U.S./French Estate Planning: A General Outline

February 7, 2014

What is an estate plan?
An estate plan is a blueprint of how your assets will be transferred to your heirs, during life or at death. In most cases, estate planning refers planning for what happens at the end.

Elements of an estate plan

Typically an estate plan consists of a pattern of lifetime giving, and then, at death, the plan—usually embodied in a will and/or trust – determines how assets will be dispersed.

In the U.S., a will is subject to probate, which is the procedure for recognizing the will as valid and enforceable, and for nominating the executor who will carry out the testamentary wishes contained in the will. A trust – which, in the States, is often used as a will substitute – may have been created during life (“inter vivos trust”) or by your will (“testamentary trust”). The trust is administered by a trustee and in most states, does not have to be approved by a probate court.

In France, a will is brought before a Notaire who opens a “succession” (French equivalent of
probate) and goes through the procedural steps of administering the will. An executor may be appointed in a French will, but the “executeur testamentaire” does not have the plenary powers hat a U.S. executor does with respect to a U.S. estate. The “executeur testamentaire” in France more or less helps the Notaire to do his job by acting as intermediary with heirs, helping to marshal assets and, in an international situation, helping to explain possible U.S. nuances. It is common and useful for an international lawyer, who is aware of the U.S. and French implications of an estate, to be retained by the heirs to help ease the succession proceeding through what is usually a tedious process, who can answer technical questions as they arise, and to advise on decisions that will have international implications.

Effect of your marital regime
If you are in a community property marriage one-half the assets are deemed owned by each spouse. Consequently, at death, the decedents’ estate will consist of his or her 50%. One form of community property regime, namely, “communauté universelle”, avoids tax at the death of the first spouse. However, there are some drawbacks to this.

Special characteristics of an international estate plan
The estate of an American citizen who had been residing in France at death is subject to the laws of both countries, including its tax laws. Generally speaking, U.S. law will apply to U.S. sitused real estate or a U.S. business, and French law will apply to French-based assets as well as “intangibles”, such as cash, stocks and securities, royalties from copyrights, patents, etc., wherever located.
A vexing problem for Americans is the “forced heirship rules” of France. Briefly, the forced heirship rules provide that issue (children, grandchildren, etc.) of the decedent are entitled to a specified minimum of the decedent’s assets. The percentage to which any child (or if the child is deceased, his or her children) is entitled depends on the number of children (or their own issue) left by the decedent. This includes not only children born in wedlock, but also children born out of wedlock. Any child (or the child’s heirs) has an absolute claim under French law to his or her forced share.
Is each person limited to only one will? Although not required, it is recommended that there be a separate for each country in which you have assets. The main reason is ease of administration but there may be other reasons, depending on the situation. For example, U.S.-based real estate is not subject to the French forced heirship rules, but can be willed in any manner the testator desires. This in itself may be sufficient reason to have a separate U.S. will for that asset. If a legacy to a spouse is involved, the French law provides a formula for allowing the surviving spouse to choose the best way to take her share.
CAUTION: If there is more than one will, care must be taken in the drafting so that one will does not supersede or override another.

Trusts
Although trusts cannot be found in the French law, foreign trusts are recognized by the French law, and use of them enabled U.S. citizens to pursue an intelligent estate plan (especially with respect to children and spouses). The use of trusts also opened the door to some useful tax planning, especially with respect to French wealth tax (ISF). However, that planning door was effectively closed by the French law of trusts enacted in July 2011. Although it is still possible to use an existing trust or even to create one, a stringent set of rules must be followed in order to avoid large penalties. The rules call for annual filings with the French fisc and create a system of “ownership” of assets that can generate unwanted inheritance tax in a multi-generational trust.

Taxation of assets at death
This is best explained by comparing the U.S. and French civil law and tax systems: In the U.S., when one dies, an “Estate” arises. The Estate is deemed to own the assets (and liabilities) until they are distributed by the court-appointed executor. The total assets of the Estate are valued and estate tax is levied on the total net estate (assets minus debts and other liabilities). In France, assets are deemed by law to pass immediately to the decedent’s heirs (whether or not there exists a will). The heirs are deemed to own the assets from the moment of death. No “estate” exists as an interim holder of the assets. This has several important consequences, one being that there is no single tax that applies to an “estate”. Instead, each heir pays inheritance tax at the applicable rate, determined by the heir’s relationship to the decedent. Spouses are taxed at zero percent. Children, grandchildren, etc., at rates ranging up to 45%. First cousins, nieces, great-nieces, nephews and great-nephews, 55%. Everyone else, 60%.
In the U.S. there is an exclusion from estate tax of $5,250,000 of estate assets, the exclusion being applicable during life and at death to all assets no matter who is the recipient. France allows a €100,000 exclusion per child; much less for other heirs.
Foreign Tax Credit
Any inheritance tax paid in France on assets of a U.S. citizen or resident, is allowed by the U.S. as a foreign tax credit when calculating the U.S estate tax. Obviously, the U.S. estate tax exclusion being so large, relatively few estate even have to worry about filing an estate tax return.

Custody of children
While it makes good sense to deal with guardianship in both wills (if there are two wills), if you are a French resident, it is best to specify this in your French will.

Lifetime planning
Under current law, each spouse one can give up to €100.000 per child every ten years. This should be done before a Notaire and ideally, reported to the French as a “don manuel” (Form 2735). It should also be reported to the I.R.S. on Form 709.

