1. Who is affected by cross-border succession issues, and why is it important to plan ahead when you have assets on two continents?
The American and French methods of anticipating a succession are different and rarely compatible. Consequently, American citizens living in France with assets in the U.S. and French citizens living in the U.S. with assets in France are likely to find themselves having to navigate the intricacies of two systems.
The laws regarding inheritance are a particularly sticky zone. In France, for example, a succession goes directly to the heirs. In the US, one must either go through a probate process and appoint an administrator, or have created a trust beforehand. Trusts, however, are not recognized by French law. American families that have created a trust because this is the favored approach in the US might find themselves facing complicated administrative tasks in France—and unexpectedly heavy taxation.
Another issue to be aware of concerns US banks. Although it is acknowledged by both US and French authorities that the law applicable to a succession as regards movable assets, is that of the last residence of the deceased, American banks will routinely insist on applying American procedures. They may require the same supporting documents that would be required by US law.
Families are increasingly impacted by cross-border succession issues, as a result of ease of travel and communication and increased ownership of multiple passports and dual citizenship. Children of wealthy parents leave to study abroad and end up staying, or families move abroad for work and settle down for long enough to be considered residents. The mismatch of the U.S. common law and the French civil law systems is stark, with much of U.S. planning relying on freedom of testation and trusts to save U.S. estate and gift taxes, compared to French forced heirship and failure to recognize trusts. U.S. taxpayers need to plan ahead by creating entities such as an SCI to hold French real estate, and testators should consider a separate will for each country in which they own property. This becomes exponentially more complicated when assets are located in a third country.
2. Do you see many succession cases where families could have better organized their affairs? What do you see as being the most common pitfall?
There is no universal solution and each case requires individual study, but it’s true that certain situations come up regularly. For example, one method preferred by French families in anticipating a succession is to make tax-free donations to children during an individual’s lifetime. Ownership is split, with a distinction made between usufruct and bare-ownership. This is unknown in the US tax code and US citizens can end up paying the tax they saved in France to the IRS.
Another common French practice is to transfer assets through a life insurance contract, thereby avoiding either a high rate of inheritance tax or reserved forced rights, or both. US tax authorities view such life insurance contracts as “non-qualified” and taxes the resulting revenues as income.
As Paris-based notaries and trust and estate planners, we must be familiar with French law, international private law, and with potential differences between French and American legislation and tax conventions. Our role is to help clients avoid nasty surprises by planning ahead—and to limit the damage if it’s too late to plan ahead.
I have seen a large number of such instances. I think a common pitfall for French families in the U.S. is the failure to include a qualified domestic trust (QDOT) in a U.S. will or revocable trust, to enable property to pass tax free to a trust for the decedent’s non-U.S. citizen spouse. For U.S. citizens with property in France, a common problem is the failure to protect against forced heirship by holding French real estate in an SCI or placing securities in a U.S. revocable trust. Another problem for both French and U.S. clients is the failure to address the disposition of assets located in various jurisdictions by creating a separate will for each jurisdiction. Finally, I recently had a particularly frustrating encounter concerning a very large gift that a French father was giving to his U.S. resident daughter. Flouting my advice, they refused to structure the gift using a trust, which would have saved many millions of dollars in future estate/gift taxes, simply because they “don’t like trusts.” So to generalize, I would say that a common pitfall is the failure to be open-minded so that very good advice is not rejected out of hand simply because the technique is unfamiliar.
3. How do you see transnational succession issues evolving in the years ahead?
I would like to be able to say that a simplification process is underway, but unfortunately I haven’t seen any evidence of this!
In fact, a French bill enacted last November is potentially adding another layer of complexity for expat families. French law states that no one can transfer his or her entire estate to someone other than his or her children if any member of the family resides within the EU or has a EU citizenship and if at least one asset is located in France. A surviving spouse therefore cannot inherit 100% of a deceased spouse’s assets. The law has now been reinforced, and the provision applies not only to children who are EU citizens, but also to foreign nationals living in the EU. A child can now claim compensation on assets located in France if this principle, known as forced heirship rights, has not been respected.
In conclusion, I would say it’s difficult to overstate the importance of estate planning for international families. A bit of careful anticipation can help families on both sides of the Atlantic avoid unwanted surprises.
I see much complexity ahead. The enactment of the EU Succession Regulation (Brussels IV) should have brought more certainty and control by allowing testators to choose the law that governs the succession of their property. I believe that it would have accomplished that over time. However, France’s new law which strengthens forced heirship has thrown a wrench in that, once again adding to the complexity in this area. Moreover, although the U.S.- France estate and gift tax treaty is quite complicated, it must be considered when structuring an estate plan.
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