Overseas Chambers of Peter Harris

Maison de la Boucterie
Rue de la Boucterie
Saint Saviour
Jersey, JE2 7ZW

The usufruit and CRS? How the OECD in its OCDE face has managed to turn a blind eye to French portfolio disclosures

March 6th 2017

The Usufruit and the quasi-usufruit in wealth management are less than well advertised as a simple and straightforward solution to the intergenerational succession to offshore portfolios. For example, this is of interest to Grandparents later in life who wish to gratify their childern or grandchildren without surrendering the ability to live off their assets.

A recent decision by the Conseil d'Etat, which set aside both a first instance and a Court of appeal decision, took the case as if at first instance. The judgment  has shown that, provided adequate drafting precautions are taken to remain within the strict wording of the Code civil, the use of a usufruit dismemberment coupled with a quasi-usufruit convention can, even in the closest family situations be considered non-abusive. For more details, contact me on that.

The CRS issues over Trusts and who exactly is to be reported, in what capacity, by whom and for what "account" need to be taken in perspective.

The OECD have, with five league boots, made Napoleonic strides in  marshalling the world into information shearing folds, but has reserved the full fleecing section for those involved with trusts. Each of the interveners in a trust is considered to have a reportable dare I say quasi-proprietary interest in an account. Any attempt to draw the multiplex nature of this to the attention of the OECD is met with a response indicative of a complete lack of understanding of the concept as it is.  If however one addresses it as the Organisation de Coopération et Développement Economique, then all become clearer, at least as to why.

That is the difficulty where administrative practice parts company with the laws of property and considers what it does not apprehend to be contractual rather than proprietary.

So why is the sauce for the equitable goose not sauce for the civil law ganders? Par for the course on the nearby Auteuil, perhaps? Or simply using the Code civil as an eye-patch?  One can only be civil, so:

The French usufruit over movables is well known, but its full usefulness in both a banking and wealth management is little understood outside France and civilian usufructuary systems.

What is even less appreciated is the subtlety which can be introduced into a succession over an investment portfolio in France by a convention de quasi-usufruit over the portfolio, which in effect carves out income and disposal rights to the usufruitier with an obligation to reimburse the nus-propriétaires.

For example, one opportunity for this, in France - why not elsewhere - arises in the aftermath of the sale of a Société civile, immobilière or otherwise, where the elder generation is left holding a usufruit, again well known in Jersey property law, and the next generation holds the nue-propriété. The use of a usufruit over movables such as shares and portfolios is also known in Jersey, and has provided a useful mechanism for those who have been made aware of it.  It is not restricted to the example.

The quasi-usufruit whether notarised or not, is a mechanism developing the mechanism whereby assets or cash consumed by the usufruitier constitute a debt of their estate due to the nus-propriétaires. The debt is deductible  from the value of the usufruitier's estate at death. The usufruit mechanism extinguishes at nil value on death, and is therefore not brought into account in the usufruitier's succession. The debt for that which has been consumed then is owed and paid to the nus-propriétaires.

It is now clear that French banks are only reporting the (quasi-)usufruitier of an investment account and omitting any indication of the nue-propriété.

How do they manage this? Simply: the porfolio account is in the name of the usufruitier alone and not the usufruitier and the nu-propriétaire. The nu-propriétaire in fact retreats from ownership as such to a mere right of créance for cash or assets consumed, taking the account or what is left on it back without charge to succession duty on the decease of the usufruitier, with a right to require restitution of capital consumed.  Neat isn't it? Hardly surprisng that the OCDE, in its French formation,  takes it all out on trust accounts, where the nu-propriétaire "equivalent" would also be exposed.

Rather than falling into the trap of justified outrage - of kettles calling pots black,  why not use it?

We have the legal machinery to institute a quasi-usufructuary mechanism available in Jersey, I have contributed to certain instruments using this, and it does work.

There is ample scope for its use in client relationships with the United Kingdom, as, for example,  a trust company can be a nu-propriétare, thus advancing capital  whilst retaining the right to restitution of cash or fungible capital consumed out of the UK resident's estate, whether situated in the UK or outside it, for example, in Jersey.

If Pascal Saint Amand is turning a Nelsonian blind eye to this Pan Gaia declarative absence so as to enable non-declaration of real and vested underlying interests in French portfolio accounts, let us use it as a non-trust instrument to unwind or re-engineer certain otherwise risky structures for those in aposition to do so.  Please note that even the French tax administration have stated that a usufruit is not a trust, even by their standards!

Please contact me whether you are banker, fund or investment manager or even trustee to see how you can use this fruitfully, with every aspect of the pun intended. If the process can pass through the notions of abus de droit proferred by the French tax administration, as confirmed by the Conseil d'Etat, it can certainly do the same elsewhere.

Peter Harris