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.


Why You Need A Lawyer When You Purchase A Property in France

May 7, 2013

First, a note of transparency:  I am a lawyer, qualified to practice in France (as I am in the U.S.). Thus, my position as expressed here must be viewed in that context.  However, I think you will find, after reading this entry, that my opinion is not biased but rather is based on common sense, practical experience and a feeling of concern for foreigners who purchase real estate in France without full knowledge of the process and risks.

What is the process?  Once you have identified a property – usually with the help of a real estate agent – you will enter into a purchase-and-sale agreement (PSA), known as a “promesse de vente” or “compromis de vente”.  The PSA is eventually followed by the actual closing, i.e., transfer of title to the property, the closing usually occurring two to three months after signature of the PSA.  An essential player in the purchase transaction is the Notaire.  The Notaire is legally trained, specializing (after extra and intense supplemental education) in various forms of property transfer.  The forms include transfers of title to real estate, transfers by gift or at death, etc.  It is the Notaire and his team who usually prepares the PSA and sees to it that all legal and administrative steps involved in the eventual transfer of title are carried out.  This includes, among many other items, checking property title (there is no title insurance per se in France—the Notaire is responsible for the passage of good title), seeing to it that various municipal compliance tests (lead, asbestos, termites, electricity) are done and made available to you, clearing the purchase with the municipality, etc.  There may be one Notaire acting for both buyer and seller, or one Notaire for each chosenby each party.  As the buyer pays the notarial fees, if there are two, the single fee is split if there are two.  We usually recommend one for each. 

Sources of legal advice.  Buyers are often under the impression that they are getting all the legal advice they need about their property purchase from the Notaire.  Notaires are certainly well-informed about their subject matter but, due either to their limited view of your particular needs, to cultural limitations, or to language limitations, they usually restrict themselves to offering basic information or perhaps responding to your direct questions—which may not cover all the questions you should be asking.  Further, many real estate agents—who are not lawyers—have acquired a certain amount of knowledge of a real estate transaction due to their involvement in many and, though they should not, do indeed offer advice of a legal nature.  Anyone who has been involved in a matter that requires input from a lawyer, knows that lawyers view a transaction in a special way.  For one thing, we see it holistically, meaning that we see each element in terms of the overall transaction.  So, while a bit of advice may be accurate, it may not be correct in terms of the buyer’s short-term or long-term goals.   

What value can a lawyer add?  A lawyer especially one versed in the laws of the U.S. and France, will be able to advise you on some or all of the following:

  • Should you create a holding company for your property and if so, what form of company?  What are the advantages and disadvantages of a holding company?
  • What possible opt-out clauses can be added to the PSA to protect your interest in the purchase?
  • What estate planning measures should you be thinking of when purchasing a property?
  • What are the French and U.S. income tax and capital gain implications of your property holding?
  • What are the French wealth tax implications?
  • The lawyer will read the PSA line by line and point out any irregularities or other points of interest of which you should be aware.
  • He will coordinate with the Notaire or both Notaires, which will relieve you, the buyer, of that chore and also be much more efficient. 
  • He will advise on such mundane issues as whether your purchase should ultimately be held by your U.S. revocable trust (the answer is decidedly no!), and help you explore how else your planning objectives can be realized.  
  • He will help you understand the current problems in France with short-term rentals. 
  • He will explain the French forced heirship rules (ie, the rights of children) and how to minimize their effect.
  • There are other issues too numerous to raise here, but the reader can see that there is valid justification for why a lawyer should be brought into the picture.  Also, if the lawyer is American, as is yours truly, he understands “where you are coming from” or, better, “where you should be going”.
  • Finally, of the various fees the buyer must pay when purchasing a property – notarial fees, broker fees, possibly bank fees in the case of a mortgage property, the lawyer’s fees are usually based on time spent and, as a percentage of your total transaction cost, are by far the lowest, while his advice is of considerable value he may make the day or save the day for you.