruct interest often leads to foreign information reporting.

While the U.S. income tax implications for a usufruct holder are generally straightforward and unproblematic, the U.S. estate and gift tax consequences can be unfavorable if the usufruct holder is a U.S. person for U.S. transfer tax purposes. This discrepancy can be surprising, given the favorable treatment under foreign tax law.

For a U.S. bare owner, which is more common when the usufruct holder is not a U.S. person, there’s usually no current income tax inclusion related to the income generated by the property under the usufruct, except in the case of a sale transaction or another extraordinary event. Issues on foreign information reporting often come up.


In France, due to inheritance and gift taxes between parents and children reaching up to 45 %, and a maximum credit per beneficiary of only €100,000 per child, and with such taxes on other transfers of up to 60 %, the transmission of assets inter vivos while reserving an owner’s usufruct is a significant estate planning tool. This strategy is arguably encouraged by the French tax system due to its exceptionally generous treatment.

Firstly, the gifted bare ownership interest is valued on a scale that favors the donor, which never leads to 100 % of the property’s value being attributed to the bare owner. At most, the bare ownership is valued at 90 % when the usufruct holder is 91 years old or more.

Furthermore, gifts in France result in a stepped-up basis to the fair value of the gifted property at the time of the gift, eliminating pre-gift built-in gain for the bare ownership portion in the case of a sale during the usufruct holder’s lifetime. This step-up is increased further to the fair market value of the full property rights at the time of the transfer of the bare ownership after the usufruct holder’s death in the case of real estate assets.

Moreover, because France does not have an equivalent rule to IRC section 2036, usufruct interests that terminate at death by operation of law cause the future increase in value to be excluded from the taxable base for inheritance tax purposes. As a result, the bare owner will not be required to liquidate estate assets to pay the transfer tax on the divided ownership property.

Finally, because the €100,000 exemption on a transfer under French law renews every 15 years, the exemption is doubled if the transferor dies more than 15 years after the transfer. This combination of factors makes the divided-ownership strategy an extremely effective tool of French estate planning.

Divided Ownership Under French Law

Under French law, the principle of divided ownership splits a “full property interest” (similar to a fee simple interest under common law) into two concurrent interests: the usufruct and the bare ownership. The usufruct, which could last for an individual’s lifetime or a fixed term of years, grants the right to use and earn income from the asset for a specified period. The bare ownership, considered the current legal owner, doesn’t entitle enjoyment of the property until the usufruct interest expires.

The usufruct interest includes the right to use the underlying property while preserving its condition and benefit from the income generated by the property during the term of the usufruct. The bare ownership includes the right to sell the property. The usufruct interest ends by operation of law at the end of its term, during which the usufruct holder is responsible for maintaining the property’s condition The termination of a usufruct interest isn’t subject to the U.S. equivalent of probate. Instead, it’s administered by the French notary, who serves as the civil authority responsible for the distribution of inherited assets.”

A gratuitous transfer of bare ownership must be executed by a French notarial deed. French law requires the transfer to be made at least three months before the donor’s death to ensure tax compliance. If the bare owners are also the heirs of the usufruct holder, the deed may specify that the property division is an advance on the bare owner’s inheritance rights under France’s forced heirship regime.

Any legal or contractual conditions or restrictions applicable to the transfer are outlined in the notarial deed. These conditions can vary widely depending on the property’s nature and the donor’s objectives. For instance, the French Civil Code allows for a reversion right for a donor when the bare owner predeceases the donor without issue. Also, a bare owner is usually not allowed to pledge, sell, or otherwise transfer the property during the usufruct holder’s lifetime without their consent or without reinvesting into another asset on which the rights of the usufruct holder would be substituted. Any such transfer will nullify the property division.

Lastly, a lifetime usufruct interest may arise by operation of French law or under the notarial deed in favor of a surviving spouse at the death of the first spouse.

U.S. Tax Treatment

Several authorities address the U.S. tax treatment of a usufruct/ bare ownership arrangement. 

However, they provided inconsistent information. Below  is just an overview:

Life Estate vs. Trust


Life Estate: Rev. Rul. 64-249

In Revenue Ruling 64-249, issued in 1964 (1964-2 C.B. 332), the Internal Revenue Service (IRS) examined whether a Louisiana usufruct holder should be considered a shareholder of an S corporation under section 1371. The case involved a taxpayer and her husband who owned all the stock of an S corporation as community property. Upon the husband’s passing, the S corporation shares were bequeathed to their children, with a usufruct reserved for the surviving spouse (the taxpayer) for the remainder of her life.

The IRS noted that under Louisiana law (which is based on the French Civil Code), a usufruct grants the right to enjoy property owned by another and to benefit from its profits and utility. In the context of a corporation, this would correspond to the right to receive dividends.

