Update on American Trust in France
An Update on Trusts
Back in June last year, we published a post on why you might want to close out your living trust before moving to France. You can find the post here: https://www.sanderlingexpat.com/blog/leave-your-living-trust-behind.
At that time, a new ruling from France’s Conseil d’État had dramatically changed how French tax authorities were going to have to treat money received from a trust. And everyone, including the tax authorities, were left with some pretty significant questions.
One year on, we have received guidance back from the Ministry of Economy and Finance on one of the cases we were following. And information is slowly coming in on other cases. So what do we know now?
Our advice
First and foremost, the news we are getting has not caused us to change our advice. If you are planning a move to France, you most likely want to terminate any living trusts. In fact, if you have any other sort of trust that really is no longer filling a particular function, get rid of that, too, if possible.
What is required?
We already knew that trusts create extra paperwork in France. If an American trust as a beneficiary, a trustee, an administrator or trust property in France, then the French authorities want to know about it. As soon as you move to France or if you become involved with a trust while living in France, the trustee should fill out (or have filled out) this form: https://www.impots.gouv.fr/formulaire/2181-trust1/declaration-de-constitution-de-modification-ou-dextinction-dun-trust and submit it along with the trust document.
The form details for the French authorities what the trust is, who is involved and what sort of assets it is holding. Every year, the trustee will fill out this update to the form to let France know what changes have occurred during the year: https://www.impots.gouv.fr/formulaire/2181-trust2/declaration-annuelle-de-la-valeur-venale-au-1er-janvier-des-biens-droits-et-.
Notice that these forms do not involve any taxes – they are just notice forms. And as a reminder, you will fill out similar forms for the IRS if you receive money from foreign trusts.
What about taxes?
The new bits of guidance that we have received make three things clear:
1. France will only tax you on money from a trust in the year you actually take it. Gone is the “pass through” treatment that taxed the interest paid by the bonds in your account just as if it had been your personal account. This seems like good news if you are leaving money or property in the trust. But there is a big catch.
2. Any cash or other assets you take out of a trust are now classified as “other income” under Article 22 of the US-France Tax Treaty. As such, this income is taxed first in the country where you live (France). It is then also taxed in the US. You could ask the US for a credit for the French taxes you paid, but…
3. The US taxes living trusts and many other trusts as “pass-through” entities. That is to say, it taxes you personally the year the trust earns the money, not when it is distributed to you. So, you don’t have a US tax to “match up” to the French taxes paid. The IRS will most likely have to issue specific guidance if we hope to have a way to avoid double taxation of income in and from living trusts. This result is particularly frustrating because for US citizens in France, most investment income from the US that is not in a trust (dividends, interest and capital gains in accounts) gets special treatment under Article 24 of Treaty whereby the authorities credit you 100% of the French taxes and social charges that would have been due in France.
The good news
There is also some good news, however. While the guidance so far is limited to specific cases, it looks like the Ministry will treat at least some of the money from your trust as capital rather than income. If you put $10,000 USD into a trust, that is capital. If you have the trust put that in a CD that earns 2%, the $200 you get at the end of the year is income from the capital. If you now take all of the money out of that account, France will likely say that $10,000 of it is just a return of your original capital (not income) and only tax the $200.
At least one case includes an opinion from the Ministry that an asset in a trust can be transferred out of the trust back to the original owners without paying capital gains until it is actually sold.
In the same case, there was an indication that if the owners of a living trust had paid taxes on the trust income in the US from money in the trust, that amount would be added to the trust capital.
The remaining questions
The Ministry’s apparent willingness to distinguish between capital and income is good news. But there are certainly questions that remain about how to do that in more complex cases. If you only took out $50,000 from the trust example above, would you treat the $200 as fully included in that distribution? Proportionately? Not included?
And the question we’ve been thinking about: what does this mean for inherited trusts? If a French resident inherits money from a US person, the beneficiary should file a notice in France but pays not taxes on the inheritance in France. What if they inherit through a trust? Does the same treatment apply? Do they get to characterize the original deposit from the estate into the trust as their own “capital”?
Conclusions
Like anyone else involved with American citizens in France, we are waiting for more clarification. And we can imagine scenarios in which a trust could be used to advantage even with this new tax treatment.
But most American expats will find that getting rid of trusts before a move to France is likely to be your best move.