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ISSUE NO. 6 : FRANCE & TRUSTS

27 May 2016

Trusts are a gift of England to the world.

They developed during the Middle Ages. Parliaments were only held seldom.  So the Common Law became static.  An Order of King Edward III in 1349 confirmed the custom of referring to the Lord Chancellor certain petitions to the King in Council to exercise his judicial powers to rectify deficiencies in the Common Law.  The Lord Chancellor was always an ecclesiastic.  He purportedly exercised the King's conscience.  Thus, if John inherited the Manor from his father on trust for the grandchildren, John was the legal owner at law.  Could he sell the Manor and make off with the cash?  Answer :  no, the Lord Chancellor came along and clobbered him.  John had to look after the Manor for the children.

 

Until recently, French law did not recognise trusts at all. Horrid Anglo-Saxon trusts :  completely unacceptable.  Now, however, unit trusts are allowed.  But an ordinary family trust in the English sense is still expressly forbidden.  Article 2013 of the French Civil Code says that a trust [fiducie] is void if it arises from a gift in favour of the beneficiary.  Such nullity is a matter of public policy.  Door slammed.

 

However, since the year 2006 this shut door has been slightly breached as follows.  You can now make a Will leaving a property to your son on terms that he must keep it and transmit it to his son when he dies (assuming that the compulsory reserves under French law in favour of other children are not thereby infringed).  You can also make a gift of, say, € 100,000 to your son on terms that if, say, he only spends € 80,000 of it during his lifetime, the remaining € 20,000 must go to your grandson. Same for daughters and grand-daughters of course.

 

So how do ordinary 'Anglo-Saxon' trusts get charged to French Inheritance Tax? Monsieur Dupont, a Frenchman living in Paris, has placed, let us say, a million euros in the Cayman Islands on trust for his relatives and friends.  He has also left a large château in the Dordogne.  France will charge the trust assets in line with the blood relationship between the beneficiaries and the deceased.  Mere friends will pay French Inheritance Tax at 60%.  If the trust is a discretionary trust, so one cannot determine the blood relationship of the beneficiaries, France will charge the trust assets at 45% thereof.  If the trustees in the Cayman Islands don't pay up, the French taxman will grab the château in the Dordogne, sell it, and pay himself that way.

 

Where a British owner of a second home in France has left a Will leaving all his assets worldwide on trust to trustees for his children, France will simply see through the trust and charge French Inheritance Tax on the French property at the usual rates as between parent and child under French tax law.

 

To summarise, Anglo-Saxon trusts are gradually creeping up on France. It has taken a good 500 years and more, but England is slowly winning.  However, if you want to set up a tax structure concerning your French property, you need very careful legal advice, and if you come to me for that, the answer that I will be giving you will probably be no, don't do it.