The ruling clarified that the taxpayer was neither a guardian nor a trustee for the benefit of their children. Instead, she held her interest for her benefit. The relationship between the taxpayer and the children was likened to that between a life tenant and remaindermen. Based on this analogy, the IRS concluded that the usufruct holder had an income interest in the S corporation stock. Consequently, the dividends paid by the S corporation were required to be included in her gross income. Moreover, citing a Louisiana law, the IRS ruled that the usufruct holder is regarded as the shareholder of an S corporation for the purposes of section 1371.

Life Estate: LTR 201032021

ownership of a foreign holding company to her children and grandchildren, some of whom were U.S. persons. She intended to retain a usufruct in the holding company shares for her lifetime.

According to the said foreign country’s law, when there is a gift with a reservation of a usufruct, the full owner transfers title to another person (the bare owner) while retaining the current rights to use and enjoy the property for life. At the end of the usufruct term, full rights in the property revert to the bare owner. 

The holding company’s organizational documents specified that in case of a division of rights in the property, the usufruct holder had full voting power over the stock, while the bare owners had no voting rights. The donor was not obligated to restore the property’s value at the end of the usufruct term. Although the donor could alienate her usufruct interest, she lacked the power to sell the holding company shares. The articles of association allowed for limited voting rights to the bare owners, but the donor retained the right to veto any shareholder decision.

Among the rulings requested of the IRS was that the donor would be treated as owning a legal life estate in the holding company shares after transferring the bare ownership. The IRS cited Regulation section 301.7701-4(a) (entity classification rules related to trusts) and Rev. Rul. 64-249. The conclusion was that a trust was not established because the donor was neither a guardian nor a trustee for the benefit of her children and grandchildren but instead held her interest as a usufruct holder for her own benefit. Instead, the IRS concluded that the usufruct interest in the holding company shares should be treated as that of a life tenant in a common law state.


Trust LTR 9121035

In Letter Ruling (LTR) 9121035, a foreign individual was designated as the sole heir of his foreign mother through her will. The will stipulated that if the son validly waived his inheritance, his three children would inherit in equal shares, and the son would receive an unrestricted usufruct that would expire upon his death. The children held dual citizenship in the United States and the foreign country. The will further specified that the usufruct would cover the mother’s share of profits from various partnerships and other businesses. Additionally, if the son’s exercise of the usufruct caused a loss in the estate’s value, he would be obligated to restore that lost value from future profits. The will also appointed the son as the executor of the entire estate, with the condition that his executorship would terminate after 30 years.

After the mother’s passing, the son waived his inheritance and received the usufruct in his mother’s estate. He also assumed the role of executor. Consequently, his children became the bare owners of the estate assets, subject to his usufruct.

The Internal Revenue Service (IRS) analyzed the arrangement created by the mother’s will, governed by foreign law. According to regulation section 301.7701-4, the IRS concluded that the arrangement constituted a trust for U.S. federal tax purposes. Interestingly, the IRS focused solely on the entity classification regulations and did not explore whether the arrangement could instead be considered a life estate.

It’s worth noting that this ruling presents somewhat unusual facts, as the usufruct holder also served as the executor of his mother’s estate over an extended period.

Other Rulings of Interest: Subpart F Rules (LTR 8748043)

In Letter Ruling (LTR) 8748043, the IRS addressed the treatment of a U.S. bare owner regarding distributions between foreign corporations. The issue involved potential current taxation for the bare owner under the foreign personal holding company rules or subpart F rules.

Although the structure was complex, the central question was whether the usufruct holder or the remaindermen (bare owners) should be considered the owners of the foreign company stock for purposes of the foreign personal holding company rules (which have since been repealed) and controlled foreign corporation (CFC) rules. The IRS referred to regulation section 1.958-1(c)(2), which determines a person’s proportionate interest in a foreign corporation based on all relevant facts and circumstances. 

Additionally, for determining subpart F inclusions under section 951(a), a person’s proportionate interest in a foreign corporation generally relates to their income interest in the corporation.

The IRS reasoned that because the usufruct holder had a 100% interest in the corporation’s income during the usufruct term, they should be treated as the owner of the foreign company stock for subpart F purposes. Consequently, a dividend from one foreign corporation to another within the structure would not trigger immediate U.S. tax consequences for the remaindermen/bare owners. The IRS highlighted that this conclusion aligned with its position in Revenue Ruling 64-249.

Incomplete Gift Ruling: LTR 201825003

In Letter Ruling (LTR) 201825003, the taxpayer and the taxpayer’s spouse entered into a deed of transfer. The deed reserved a usufruct and possession of artworks for the taxpayer and spouse while granting a remainder interest to two foreign museums upon the death of the surviving spouse. As of the date of the letter ruling, the spouse had passed away.

Under the terms of the usufruct interest, which would expire upon the taxpayer’s death, the taxpayer could not sell or otherwise dispose of any of the artwork. Additionally, the taxpayer was barred from changing the disposition of the artwork to the museums. However, the taxpayer had the option to waive her life interest and usufruct by delivering some or all of the artwork (of which she currently retained physical possession) to the museums.

