Advantage of Irrevocable Discretionary Trusts

If you are the beneficiiary of an irrevocable trust that contains a specific or broad discretionary feature, you may be able to exclude the assets of that trust from  your French ISF.  Ideally, the trust would have been created by a third party, such as a parent or other relative, but such proximilty is not necessary.   The terms of the trust would grant discretion to an independent trustee to make capital and/or income distributions to the French-based beneficiary.    A case based on facts similar to these was decided in 2005 by A French tribunal, in response to the attempt by the French Tax Authorities (“fisc”) to include the trust assets in ISF base of the French resident beneficiary.  The court held against the fisc, saying that the French resident beneficiary did not have sufficient control over the trust assets to consider the asset as “owned” for purposes of the wealth tax.  The fisc did not appeal this case, so, at least for the time being, it is considered established precedent.   

Needless to say,  the principle of this case has formed the basis for much ISF tax planning in a variety of factual settings. 

Another point to keep in mind is that a distribution of trust principal from such a trust may result in French gift tax being imposed on the beneficiary in the year received.  So, one result for ISF purposes and another for gift purposes.


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