The usufruct: passing on ownership, keeping the income

A widow signs her apartment building over to her son, keeps living in it, and has a usufruct entered in the notarial deed. Three years later the roof must be replaced entirely, and the quote comes to 48,000 €. The son thinks that is her problem, because she collects the rent. She thinks it is his, because he owns the building. German law settled the question long ago.

Two rights in one asset

Anyone who wants to pass wealth to the next generation while still alive faces a conflict of goals. They want to transfer early, perhaps because of the tax allowances or to head off disputes among heirs. At the same time they often still need the income themselves, as a home or as retirement money.

The German Civil Code (BGB) resolves this conflict by separating ownership from the benefits. Ownership passes to the child, the benefits stay with the parents. Lawyers call this a transfer subject to a reserved usufruct, and practitioners speak of anticipated succession (vorweggenommene Erbfolge).

The term anticipated succession does not appear in the statute in that form. It names no separate type of contract but an economic aim: assets go now where they would otherwise have gone on death. Legally the transaction is almost always a gift, and specifically a gift encumbered with a usufruct.

What benefits are is defined in section 100 BGB: the fruits of a thing or a right and the advantages its use provides. For a let building these are the rents; for a house one lives in, the advantage of living there. The usufructuary may therefore let the property or move in personally.

A usufruct need not be comprehensive. Under section 1030(2) BGB it can be limited by excluding individual benefits. Parents may, for instance, reserve only the rent from one particular flat and leave the remaining units to the child for free use straight away.

The object of a usufruct need not be a physical thing. Section 1068 BGB also allows it over rights, and the rules for things then apply accordingly unless the following sections provide otherwise. Company shares can thus be transferred while the profit entitlements stay with the transferor.

This course concentrates on the most frequent case: a plot of land, usually a rental building or the family home, passing to a child subject to a reserved usufruct. The rules for rights and business interests follow the same basic ideas but carry refinements of their own that are not explored here.

What the usufructuary may do, and where the power stops

Under section 1036(1) BGB the usufructuary is entitled to possession of the asset. He holds the keys, signs the leases and decides who moves in. The child has become the owner but can neither move in nor give tenants notice as long as the usufruct lasts.

That right of possession comes with a constraint. Under section 1036(2) BGB the usufructuary must preserve the previous economic purpose of the asset and act according to the rules of proper management. He may not unilaterally turn a residential building into a warehouse or a restaurant.

Section 1037(1) BGB is even clearer: the usufructuary may neither reshape the asset nor alter it materially. An extension, a demolition or a split into condominium units are therefore outside his powers. They remain matters for the owner, who in turn must respect the right of use.

Ordinary wear, on the other hand, is not charged to the usufructuary. Section 1050 BGB makes clear that he is not answerable for changes or deterioration caused by the proper exercise of the usufruct. Worn floors or faded paintwork after twenty years are not damage he has to make good.

One feature sets the usufruct apart from almost every other property right. Under section 1059 BGB it cannot be transferred. The mother can neither sell it nor give it away nor leave it by will. What she can hand over is the exercise, for example by letting the flat or allowing a third party to exercise the right of use.

Against interference the usufructuary is protected like an owner. Section 1065 BGB declares the claims arising from ownership applicable accordingly. If anyone impairs his right, including the owner, he may demand surrender, removal of the interference or that it cease, exactly as an owner could.

Who bears which costs

The cost split is where families argue most often, and the statute regulates it with surprising precision. The basic idea is that whoever draws the income bears the running costs, and whoever holds the substance bears the extraordinary ones.

Under section 1041 BGB the usufructuary must maintain the asset in its economic condition. Repairs and renewals fall on him only to the extent that they belong to ordinary upkeep. The dripping tap, repainting the stairwell or servicing the boiler are therefore paid by the mother.

Replacing a roof in full, exchanging the whole heating system or restoring the building after water damage go beyond ordinary upkeep. The statute does not place these costs on the usufructuary. Whether the owner must bear them is for the transfer agreement to say, and that is exactly why it should.

The owner can only react if he is told. Section 1042 BGB obliges the usufructuary to notify him without undue delay if the asset is destroyed or damaged or if an extraordinary repair becomes necessary. The same applies when a third party claims a right in the asset.

Then there is insurance. Section 1045 BGB requires the usufructuary to insure the asset at his own expense against fire and other accidents where proper management calls for it. The claim against the insurer must belong to the owner. If insurance is already in place, he pays its premiums.

The most important cost rule is section 1047 BGB. The usufructuary bears the public charges resting on the asset, such as the property tax (Grundsteuer). The only exception is extraordinary charges regarded as imposed on the capital value. The ordinary property tax assessment is therefore the mother's business.

The same provision covers private-law charges that already rested on the asset when the usufruct was created, in particular interest on mortgages and land charges. What is NOT there is worth noticing: repayment of principal. The statute assigns the interest to the usufructuary, not the paying down of the loan itself.

If the usufructuary incurs outlays he is not obliged to make, reimbursement under section 1049 BGB follows the rules on agency without mandate. He may remove any fixture with which he has equipped the asset. Someone who voluntarily fits a new kitchen can therefore take it along when leaving.

All these rules apply only insofar as the parties agree nothing else. Many transfer agreements deliberately depart from them, for example by having the parents also take on major repairs so that the child does not pay before receiving any income. Such arrangements have tax consequences, which the second module touches on.