The deed specified several conditions subsequent:

  1. The museums had to comply with various requirements for exhibition.
  2. The museums must not become privately owned.
  3. Certain changes in law, such as a change that would cause the transfer to be taxable, were prohibited.

The deed was also subject to a condition precedent: a favorable ruling on the absence of a completed inter vivos gift for U.S. gift tax purposes had to be obtained. If any of the conditions subsequent were not satisfied, the usufruct holder would have the right to revoke the transfer. If the condition precedent was not satisfied, the deed would not come into force at all.

The donors and usufruct holders intended that, based on the terms of the deed of transfer, the gift would be incomplete for purposes of Regulation section 25.2511-2(b). Consequently, the full value of the artwork would be included in the estate of the surviving spouse. The ruling concluded that the gifts were complete, except for the condition precedent to obtain the favorable ruling, because the conditions subsequent that could cause a revocation were not dependent on any act of the taxpayer.

This ruling highlights the crucial relationship between the specific terms of property division and the U.S. transfer tax analysis of the division.

Testamentary Disposition: Lepoutre

In the Lepoutre case, the taxpayer argued that the usufruct interest created in the decedent’s community property interest (under the French marital contract adopted at the time of the decedent’s marriage) should not be included in the estate of the decedent. Alternatively, if included, it should be valued reduced by the value of the surviving spouse’s usufruct interest.

The U.S. Tax Court rejected the estate’s arguments, stating that “the antenuptial agreement provided for rights in the surviving spouse only upon the death of the other spouse.” Therefore, under Federal estate tax law, it was considered a testamentary disposition and a transfer of an interest in property at the death of the first to die.

In cases where local law provides for rights created during the life of the transferor but that arise only upon the death of the transferor, the contract providing those rights may be viewed as a testamentary disposition.

Louisiana Consumables Cases

In the Marshall case, the estate claimed a deduction for the obligation of the decedent under Louisiana law. The decedent had inherited an imperfect usufruct interest from her husband upon his death. The obligation was to restore equivalent property to the naked or bare owners of the mineral rights over which she had inherited the usufruct interest.

The Louisiana Civil Code provisions relevant to this case are as follows:

  • Art. 535: Perfect usufruct does not transfer ownership to the usufructuary; they are bound to use the property prudently and preserve it for eventual return to the owner.
  • Art. 536: Imperfect usufruct transfers ownership to the usufructuary, allowing them to consume, sell, or dispose of the property.
  • Art. 549: If the usufruct includes consumable items, the usufructuary can dispose of them but must return the same quantity, quality, and value to the owner at the end of the usufruct.

The district court held that the decedent had the right to use and consume the royalty interests she received. However, under Article 549, she was obligated to account for and restore the value of the royalty income she received during the entire period of her usufruct. 

Pursuant to IRC section 2053(a)(3), the estate was entitled to claim a deduction for the entire royalties received by Mrs. Marshall during her usufruct.

In a recent decision, the Fifth Circuit affirmed the IRS’s right to levy a bank account containing proceeds from the sale of securities. Under Louisiana law, the securities sold were subject to a surviving spouse’s usufruct interest, with bare ownership by the couple’s children. The surviving spouse had outstanding tax debts at the time of his death. The IRS levied the account on the basis that the children had no rights to the consumable assets by virtue of their bare ownership, other than as unsecured creditors of the usufruct holder.

The court’s analysis turned on an observation under Louisiana law that:

“A usufruct of consumables differs from a usufruct of nonconsumables because the usufructuary acquires ownership of the things and the naked owner becomes a general creditor of the usufructuary.”

This ruling and others address situations arising under Louisiana law, similar to the French quasi-usufruct model, and provide precedent for treating the quasi-usufruct holder as the owner of the underlying property for tax purposes while arguably providing support to claim a deduction for the quasi-usufruct debt obligation to the beneficiaries against the gross estate of the quasi-usufruct holder.


While the relatively limited authorities are not entirely consistent, they do offer helpful guidelines for analyzing the likely tax treatment of a usufruct/bare ownership property division. We emphasize the following considerations:

Review the Documents:

  • It is critical to thoroughly review the documents that establish the property division.
  • Consulting with foreign counsel is essential to better understand the rights of the parties as provided by local law.

Variety of Facts:

  • There exists a wide variety of facts related to usufruct/bare ownership arrangements.
  • These facts may include differing amounts of control retained by the usufruct holder/donor and varying splits of economic rights between the usufruct holder and bare owner.

In summary, navigating the complexities of usufruct and bare ownership requires careful examination of legal documents and expert advice to ensure compliance with relevant laws and regulations.

Income Tax Issues

Substantive Tax Treatment

In many ways, the substantive tax treatment of a U.S. usufruct holder is quite similar to that of a full owner.

1 Generally, it follows the economic rights outlined under foreign law treatment. Specifically, the usufruct holder is typically subject to tax on rents, dividends, or other income generated by the property subject to the usufruct. These economic rights should also be subject to tax in the foreign jurisdiction, allowing for a foreign tax credit to reduce the U.S. tax burden on the usufruct holder (unless the income received is considered exempt under foreign rules or is not taxable). In essence, the divided interest strategy should not create double income taxation.

