In France, however, there is no such concept as a trust (however there is arguably a version of one, but I will return to that later...).
In 1987 work began on a French piece of draft legislation to define what trusts are and how they should be dealt with under French law. Two decades later it was still draft law and it looked as though it would never get anywhere, but by 2007 (a whole two decades later) legislation started to form. What was clear from the law is that the French fiscal authorities were deeply suspicious of trusts.
As from July 2011, French residents placing capital into trusts are viewed as gifting to a non-relative and will be taxed at 60% of the value given. Those not declaring a trust will be subject to a penalty, which is the higher of up to €20,000 or 12.5% of the trust value.
This hostility toward trusts means that, overall, we would recommend avoiding any kind of trust as a financial planning tool for anyone who is a resident of France.
But what if you are reading this and you are the beneficiary of a trust or are a trustee of one or the settlor of one and you live in France?
Should you panic? The answer is “not necessarily”. Much depends on what the trust is, how it is set up and, importantly, when it was set up.
If you have set up a trust while living in France, this is not good news, as for every €100,000 you added to it the French government will want €60,000 of it.
We often come across people who are one of many beneficiaries of family trusts that were set up many years ago, well before even moving to France. These tend not to be a significant problem, where they are properly declared, which is usually on a form 2181.
Often, there is not even any income coming from these, so they are fairly straightforward. Naturally, these family trusts are difficult to disband, but one person being written out of the trust is usually not a problem.
The point for us is that planning is difficult where trusts are concerned. The law is not sophisticated enough to fully understand complex scenarios, so it is often down to the local tax office to decide exactly how a trust will be treated. So, if good financial planning means dealing with certainty as far as possible, then keep well away from trusts.
This leads to a question – if trusts are how people plan in the UK, what do the French do to plan around inheritance? Well, earlier I promised that I would cover the fact that there is arguably a version of a trust in France.
Here I define some of the main characteristics of a trust:
- It is outside of the estate
- The content no longer legally belongs to the settlor (until they want it back at least)
- Beneficiaries may be directly named so the proceeds can be paid outside the estate
- There are tax advantages for the beneficiary
...and here are some of the characteristics of a French assurance vie:
1) It is outside of the estate
2) The content no longer legally belongs to the policyholder (the policy owns the assets and the policy holder owns the policy)
3) Beneficiaries may be directly named so the proceeds can be paid outside the estate
4) There are tax advantages for the beneficiary
Did you notice similarities?
You can also have a beneficiary clause managed by a notaire, separately from the estate.
This means that, like a trust, you can leave a complex set of instructions: for example your children, nephews, nieces or other beneficiaries inherit but if they die, then their children or nephews or other beneficiaries inherit instead.
There are many sophisticated clauses that may be used within a French assurance vie and full understanding of these is vital.
The crucial point to consider is that it must be a French-compliant assurance vie or it simply will not work like this. A UK / offshore life assurance bond does not usually have a beneficiary clause, will not generally have French fiscal representation for inheritance and is not able to use clauses under French law.
French tax planning is complex and requires serious thought and ideally expert guidance from a suitably French-qualified professional.
This column was written by Robert Kent of Kentingtons financial advisers.
See www.kentingtons.com
