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What Americans in France need to know about trusts

Genevieve Mansfield
Genevieve Mansfield - [email protected]
What Americans in France need to know about trusts
A person uses a laptop (Photo by Julian Stratenschulte / POOL / AFP)

Having a trust in place - regardless of whether you set it up or are the beneficiary - can have serious tax implications for Americans in France. Here is what you need to know.

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In the United States, setting up a trust is common practice - people use them to reduce estate taxes, avoid the time and fees associated with probate court, as well giving more flexibility and control over your assets to determine when payments are given (perhaps for minor children or disabled adult children).

Trusts are a common legal instrument for inheritance in the US - but in France they are less common and in fact are viewed with suspicion by tax authorities, which can cause problems for Americans in France who have a trust.

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The Local spoke with G. Warren Whitaker, a US-based attorney specialising in domestic and cross-border tax, trust and estate planning for individuals and multinational families, to understand how Americans in France should approach their trusts.

Death and taxes: What you need to know about estate planning in France

"Trusts have a negative reputation in France," he explained. "Previously, the French were not clear how to tax them, so they offered huge opportunities. But over 10 years ago, France passed a law that cut through a lot of the legal concepts we have as Americans have about trusts."

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Essentially, he added, it is widely assumed in France that trusts are used for tax evasion purposes.

The main effect of this is that income from trusts - whether that is an inheritance or regular income - would almost certainly be taxed in France, even if the trust is based in the US.

This is in contrast to other types of income from the US - for example rental income or share dividends - which are covered by dual taxation treaties and are therefore usually taxed in the US, even if you live in France. 

Reporting requirements

First and foremost, Americans in France (with French tax residency) must report any trust that they are named in to French tax authorities as part of their annual tax declaration.

Each year, you must fill out the "FORMULAIRE N°2181-TRUST2" which asks for the market value, as well as any accrued income, of the trust as of January 1st of that year. You will also have to name other people listed in the trust - whether they are 'moral' or 'physical' people. You will be required to give extensive information, including their dates of birth and addresses.

You must also fill out an additional "event" declaration if a trust is created, modified or terminated. This must be done within one month of the event. This tax form is also available on the government tax site: FORMULAIRE N°2181-TRUST1.

Whitaker defined modification in his article French Tax Laws Affecting U.S. Citizens And Trusts as "every change in: (1) the terms of the trust, (2) its functioning, (3) its settlors or beneficiaries deemed settlors, (4) beneficiaries, (5) trustees and administrators, (6) the death of any of the foregoing, (7) any transfer to or from the trust of property or rights, (8) any transfer or attribution of property, rights or income of the trust, and (9) generally any modification of any right or fact that could impact the economics or the functioning of the trust."

What are the penalties for not reporting?

As of 2023, the maximum penalties for omission or incomplete reporting when it comes to trusts stood at €20,000.

Taxation of trusts

Once a trust pays out there are a few different scenarios on how you might be taxed on your trust in France, depending on which tax regime French fiscal authorities place it under: income, inheritance/ gift, and/or wealth tax.

According to Paris-based tax attorney, Jérôme Assouline, the level of taxation will depend on how French fiscal authorities view your trust. "People should be aware that there is a possibility the trust could be taxed at a rate of up to 60 percent upon distribution," Assouline warned.

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"It will depend on whether French tax authorities view your trust as being used for succession purposes. If they determine that it is, then it will be taxed in the standard rates for inheritance. If it is not viewed as succession, then it could be taxed at the highest rate," the tax expert explained.

Assouline explained that as such, people should be aware of a potentially high tax burden when the trust is distributed.

If you have received income from the trust - not including a trust that pays out on someone's death - then you can expect the French taxman to treat the sum, whether capital or income, "as investment income, in the hands of the taxpayer", according to Spectrum International Financial Advisers in their article French Trust Law.