However, there are complexities. For instance, a U.S. person retaining a usufruct on shares of a foreign corporation may be subject to U.S. anti-deferral rules, such as the subpart F regime or rules related to passive foreign investment companies. This can lead to timing differences between taxation in the foreign jurisdiction and the United States, especially when a U.S. person holds full ownership in foreign company shares.

Determining whether the usufruct holder or bare owner (or both) should be treated as the shareholder for applying U.S. anti-deferral rules can be challenging. For example, if an 80-year-old usufruct holder owns 51 percent of a foreign corporation, while the bare owner does not hold U.S. person status, the present value of the usufruct interest (discounted based on section 7520 rates) may not exceed 50 percent of the total value of the controlled foreign corporation (CFC).

Under section 958, the shareholder’s proportionate interest is determined based on all relevant facts and circumstances, considering their interest in the corporation’s income. A private letter ruling confirmed that a usufruct holder with exclusive dividend rights during the usufruct term is considered the owner of the shares for subpart F inclusions under section 951(a) during that term.

However, usufruct holders may not always have exclusive rights to all income. The bare owner might have rights to distributions treated as stock redemptions in the foreign jurisdiction but as dividends in the United States (under section 302). 

Additionally, the bare owner could have rights to accumulated earnings, while the usufruct owner only has rights to current-year earnings. Corporate decisions, such as withholding dividends from current earnings, can impact the allocation of income between them.

Voting rights further complicate matters. In France, usufruct holders generally exercise voting rights related to profits, while bare owners vote on decisions regarding the legal entity’s existence, form changes, mergers, or liquidations. Determining a shareholder’s percentage of both vote and value for section 957 tests, and applying section 958 rules, can be intricate.

For non-U.S. corporations actively conducting business, the uncertainty about CFC classification may not affect PFIC classification. However, foreign corporations with reserved usufructs often hold companies with investment portfolios or minority stakes in other firms. The corporation will likely qualify as a PFIC under section 1297 in such cases. U.S. usufruct owners relying on the CFC/PFIC overlap rule (section 1297(d)) may face PFIC exposure if the foreign corporation’s CFC status remains uncertain.

Foreign Information Return Reporting

The foreign information return reporting for a usufruct holder of an interest in a foreign entity or account would likely resemble the reporting for a full owner on forms 5471, 8865, 8621, and 8938, as well as Financial Crimes Enforcement Network Form 114 (the foreign bank account report). Taxpayers might consider including a footnote on the relevant form to explain the nature of the interest.

Regarding the maximum value of the interest on Form 8938, there is some ambiguity for usufruct holders. Should the disclosed value be based on the term interest or the full interest in the property? To value an interest in a foreign trust, Treasury regulations under section 6038D consider the value of amounts received during the reporting year and the value of the term interest, accounting for valuation tables under section 7520. However, it’s worth noting that, according to the authorities described in Part I, a usufruct/bare ownership property division may not be treated as a trust for U.S. income tax purposes. Section 6038D does not specifically address non-trust term interests in property. If the interest is akin to a jointly owned interest, both the usufruct and bare owners should report the entire value of the interest in the joint owner’s specified foreign financial assets. Similarly, the FBAR requires each joint owner of an account to report the full value. While this valuation is primarily a disclosure matter with no direct financial impact for the taxpayer, a conservative approach may use the higher value. However, for voluntary disclosure filings (including under the Streamlined Domestic Offshore Program), the chosen valuation could affect the penalty amount for the taxpayer.

Transfer Tax Issues

Bare Ownership Interest as a Completed Gift

When a U.S. person makes a gift of a bare ownership interest while retaining a usufruct, an initial question arises: Is the gift complete for U.S. transfer tax purposes? 

Depending on the rights retained by the usufruct holder and other factors, the gift of bare ownership may not qualify as a completed gift for U.S. transfer tax purposes, even if it constitutes a gift for French tax purposes. According to Reg. section 25.2511-2(b):

“As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete. But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case.”

In cases where a transfer of property is subject to a reserved power, the terms of that power must be examined to determine its scope. Although it may be uncommon, a usufruct holder might reserve additional powers that could render the transfer of bare ownership incomplete. This analysis considers all relevant facts and circumstances, including the deed creating the usufruct and foreign law. For instance, if a usufruct reservation on company stock allows the usufruct holder to declare an extraordinary dividend benefiting them but not the bare owner, the gift may be incomplete.

Practitioners sometimes refer to reversion rights commonly included in French deeds for transferring bare ownership (as described in Part I). Articles 951 and 952 of the French Civil Code allow for a reversion right that must be exercised and confirmed in the notarial deed if the bare owner predeceases the donor without issue. 

Under Treasury regulations, a gift is incomplete if the donor reserves the power to revest title in themselves. However, this right alone may not suffice to render the gift incomplete. 

