Trust & estate planning
As you may recall our first article of this « Trust-Trilogy » started out by stating that in 2011 France defined trusts for tax purposes only. The article also gave the main terminological basis of trust.
Today let’s take a more detailed look at the new tax implications on your estate planning.
A./ Which transmissions are subject to tax?
All gratuitous transmissions, gifts/inheritances made via a trust are now subject to transfer duties. In France gift tax and inheritance tax both fall under the global denomination of ‘droits de mutation à titre gratuit’, also known as ‘DMTG’ for short.
The granted assets, including the income of capitalized assets placed in trust, are taxed at a net market value on the date of the transfer (i.e the date of the gift or upon death of the grantor).
B./ Which assets are subject to tax?
1. French territoriality rules
Article 750 ter of the French Tax Code (Code Général des Impôts or CGI for short) defines French territoriality rules in the event of a gratuitous transfer.
It is necessary to point out that French transfer duties apply, subject to double tax treaties.
In the event the settlor, or the beneficiary (who is also the settlor), are non-French tax residents transfer duties are due:
– On all the assets and rights held in trust, regardless of the country of their location, when the beneficiary is resident in France on the day of the transmission and has been for at least six years in the last decade;
– Or solely on the assets and rights held in trust that are located in France in all other cases.
2. The impact of international tax treaties
International tax treaties provide mechanisms to eliminate double taxation. Where inheritance and gift taxes are involved the right of taxation between the two States involved is based on two criteria: the location of the assets, or the State of domicile of the deceased, the donor or the heir.
Therefore when the assets held in trust are transferred in the cases foreseen by Section II, article 792-0 bis of the French Tax Code, the presence of the trust has no impact on the application of international double tax treaties where inheritances and donations are concerned.
When a juridical double taxation is revealed, that is to say when one person is taxable on the same property by more than one State the terms of elimination provided for by the conventions are applicable under the general conditions of common law.
In such a case, when France is the country of residence the tax paid abroad is due subject to the limit of the tax due in France. It is the responsibility of the taxpayer to prove payment of the foreign tax.
3. Presumption of ownership
The presumption of ownership foreseen by article 752 of the French Tax Code has been expressly extended to assets and rights held in trust.
Therefore the status applicable to securities has been extended to assets or rights held in trust to which the deceased had ownership, received income or performed any operation in relation to less than a year before his death.
Said assets or rights are presumed to be part of his estate, until proven otherwise.
C./ Obligations regarding tax returns
In the event of a gratuitous transfer of assets or rights held in trust, including the income of capitalized assets, they shall be reported on the general forms corresponding to their nature, i.e a « declaration de succession ou donation ».
These are the basic relevant forms filed upon death or after a gift.
D./ Terms of taxation
1. The transmissions qualified as gifts or as transmissions by death
The transferred assets, including their capitalized revenue will be taxed at their net market value at the date of the transfer under conditions of ordinary law. The tax rate will be that corresponding to the family tie between the grantor and the beneficiary.
If the grantor and the beneficiary were husband and wife or tied by a civil partnership the transmission upon the grantor’s death will be free of tax pursuant to article 796-0 of the French Tax Code.
2. The other types of transfers
The grantor’s death entails new taxation, whether the estate is transferred upon his death or whether it is foreseen for a later date.
a) The transmission of a determined share to an identified beneficiary
When the share is defined at the date of death transfer fees (death duties) are applied to said share and the tax rate is that corresponding to the family tie between the grantor and the beneficiary.
Thus for the liquidation of death duties the value of the assets, properties and rights held in trust and transferred upon death is added to the value of the rest of the estate.
Basically general taxation rules apply here. Equally the same rules of exemptions also apply. For example the exemptions foreseen by article 795 of the French Tax Code, that deals with transfers in favor of philanthropic organizations, apply.
b) The transmission of an overall share to one or several of the grantor’s descendants
Here we are faced with a situation where even though the share is defined at the time of death and globally is destined for all of the grantor’s descendants, it is not possible to share it individually between them.
In this case death duties are due on said share at the top marginal rate applicable in the direct line of lineal descent (said rate was increased to 45% for inheritances since July 31st 2011 by article 6 of the First Amending Finance Act of 2011, No.2011-900 of July 29th 2011) and no allowances are granted.
c) All other case transfers
This third case reflects in practice the following assumptions:
– Either the assets or rights remain held in trust after the grantor’s death without being attributed,
– Or the share, that is not individually defined, is attributed to several beneficiaries, some of which are not the grantor’s descendants.
In these situations taxation will occur at the highest rate of the installment table III of article 777 of the French General Tax Code.
Let’s take an example:
The grantor of a trust who is a French non-tax resident dies on January 10th 2012. In 2010 he created three trusts whose characteristics are as follows:
– Trust A: a revocable trust whose beneficiaries are the grantor and one of his two sons. The son is a French tax resident;
– Trust B: a discretionary irrevocable trust whose beneficiaries are the two sons of the grantor, both of which are French tax residents;
– Trust C: a discretionary irrevocable trust whose beneficiaries are for half the two grandsons of the grantor « alive on the 1st of January 2015 ».
The trustee of the trust retains full discretion to dispose of the other half of said trust.
The grantor’s death entails the following tax liability:
– Death duties on the net value of his whole estate which comprises the net value of trusts A & B,
– Death duties on the net value of trust C: at a rate of 45% on one half due to the fact the number of the beneficiaries was not defined (« grandchildren alive on January 1st 2015 ») & at the rate of 60% on the balance.
E./ Summary of the different hypothesis’s of taxation
|The nature of the transfer||Taxation|
|Death or donation/gift||Death duties are due at a rate dependent on the degree of relationship with the deceased|
|Neither death nor donation:
– The share and the beneficiary are determined
– The share is determined but it is destined globally to several descendants of the grantor
– other cases:
* the trustee of the trust falls under the law of a non co-operative State or Territory ; or the grantor was domiciled in France when he created the trust after May 11th 2011
*Assets remain placed in trust after the grantor’s death without having been attributed
|Death duties are due at a rate dependent on the degree of relationship with the deceased
In our third and final article we will take a look at the wealth tax issues related to trusts.