This means that the amount received is subject to progressive tax rates set up by France's income tax scale, as such the distribution received could end up being taxed at the highest rate depending on your situation. Social charges can also be applied.

Inheritance and gift tax

When it comes to inheritance, France's approach to trusts has implications for beneficiaries both inside France and outside of the country. This would therefore affect you if you live in France and receive an inheritance via or a trust. But it would also affect anyone that you leave money to via a trust - even if they don't live in France. 

This may come as a surprise to Americans who would expect to not see a trust included in the deceased's estate, but if a US citizen dies in France - and at the time of their death they were a tax resident of France - then French succession tax is applied to their global assets, and French tax authorities include assets in a trust.

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As such, the non-resident beneficiaries of a trust established by French tax resident may find themselves having to pay French inheritance tax on the trust.

In terms of the rate of tax applied, it will depend on the relationship between the settlor and the beneficiary. The general rule for inheritance and gift tax rates is that they increase the further the family connection from the settler. For people who do not have a family connection, the maximum rate of 60 percent is applied.

Find full details of the different rates HERE

Americans looking to retire to France with trusts already set up, perhaps for their children or grandchildren, should be wary of this.

Whitaker explained: "France will view you as the owner. My understanding is that because you are the creator of the trust, France will say that it is still in your estate and it is subject to French inheritance tax."

Another issue is that tax authorities in France may look at the value of the trust in its entirety, even if you are only one of several beneficiaries.

He added: "French law is written on the assumption that every trust has only one beneficiary, but that is often not the case. If there is a trust split amongst four children and I am getting one quarter of it, then the legal professional handling my estate would need to ensure with tax authorities that it is only the one quarter that is included for French inheritance tax purposes.

"In theory, the French could say you are a beneficiary, so the whole trust is included."

For this reason, Whitaker recommends that Americans in France work with legal and tax professionals who are familiar with trust law, both French and American systems of tax, and relevant bilateral treaties.

More generally, the legal expert often advises that his clients consider terminating trusts before moving to France if possible.

For settlors, Whitaker said: "If there is a lot of money in the trust and I created it for my children, then we might terminate it and pay outright. But you would want to do that before becoming a tax resident of France."

For beneficiaries, he offered an example of a family with four children: "If there are four kids under one trust, what we might do is divide it into four trusts. That way, the child living in France is only beneficiary of one quarter, not the whole thing." 

Wealth tax

France also has a wealth tax (IFI), which can be applied to people with total assets worth more than €1.3 million.

Whitaker emphasised that worldwide assets are not included in the calculation until the American has been resident in France for at least five years.

However, once the five year limit is up, all assets - including real estate in the US and trust assets outside of France - will be included in the calculations for wealth tax purposes.

For this reason, the legal expert explained that: "During those first five years, we often get rid of trusts that are out there so that after the five years are up, they won’t have to report them and they wont be included in the estate."

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What if it is a revocable trust?

According to Whitaker, "French law is very simple. If the trust is something you are the creator of or the beneficiary of, then it is included in your estate. 

"In the US, I could create a revocable trust or irrevocable trust, but either way France will see it as belonging to me and as part of my estate."

What if I add a clause in my Will to make sure it is governed by US law?

This will not help you avoid paying tax in France. It's a commonly misunderstood point, but comes down to the difference between inheritance law and inheritance taxes.

French inheritance law applies the principle of forced hiership - meaning that you cannot disinherit your kids - and applies set portions of the estate to children. Foreigners living in France can stipulate that they want their will administered under the laws of their home country, which means they avoid this requirement.

But whoever your heirs are, they would still pay inheritance tax in France - and the rates of tax are much higher for people who are not blood relatives. 

Whitaker added: "You can do this, and it does mean that your will will be interpreted under US law in terms of governing the trust. But the question is about taxation and France will tax the trust."

This article is intended as a general overview of French law and is not a substitute for independent legal advice. In all cases, it is best to obtain independent advice that's appropriate to your personal situation, from a financial or legal expert.

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