A recent private letter ruling (LTR 201825003) analyzed a donation of bare ownership in certain artworks to a museum. Despite conditions precedent and reversionary rights, the IRS concluded that the gifts were complete because the conditions for revocation were independent of any act by the taxpayer. Reversion rights upon the death of the bare owner without issue or other terms providing additional benefits to the donor but beyond their control may not necessarily support an incomplete gift analysis.

Additionally, an incomplete gift could arise if the usufruct holder’s creditors have access to the entire property. As discussed in Part I, French law allows the quasi-usufruct interest holder to manage the portfolio as a legal title holder, including satisfying creditor claims. Consequently, in quasi-usufruct arrangements, the property division may be treated as an incomplete gift for U.S. transfer tax purposes.

Value of the Bare Ownership Gift

When a U.S. person makes a completed gift of a bare ownership interest and retains a usufruct, an additional question arises: How should the gift be valued for U.S. gift tax purposes? While U.S. gift tax regulations provide standardized methods for valuing remainder interests in property after a life or term interest, special valuation rules may apply in typical family estate planning scenarios under section 2702.

Section 2702 applies to “transfers in trust” to certain classes of family members where the transferor (or a family member) retains an interest in the trust. Despite the use of the term “trust,” these rules are broader and may also apply to transfers of term interests in property (including life interests). When there is a completed gift of a remainder interest and section 2702 applies, the partial interest retained by the transferor may be valued at zero. This results in a taxable gift equal to the full value of the property, not just the value of the remainder interest. 

In U.S. planning, specific trusts like grantor-retained annuity trusts allow donors to make gifts to family members with a gift tax base less than the full property value. In the case of a grantor-retained annuity trust, the retained interest is a fixed amount and qualifies as a “qualified interest” for valuation purposes using section 7520 principles.

However, Section 2036 poses challenges. It may cause gifted property with a retained life interest to be included in the gross estate of the donor upon death as a transfer of property with a retained income interest. Unfortunately, the value included at death would typically be the full property value, without a reduction for the value of the bare ownership gifted. 

Fortunately, estate tax inclusion usually does not result in double taxation. The previously gifted property should be excluded from “adjusted taxable gifts,” and thus from the amount used to calculate estate tax, under section 2001(b)(1)(B) because it is already included in the gross estate under section 2001(b)(1)(A). However, unlike France and many other civil law jurisdictions, there is no U.S. federal transfer tax benefit to a U.S. person in the reservation of a usufruct.

Despite the unfavorable U.S. transfer tax consequences for a U.S. donor with substantial assets, this planning tool may still be worthwhile for a U.S. person subject to French inheritance tax. If a U.S. person’s worldwide assets are around $5 million (well below the exemption), and they own valuable real estate in France (e.g., an apartment worth €2.5 million), significant tax savings related to French inheritance tax can still be achieved. Even if the full value of the French real estate is includable in the U.S. gross estate, the individual should not have a taxable estate for U.S. estate tax purposes if the property value and any prior taxable gifts remain below the applicable exemption level at death. Additionally, the usufruct holder’s heirs (if U.S. persons themselves) would benefit from a step-up in the basis of the property for U.S. federal income tax purposes.

U.S. Exit Tax

The reservation of a usufruct further complicates matters for a U.S. person who is a covered expatriate subject to the U.S. exit tax under section 877A. Under section 877A, U.S. gift and estate tax principles determine what a covered expatriate owns. For the “net worth” test, an individual is considered to own any interest in property that would be taxable as a gift under IRC chapter 12 of subtitle B if they were a U.S. citizen or resident who transferred the interest immediately before expatriation. 

In the case of a prior incomplete gift of the bare ownership interest, the usufruct holder would likely be considered to own a full interest in the property for U.S. gift tax purposes. However, it’s unclear how the net worth test would apply to the retained life interest, as these rules do not specifically address valuing a retained interest previously included in the gift tax base under section 2702.

The expatriation rules also address the valuation of interests in trusts, but their applicability remains uncertain. Most property divisions are more likely to be treated as life estate/remainder interests rather than trusts. 

Under the mark-to-market regime, a covered expatriate is considered to own any interest in property that would be taxable as part of their gross estate for federal estate tax purposes under IRC chapter 11 of subtitle B. Therefore, even in the case of a completed gift of a bare ownership interest, the expatriating usufruct holder may be subject to exit tax as if they owned a full interest in the property due to the likely inclusion of the property under section 2036. The intended result remains unclear, but questions about exit tax often arise regarding an expatriating bare owner.

While section 877A(h)(2) provides a step-up in basis to the fair market value of property as of the first date of residence for nonresident aliens who become U.S. residents and are later subject to the exit tax, it is not entirely clear how these rules apply to a usufruct holder. 

In short, the exit tax rules under section 877A create a complex landscape that intertwines the challenges of income tax and transfer tax regimes for a U.S. person who holds a usufruct.