Creation: notary and land register

Land is not transferred with a handshake. Under section 311b(1) BGB even the contract by which someone undertakes to transfer ownership of land must be notarially recorded. The transfer agreement therefore always passes across a notary's desk.

The promise to make a gift also needs notarial form under section 518(1) BGB. A defect of form is cured by performance, which for land means conveyance and registration. Nobody transferring a house relies on that cure, however.

A usufruct over land is a right in rem. For it to arise, section 873(1) BGB requires two things: agreement between owner and holder, and entry in the land register (Grundbuch). Without registration there is no usufruct, at most a contractual arrangement between the parties.

Under section 19 of the Land Register Code (GBO), an entry is made when the person whose right is affected consents to it. In a transfer with a reservation, that is the new owner, the child. In practice the notarial deed therefore contains both the conveyance to the child and the consent to register the usufruct for the parents.

Registration is more than a formality. It makes the usufruct effective against everyone, including the child's creditors and later buyers. If the child sells the house, the usufruct survives; the buyer acquires land whose income is not his for the time being.

Section 311b(2) BGB draws a limit. A contract by which someone undertakes to encumber his future assets, or a fraction of them, with a usufruct is void. A usufruct is therefore created over specific items, not wholesale over whatever someone may own at some point.

Over movable things the usufruct arises differently. Section 1032 BGB requires delivery of the thing and agreement that the acquirer is to hold the usufruct. For artworks, furniture or vehicles handed over together with a house, it is this rule that applies, not the land register.

The end: death, return and running leases

The usufruct is tied to the person. Section 1061 BGB provides that it is extinguished on the death of the usufructuary. It cannot be inherited, and that is precisely what makes it fit anticipated succession: when the parents die, full ownership automatically reunites with the child.

In the land register the extinguished usufruct remains visible, though, until it is deleted. That does not change the legal position: it already ended with the death, without any notice, waiver or declaration by the owner being needed. Deletion merely brings the register back into line with that.

If the usufruct ends during the holder's lifetime, for example through a waiver by the parents, section 1055(1) BGB requires the usufructuary to return the asset to the owner. Such a waiver can itself be a gift to the child, whose tax side has to be examined as a separate step.

If the usufructuary has let flats, those leases do not end with him. Section 1056(1) BGB applies the rules on the sale of let residential property accordingly: the owner steps into the running contracts. The mother's tenants thus become the son's tenants.

In return the owner receives a special right of termination. Under section 1056(2) BGB he may give notice observing the statutory period. If the usufructuary waived his right, notice is only permitted from the point at which the usufruct would have ended without the waiver. A waiver therefore does not shorten tenants' rights.

Tenants, for their part, can demand clarity. Section 1056(3) BGB allows them to set the owner a deadline to declare whether he intends to terminate. Once the deadline has passed, termination is no longer possible. The new tenancy thus becomes stable quickly.

Usufruct or right of residence

Not every transfer needs a full usufruct. Parents who only want to live in the house themselves and can do without rental income often choose a right of residence under section 1093 BGB. It allows a building or part of one to be used as a home to the exclusion of the owner.

The right of residence is a limited personal servitude and therefore narrower than a usufruct. It grants use in particular respects, namely living there, not the drawing of all benefits. Letting is not part of its statutory content; under section 1093(2) BGB the holder may however take in his family and the persons needed for care.

Some usufruct rules apply to the right of residence accordingly, such as the duty of ordinary upkeep under section 1041 BGB and the duty to notify. The allocation of charges under section 1047 BGB, by contrast, is not among the provisions section 1093 refers to. Anyone agreeing a right of residence should therefore allocate property tax expressly in the contract.

Choosing between the two rights is not a matter of style. A usufruct fits when the parents want to live on the rent or the building is fully let. A right of residence fits when they only want to keep their own flat and hand the rest of the building to the child immediately.

The civil-law periods of a transfer

Giving during one's lifetime starts several clocks, and two of them measure ten years. The first concerns the donor. If he later falls into need, section 528 BGB lets him demand the gift back to the extent that he can no longer afford his reasonable maintenance.

Under section 529(1) BGB this claim is excluded if, when the need arises, ten years have passed since the gifted item was performed. It matters above all when a care home has to be paid for and a social benefits authority asserts the donor's claim.

The second clock runs in favour of those entitled to a compulsory share. Section 2325 BGB adds gifts back to the estate and lets them fade out over ten years; the course on the compulsory share explains the details. For a transfer with a reservation, one single word decides: the period starts with the performance of the gifted item.

The statute does not define performance here. According to the case law of the Federal Court of Justice (BGH), the change of owner in the land register is not enough on its own if the donor reserves the benefits comprehensively: he has then not truly given up the enjoyment of the asset. That is judge-made law, not statutory text.

The consequence for planning is considerable. A house transferred under a full reserved usufruct may still count in full for the compulsory-share top-up after twenty years, because under this case law the period never started to run. How far a merely partial reservation reaches is a question for the individual case.

Finally, the donor often expressly reserves a right to reclaim the gift, for instance if the child dies first or sells the house. If the gift has to be returned on that basis, gift tax is extinguished with retroactive effect under section 29(1) no. 1 of the Inheritance and Gift Tax Act (ErbStG).