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.


New French Trust Law — Filing Date September 30, 2012 and, in certain cases, December 31, 2012

September 22, 2012

As you may know, the French tax authorities are implementing the July 29, 2011 law concerning persons involved with common law trusts.  Many of my clients are so involved, and we have been working steadily to meet the truncated deadlines for reporting any such interest.  The penalty for not doing so in a timely fashion is the higher of €10,000 or 5% of the trust corpus on January 1st of a given year, the first year being 2012.  There may also be an additional charge of .05% of assets unreported in the French wealth tax (ISF) return.

The folllowing is a Memo I sent out to my clients today, as a supplement to prior work we have been doing to meet the deadline.  If you have questions, please contact me at mail@okoshken.com.

Follow-Up Concerning  The September 30th  Trust Filing (France) 

 

Intro – There are some open questions, especially for those of you whose trust provisions are fairly complicated and/or there are multiple beneficiaries involved.

 Referring to the official Form issued by the Fisc on September 15th, which I sent you earlier this week, there is also the question of how to answer question 5 (“Continu des termes du trust”), which calls for a description of how the administrative provisions of the trust work; and questions 6 and/or 7 of that Form.    

 

Let me go through the Form in the order presented in the Form itself.

 1.          You have already provided the name of the trust in the first Report that you mailed before September 15th.

2.         You have already provided the name of the trustee (“administrateur”) of the trust.

3.         You have already provided the name of the settlor of the trust, or, if the settlor or settlors is/are deceased, then the current beneficiary or beneficiaries (who are deemed under the new law to be settlor(s).  However, what has not yet been provided is the date and place of birth and, in the applicable case, the date and place of death, of the settlor(s).

4.        You have already provided the name and address of all beneficiaries.  Even if the beneficiary is not a current beneficiary, a close reading of the law indicates that that person should be named.  I think contingent charitable beneficiaries may be omitted this time around.  However, what has not yet been provided are (a) maiden name, (b) date and place of birth, and if applicable (c) date and place of death.

5.         You have NOT yet providedthe terms of the trust (“continu des termes du trust”).  By “continu des termes du trust”, is meant any or all of the following: (a) Whether the trust is revocable or irrevocable.  (b) Whether the trustee has discretion about when income and/or principal must or may be distributed to a beneficiary.  (c) In the case of a sole  beneficiary, what happens when that beneficiary does, i.e., who is the successor and what terms apply in that case – e.g., the trust terminates, the assets stay in trust until a certain age, etc.  (d) Whether a beneficiary has a power of appointment and a description of that power – e.g., to whom? to what class? any limitations on the power, etc.  (e) Under what circumstances a beneficiary will come into a portion or the entirety of his or her share. (f) If there are more than one beneficiary, how are the trust assets and income divided amongst them?   Note, the instructions to this form  invite, but do not insist, that you join a copy of the trust to the form.   IF YOU ARE NOT ABLE TO DO THIS YOURSELF, YOU MAY NEED MY ASSISTANCE.  IF I DO NOT ALREADY HAVE A COPY OF THE TRUST, PLEASE EMAIL IT TO ME AT ONCE.  In the interest of time, my suggestion is that the response to item 5 of the Form be submitted in English, and then waiting until the fisc asks for a translation. There seems no other way to meet the absurdly short deadline.

Items 6 and 7 divide the trust assets into two categories:  Item 6 lists those of your trust assets which should have been declared but were not declared in your ISF return on June 15th.   The total of those assets not declared in your ISF return for 2012 are subject to an additional tax of 0.5%.  If this does not apply to you, (i.e., those assets were indeed included in your ISF return, or else you were not liable to file a an ISF return because of its total value including the trust assets were less than 1.3m euros on January 1, 2012.   Item 7 is an identical breakdown of assets but relates to those already reported in your ISF return.   Here is the breakdown (either for purposes of Items 6 or in 7 — possibly some assets in one or the other depending on whether a particular asset that should have been disclosed in your ISF return was not disclosed).  

Both Items 06 and 7 are divided into A (real estate) and B (personal property, stocks, bonds and similar investment property, and all other assets).  You have already provided a breakdown of the contents of the trust, so listing them in 6 or 7 would depend on whether any of those assets should have been but were not included in your 2012 ISF return.  Although the January 1st value should (according to the Form) be expressed in euros, in some cases the values already submitted were in U.S. dollars.  I think this should do for now, although you may at your discretion, make the conversion on the Report already filed.  Note that if any of the above were not included in your wealth tax return (if one was due on June 15th), you would be subject to an added tax of 0.5% of the total value of those assets.  Thus, a separate calculation must be made.

 

The Form (or supplemental report on plain paper) should be dated and signed.  The Report has a place for this at the bottom of page 5.

 

For those of you who will complete this task yourself, my suggestion for how to comply with the law and how to avoid confusion chez le fisc is as follow:

a)     Add the additional information required to the official Form or else do so on plain white paper (this is allowed only for 2012).

b)     Attach the Form or the plain white paper containing the additional information to a copy of the Report you have already filed (i.e., prior to Sept. 15).

c)      Add a letter signed by the Trustee to the effect that the information contained in the enclosed Form is supplementary to the Report already filed, copy attached.

d)     Mail LRAR or by courrier (return receipt) to the same address as you mailed the original Report.

 

One or two of indicate that your Trustee was unwilling or unable to sign the original Report.  In such case I advised that the current beneficiary sign in the Trustee’s place.  The same advice would apply this time around.  Note though, the law does call for signature by the Trustee, so it is unknown at this time what the consequences of the absence of that person’s or entity’s signature will be.   

 

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THE FOLLOWING APPLIES ONLY TO THOSE OF YOU WHO CREATED, MODIFIED OR TERMINATED A TRUST ON OR AFTER 31 JULY 2011.    If such creation, modification or termination occurred between July 31, 2011 and September 15, 2012, the relevant declaration must be made on or before December 31, 2012.    As this gives us some breathing room, I will address the issues related to that form in the coming weeks.