While the income tax consequences for a U.S. citizen or resident usufruct holder are relatively straightforward and generally follow the economic rights of the property interest (except for the application of anti-deferral regimes), uncertainties persist regarding the treatment of foreign law divided ownership strategies within the context of U.S. information reporting, transfer tax, and exit tax rules.

In most situations involving global families, it is the bare owner, rather than the holder of the usufruct, who is a U.S. person. The usufruct holder is often a nonresident alien who establishes the property division for foreign estate planning purposes. Sometimes, one or more members of the younger generation move to the United States. Whether the reservation of the usufruct and gift of the bare ownership precede the acquisition of U.S. tax residency by the bare owner or occur after the child has already become a U.S. tax resident, this remains an unsettled area of U.S. tax law, creating substantial uncertainty for the U.S. bare owner.

Complexities arise when the usufruct holder is a non-U.S. person, resulting in the divided interest being partly inside and partly outside U.S. taxing jurisdiction. We had primarily focused on this scenario unless otherwise noted. The key U.S. federal income tax issues that arise for the bare owner who is a U.S. person include:

  1. Income Tax Reporting: Reporting income generated by the property subject to the usufruct.
  2. Computation of Gain: Determining gain on the sale of the property, including eligibility for a basis step-up upon the death of the usufruct holder.
  3. Antideferral Regimes: Applying various U.S. antideferral regimes to such an individual.
  4. Foreign Information Reporting: Complying with reporting requirements related to the bare ownership interest.
  5. Exit Tax Application: Understanding the implications of the exit tax regime.

Tax Treatment

Income Tax Treatment- Income

In basicdivided interest cases, the bare owner has no current right to the fruits of the property, resulting in no current income. For instance, in the usual scenario, the bare owner would not be entitled to rental income, interest, or dividends generated by the directly-held property subject to the reservation of a usufruct.

The situation becomes more complex when dealing with an indirect interest via a controlled entity, where the shares are the object of the usufruct and bare ownership interests. Often, the usufruct holder will gift the bare ownership of shares to family members while retaining control of the entity. Voting rights may be split between the usufruct and bare owner, with the usufruct holder typically deciding on the distribution of current-year or accumulated profits by the entity, while the bare owner generally decides on the liquidation of the entity or changes in its corporate form.

Under French law, distributions of ordinary dividends and annual income benefit the usufruct holder, whereas accumulated reserves primarily benefit the bare owner. Thus, if the usufruct holder chooses not to distribute the current-year profits of the entity, it may be considered an additional economic gift to the bare owner. However, the actual transfer of accumulated profits later takes the form of a corporate distribution (either as a dividend or as liquidation proceeds) under French law. The question of whether the corporate form excludes this distribution from the scope of any French transfer tax remains highly debated in French courts.

In one case, the highest French commercial court treated the distribution as effectively received by the usufruct holder, with a corresponding debt registered in the usufruct holder’s estate at the time of his death. However, the highest French civil court ruled that the bare owner, not the usufruct holder, has the right to receive a distribution of the accumulated reserves.

The situation creates uncertainty for U.S. bare owners regarding how to report accumulated earnings—whether as a gift from a foreign person or by the corporate form (dividend income or capital gain from liquidation proceeds). This uncertainty is further compounded when the entity’s status as a controlled foreign corporation or a passive foreign investment company is also uncertain.

Tax Treatment — Gain

The sale or other taxable disposition of property that is or was subject to a usufruct raises several questions for the U.S. bare owner. Whether the transaction occurs during the life of the usufruct holder or after their death, a fundamental question for purposes of determining the amount of gain for the U.S. bare owner (or former bare owner, in a case where the bare owner’s interest has ripened into full ownership) is the U.S. tax basis.

Tax Basis for U.S. Purposes

Generally,  a U.S. bare owner should be eligible for a step-up in basis under section 1014 upon the death of a U.S. usufruct holder. The value of the divided interest property will be included in the usufruct holder’s U.S. taxable estate by virtue of section 2036. Furthermore, the IRS has ruled that a step-up in basis applies to property inherited from a non-U.S. decedent under section 1014(b)(1), regardless of whether the property is included in a U.S. taxable estate.

However, we have not located direct authority addressing whether a bare owner is entitled to a stepped-up basis under section 1014 upon the death of a non-U.S. usufruct holder. To address this, we can analyze general principles relevant to both section 1015 and section 1014. Property acquired by gift typically has a carry-over basis with reference to the donor’s basis, while property acquired from a decedent is eligible for a stepped-up basis under section 1014.

The bare owner’s situation is somewhat of a hybrid—before the death of the usufruct holder, the bare owner has certain rights, but no possession of the property or the ability to dispose of it, realize its income, and so forth. This suggests that the property could be “acquired from a decedent” within the meaning of section 1014.

If the gift of the bare ownership constitutes a completed gift for U.S. transfer tax purposes and is likened to a remainder interest in the property, then the carry-over basis rules of section 1015 should apply.