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Real Estate in France: Purchase directly in owners’ names or indirectly through a holding company?

January 9, 2014

The question raised in the title to today’s Blog has been posed to me innumerable times. There is no stock answer. Different facts for different folks call for a tailored solution in a given case. There may be more than one possible plan that fits a purchaser’s needs. Clearly, planning for the purchase of French real estate has implications that must be considered, at the risk of suffering significant penalties, high tax costs, and eventually possible lawsuits among heirs.

Example: A client, non-resident of France, just asked whether he and his wife should purchase their dream secondary residence in the South of France jointly in their own names or through a holding company such as a French SCI. They wanted to know the ins and outs of each alternative. Here is my answer, somewhat modified and broadened:

The downside of buying in your own names is that you are bound by the French forced heirship laws with respect to that property, so each and every child of yours, present or future, born in wedlock or outside, and even born of one of you and a third party, will at the time of the decease of one of the joint owners, have a fixed inheritance interest in that property, whether or not the deceased owner is a resident of France at the time of death. Consequently, the principal reason for non-residents making their property purchase through an SCI or other form of holding company, is to avoid the French forced heirship rules. What is the underlying legal reason for this? The holding company shares are considered in international law as “intangible property”, and as such are governed by the law of the deceased owner’s domicile. If that domicile is in the US or England (for example), which does not have forced heirship in their law, then the holding company shares can pass freely in accordance with the deceased’s last will and testament, without giving preference or, indeed, any interest at all, to any person, child or not.

The fact that the forced heirship rules are avoided does not mean that the underlying French property is not subject to French inheritance tax; it surely is!)

If the property is owned directly by the individuals, it is best to have separate French wills relating to the real estate, which gives flexibility to an estate plan.

Caution: If you plan to rent the apartment furnished to third parties, use of an SCI or any holding company has distinct tax disadvantages. In effect, the company is treated as a commercial company, requiring a full set of financials, including a corporate tax return, to be prepared each year by a French “expert comptable” (CPA) and, moreover, as a commercial company, the owners do not get the benefit of the 22-year write-off for French capital gains purposes that would be available were the property owned directly by the owners or via an SCI that is not classified as a commercial company (i.e., has no furnished rental activity).

Worth mentioning here is the scourge faced by short-term renters in France. A long-standing French rule barring short-term renting (short-term defined as a lease of less than 12 months, or 9 months for students), is now being enforced with a vengeance, at least in greater Paris, with stiff fines being imposed on those caught doing it. It is not clear whether enforcement is so prevalent outside of Paris and its environs, but the risk is surely there.

Another downside to the use of an SCI or other holding company is the annual tax form (Form 2746) that must to be filed each May 15th to avoid the 3% annual tax imposed on companies owned by a corporation or other entity. Granted, if done in a timely fashion, filing is merely a nuisance, but it is still another item that must be on your checklist. (One can avoid the annual filing by sending the tax people a “lettre d’engagement”, that is, a pledge to provide the information requested in the Form 2746 upon request from the fisc.)

I don’t here consider issues of divorce or other forms of termination of ownership by one a co-owner, but for some people that subject is on the list of what should be considered in structuring real estate ownership.


Second Home in France – Non-residents – Use of Holding Company

August 2, 2013

Should a non-resident buying real estate in France opt to own through a holding company?   It is not just a matter of different strokes for different folks. It is of course possible to own it directly, that is, without using a holding company.   There are substantive reasons for owning through a holding company, the most common being the desire to circumvent the French forced heirship rules.  The forced heirship rules result in all issue (children, grandchildren, etc.) of the owner(s) having an enforceable right to a pre-determined share in the property effective at the owner’s death — all issue, including those from a former marriage and issue from within or without wedlock.  Use of a holding company usually allows an estate to be structured without the impact of the forced heirship rules, hence its attraction.

If heirship is not a consideration, then it may be acceptable to own the real estate directly. 

What types of holding companies are most common?  The SCI (société civile immobilière) is the most commonly used.  It is a simple French company that allows two or more shareholders to own the property in proportions as they determine.  A U.S. LLC or S-Corp is also possible.  Why one and not the other?  Numerous considerations may come into play.   If a non-French entity is used, the owners must usually file an annual form with the French tax department providing information about the property and current owners.  The cost of not doing so is a potential 3% annual tax based on the current value of the real estate. 

Retaining a special fiscal representative at the time of eventual sale of the property by a non-resident is required no matter how the real estate ownership is structured – holding company or not.  The cost of the fiscal representative is up to 1% of the sale price of the property.  While this cost is an offset against taxable capital gain (i.e., a basis adjustment), it is a consideration. 

There was formerly the mistaken belief that ownership through a holding company resulted in no inheritance tax in France.   However, ownership of property through a holding company has no mitigating impact on the taxability of the real estate in France at the time of death.  French law and the U.S. – France estate tax treaty provide that for purposes of the French inheritance tax, ownership through a holding company is tantamount to owning the underlying property itself.

Prior to July 2011, ownership of holding company stock by one’s family trust made eventual estate administration easier and usually less costly. Since that date, however, French real estate owned directly or indirectly by a U.S. trust or any other trust requires annual reporting of the trust to the French tax department and introduces complications and possible future tax costs that should be avoided at all costs.  So, adding a holding company to the miox in order to eventually lodge the shares of the holding company in a trust no longer makes sense.