In many cases, gifts of bare ownership interests are likely to be completed gifts, although certain powers reserved by the usufruct holder could make the analysis less clear, possibly resulting in an incomplete gift. Most quasi-usufruct arrangements would likely lead to the finding of an incomplete gift.

Section 1015 and the Uniform Basis Rules

Section 1015 provides that for computing gain from property acquired by gift, the basis is the same as it would be in the hands of the donor or the last preceding owner by whom the property was not acquired by gift. Reg. section 1.1015-1(b) further states that property acquired by gift has a single or uniform basis, even if more than one person acquires an interest in the property (such as in the case of a life tenant and remainderman. 

The “uniform basis” of the property remains fixed, subject to proper adjustments for items under sections 1016 and 1017 (such as depreciation or capital improvements). In a situation where a completed gift of a bare ownership interest is compared to a remainder interest, these uniform basis rules may apply to determine the amount of gain reportable by the U.S. bare owner if the underlying property is sold during the life of the usufruct holder.

The section 1015 regulations clarify that the date on which the donee acquires an interest in property by gift is the same as when the donor relinquishes dominion over the property, not necessarily when the done acquires the title to the property 

Therefore, the donee’s acquisition date occurs when the interests (such as those of a remainderman or beneficiary of a trust corpus distribution) are created by the donor, rather than the date the property is physically acquired.

While Rev. Rul. 68-268 addresses the application of uniform basis rules to the bequest of a remainder interest for purposes of sections 1014 and 1015, it finds that no step-up in basis applies to account for the increase in property value following an intervening life estate for which no value is included in the remainderman’s estate. Although this ruling does not directly address the ripening of a bare interest into full ownership, it provides some guidance.

1014 Basis Step-Up at Death of Usufruct Holder

Despite the lack of direct authority on complete or incomplete gifts of bare ownership interests, we think an incomplete gift that fully matures upon the death of a non-U.S. usufruct holder has a higher chance of qualifying for a 1014 basis step-up. However, it’s still uncertain if a U.S. person can get a section 1014 basis step-up when their property interest comes from the maturation of a bare ownership interest.

Determining whether a gift of bare ownership is complete or incomplete can be complex and potentially inconclusive. Even if an incomplete gift is identified, the implications for eligibility for a basis step-up under section 1014 are not clearly established in case law or other authorities. 

Section 1014(a) generally refers to “acquiring the property from a decedent,” but to qualify for the basis step-up, the property transfer must align with one of the section 1014(b) subparagraphs. In the case of an incomplete gift of bare ownership, the full interest of the bare owner in the property upon the death of the usufruct holder could arguably be considered “acquired by bequest, devise, or inheritance” as per section 1014(b)(1).

We believe that if a property was subject to a gift that was only completed upon an individual’s death, it could be classified as “inherited.” In other words, the supposed “gift” of the bare ownership was incomplete for U.S. transfer tax purposes, meaning the property would only be considered acquired upon death, but the IRS typically views property under section 1014(b)(1) as part of a decedent’s probate estate. 

Reg. section 1.1014-2(a)(1) states that property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent, is considered to have been acquired from a decedent. Notably, French law has no equivalent to probate or section 2036, so neither the usufruct interest (which ends by French law), nor the bare ownership interest, leads to the property being included in the French estate.

The French notary responsible for administering the estate under French law will not include the property in the estate tax return. However, the property may be considered when determining the forced heirship rules under French law, or in other ways that classify it as a testamentary transfer rather than an inter vivos gift. Given the potential absence of a foreign law equivalent to probate or even the concept of an estate as a legal entity, we believe the meaning of “property received by bequest, devise or inheritance, or by the decedent’s estate from the decedent” in section 1014(b)(1) should be analyzed in light of the relevant foreign rules.

Sections 1014(b)(2) and (b)(3) allow a basis step-up for certain trust transfers where the decedent retained powers until death. These sections imply that section 1014(b)(1) doesn’t provide a basis step-up to all arrangements that complete upon a decedent’s death, as they deal exclusively with trusts. 

If the property doesn’t fall within section 1014(b)(1), and the usufruct and bare ownership arrangement doesn’t qualify as a trust under section 1014(b)(2) or (b)(3), the IRS might argue that section 1014(b)(9) applies. This catchall provision requires inclusion in the decedent’s U.S. gross estate for a basis step-up eligibility.

In situations where the usufruct holder and decedent is a nonresident alien, and the property is not U.S.-situs, the property wouldn’t be eligible for a basis step-up if a section 1014(b)(9) analysis applies. This requirement seems inconsistent with Rev. Rul. 84-139, which held that a U.S. heir was entitled to a basis step-up, as the individual inherited the property within section 1014(b)(1).

The general counsel memorandum associated with the 1984 revenue ruling explains that estate inclusion wasn’t meant to be a universal requirement. It also highlights the problematic nature of these rules in the case of foreign situs property acquired from a nonresident alien. For example, such property would qualify for the step-up if inherited, but not if acquired by survivorship rights through a joint tenancy.

Rev. Rul. 2023-2 provides insight into the government’s view of these section 1014 rules. It states that in the case of an irrevocable trust settled by a decedent, the basis of the assets wouldn’t be stepped up under section 1014(a), because the asset wasn’t acquired from the decedent within 1014(b). 

The ruling summarized the section 1014 regulations and Rev. Rul. 84-139. To be eligible for a basis step-up, the property must meet the conditions of one of the section 1014(b) subparagraphs. The analysis focused mainly on section 1014(b)(1). The government clarified the meanings of “bequeathed,” “devised,” and “inherited”:

  • A “bequest” is the act of giving property (typically personal property or money) by will, as defined in Black’s Law Dictionary and Supreme Court precedent.
  • A “devise” is the act of giving property, especially real property, by will.
  • An “inheritance” is property received from an ancestor by bequest or devise under the laws of intestacy or property.

In the case of property transferred in trust, the IRS found that it was not the decedent’s death that transferred the assets, so section 1014(b)(1) didn’t apply. There’s a risk that the government might not view the ripening of a bare ownership interest as falling within section 1014(b)(1), even in a case where the gift was incomplete. Despite this recent authority, the fundamental question for the U.S. bare owner remains unresolved and merits a detailed review of the facts relevant to the particular situation.

Application of Antideferral Regimes

CFC Rules

Antideferral regimes like the CFC and PFIC rules may apply when a U.S. person has an interest in a non-U.S. corporation. Previously, a bare owner’s economic interest wasn’t enough to classify a foreign corporation as a CFC without evidence of voting rights. The entity’s status required a detailed analysis of whether the voting rights, possibly split between the usufruct holder and bare owner, resulted in effective control of the foreign entity under section 957(a)(1).

Changes to the CFC rules under the Tax Cuts and Jobs Act in 2018 suggest that attributing enough value to a bare owner of a non-U.S. company might classify that entity as a CFC, even if voting control remains with the non-U.S. usufruct holder or other shareholders.

Consider a scenario where a nonresident alien owns 90% of a French company’s shares, and a U.S. person holds the remaining 10%. If the nonresident alien gifts the bare ownership of her shares to her U.S. daughter, the daughter would be attributed 70% of her mother’s 90% of the company’s value for French transfer tax purposes. However, the mother would retain the right to control 100% of the company’s income.

Under these circumstances, the bare owner could be considered to have a greater-than 50% economic interest in the foreign company, potentially classifying the company as a CFC under sections 951(b) and 957. However, the extent of the bare owner’s entitlement to dividend distributions would be a crucial factor in the analysis.

If the foreign corporation is classified as a CFC, it could have implications for other U.S. owners. For instance, a 10% minority U.S shareholder may need to include subpart F income or GILTI if the French company is a CFC.

PFIC Rules

Even if the foreign company’s ownership structure is outside of the CFC rules, questions of PFIC status for the bare owner may arise. The PFIC rules are complex and even more so in the context of a usufruct/bare ownership split.

The analysis of LTR 8748043 could apply in the PFIC context as well, suggesting that the antideferral rules should not apply to a bare owner when the non-U.S. usufruct holder is entitled to dividends or other distributions. This approach aligns with reg. section 1.1291-9(j)(1).

Foreign Information Reporting

In the case of a completed gift of a bare ownership interest, the bare owner would likely be required to report the asset on the relevant foreign information return and on the foreign bank account report. In the case of an incomplete gift of a bare ownership interest, the bare owner might consider reporting on a protective basis. Consideration should also be given as to whether Form 3520 should be filed upon the death of the usufruct holder.

Exit Tax Consequences

The exit tax rules raise many questions, mainly because they rely on transfer tax concepts that are hard to apply to a usufruct/bare ownership situation. If a bare owner expatriates from the U.S., it’s necessary to determine whether the bare owner should be treated as owning the future interest for both the net worth test and the mark-to-market tax under 877A.

If the bare owner receives the remainder interest in a transfer from the usufruct owner and donor, and it’s classified as a completed gift for U.S. transfer tax purposes, the value of the remainder interest may be included in the net worth test. If the value of the bare owner’s net assets is high enough, then the question of how to apply the mark-to-market tax in relation to the bare ownership interest arises.

In short, the intersection of the unsettled U.S. tax treatment of usufruct and bare ownership property divisions with the undeveloped area of the law, the exit tax rules, leaves many questions unanswered.


Clients often contact advisers after the gift of the bare ownership has been made or with questions about whether the gift is taxable in the U.S. While it’s usually easy to assure the client that the gift is not taxable to the bare owner for U.S. purposes, more challenging questions arise. It’s crucial for the U.S. tax adviser to work closely with the foreign tax counsel to determine whether future taxable events and U.S. antideferral regimes that may apply to the bare owner could nullify the foreign estate tax planning that motivated the nonresident alien owner to gift the bare ownership.

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