Cross-Border Tax and Estate Planning Considerations for U.S. Citizens that Plan Reside in France

This article will discuss fundamental cross-border tax and estate planning considerations for U.S. citizens that become domiciled in France. In particular, this article will discuss consequences of a U.S. citizen redomiciling that established a U.S. revocable trust.

Any U.S. citizen considering becoming a French domiciliary must understand that there are significant tax consequences associated with such a move. Under French law, an individual is considered to be domiciled in France if at least one of the four criteria below is met.

1. The habitual abode of the person or family is in France.

2. France is the principal place of sojourn (more than 183 days in a calendar year).

3. Professional activities are carried out in France or;

4. France is the center of economic interests.

Once a U.S. citizen becomes domiciled in France, in addition to being subject to U.S. income tax on worldwide income, the U.S. citizen will also be subject to French personal income tax on worldwide income unless the income is excluded by a tax treaty. There are a number of other significant consequences with a U.S. citizen becoming a French domiciliary that will be discussed in detail below.

Cross-Border Succession Considerations

U.S. citizens that establish a domicile in France should understand that their estates (or at least a portion of their estate) may become subject to French law. In the United States, if a decedent dies with a will, the decedent’s estate will be “probated” in most cases in the state of the decedent’s domicile and submitted for ancillary probate in any other state where the decedent owned real property. Probate is the court supervised process of administrating an estate. An executor is normally named in the will or if none is named, eligible or willing to serve, the court will appoint an administrator. The role of the personal representative of the estate (either an executor or an administrator) is tasked with collecting the assets, paying the last debts taxes and other charges of the decedent, and distributing the assets according to the will or the appropriate intestacy statute if the decedent died intestate. In most cases, the personal representative must be a resident of the state of qualification. Compensation for the personal representative varies by state, county, value of the estate, and circumstances.

Contrast this with the administration of an estate in France. In France, before an estate of a decedent can be distributed among heirs, a French notaire is appointed. The notary ensures that any outstanding debts or liabilities of the deceased are settled.  A French notaire is a public official appointed by the Ministry of Justice and is not the equivalent of a notary public in the United States. The number of notaires in each jurisdiction is limited, and their fees fixed by law. Their functions include the preparation and recording of notarial acts (e.g., wills, authentic instruments, deeds of gift, marriage contracts) the administration and settlement of estates and serving as the repository of wills. However, French notaires may not litigate a case in court. If a decedent dies intestate, a notaire will be responsible for identifying and locating heirs. The services of a notaire must be retained on behalf of a U.S. decedent if he or she owned real estate in France or left an estate in France that exceeded 5,000 Euros.

Conflict of Laws

What law applies to determine if a U.S. decedent’s last will and testament will be substantively valid in the foreign jurisdiction turns on choice of law rules both in the United States as well as France. France uses domicile in choice of law on succession law matters. The United States generally applies the law of the decedent’s domicile for intangibles and the law of situs for tangible personal and real property. When there is a conflict of choice of law rules between the United States and France, the French doctrine of renvoi may come into play. Renvoi is a French term which means “send back” or “return unopened.” The doctrine may be applied whenever a court is directed to consider the laws of a foreign country.

U.S. Trusts and French Law

Americans often utilize revocable trusts or living trusts to avoid costly and lengthy U.S. probate processes. However, these types of trusts can be problematic for U.S. citizens establishing a residence or domiciliary in France. While France does not have a concept of trusts under its own law, it does recognize U.S. trusts for tax purposes, and has specific reporting obligations for them. On July 31, 2011, French legislation imposes onerous tax and reporting rules on trusts where (1) the settlor is a French resident; (2) any beneficiary is a French resident; or (3) any trust asset is French situs. The French consequences associated with a U.S. revocable trust will be discussed in more detail later in this article.

Forced Heirship

Americans acquiring property in France should understand the legal rule of “forced heirship.” In the United States, “forced heirship” is a legal concept, primarily found in Louisiana, that restricts a person’s ability to disinherit certain heirs, typically children, and mandates a portion of their estates be allocated to them, regardless of the terms of a will or living trust provisions. Under French law, certain family members have an absolute right to inherit from the decedent’s estate. Any estate planning involving a U.S. citizen redomiciling in France must take into account a minimum legal reserve that must be left to children and spouses. For example, children of a decedent in France have the absolute right to inherit as discussed below:

Number of Children                         Legal Reserve to Children

One child                                           ½ of the estate

Two children                                     ⅔ of the estate (dividend equally amount the children)

Three of more children                    ¾ of the estate (divided equally amount the children)

Once the reserve has been calculated, the remaining assets can be transferred to another person by bequest.

The Importance of EU Regulation No 650/2012 in Succession Planning

EU Regulation No 650/2012, also known as EU Succession Regulation, was enacted to simplify international succession matters within the European Union. The EU Succession Regulation provides that the law applicable to the succession of a decedent as a whole shall be the law of the State in which the deceased had his or her habitual residence at the time of death. This can be overridden in one of two ways: (1) if it is clear from all the circumstances of the case that, at the time of death, the deceased was manifestly more closely connected with a State other than the State of his or her habitual residence , then the law applicable to the succession shall be the law of that other State; or (2) the deceased chooses the law of his or her nationality (defined as a deceased’s citizenship) to govern the deceased’s worldwide succession. A person possessing multiple nationalities may choose the law of any of the States whose nationality he or she possesses at the time of making the choice or at the time of death. It allows a single law to govern a decedent’s worldwide succession, succession document, mutual recognition of decisions in the European Union, and the status of heir, administrator, and executor is recognized on the basis of the European Certificate of Succession.

The effect of the EU Succession Regulation is important to U.S. citizens who own assets in France. By making the election in their wills and choosing to have the law of a U.S. state govern the disposition of their assets, U.S. citizens with assets in France can potentially avoid the potential default rules of French forced heirship law.

France’s Matrimonial Regimes

U.S. citizens redomiciling in France or acquiring assets in France should understand France’s matrimonial regimes because such regimes determine a couple’s rights of each spouse in terms of taxes, inheritance, and divorce. Such regimes can also dictate estate and gift tax planning strategies that are available to the spouses.

In France, couples can choose from several matrimonial regimes to govern their assets and debts during marriage. Below, is a breakdown of France’s matrimonial regimes.

1. Separate Property (Separation de biens)

A separate marital regime treats all property, whether acquired before marriage or during marriage, as owned individually or separately.

2. Community Property of Acquisition (communaute reduite aux acquets)

A community property of acquisition or ganancial property regime treats assets acquired before marriage as separate property. All the other assets acquired during the marriage are treated as community property (i.e., 50% owned by each spouse) unless received by gift or inheritance during marriage. This is the default marital regime in France.

3. Universal Community Property (communaute universelle)

Where it applies, the universal community property regime treats all of the couple’s assets, including those received by gift or inheritance, as community property. Under the universal community property regime, the spouses are deemed to jointly own all the assets, regardless of when acquired or how. This regime also offers the possibility of leaving all community property to the surviving spouse and limiting forced heirship claims to children borne from a previous marriage, who may exercise forced heirship rights to protect their reserved share of the estate.

European Union regulations permits parties to a marriage contract to choose (a) the law of the State where the spouses or future spouses, or one of them, is habitually resident at the time the agreement is concluded, or (b) the law of a State of nationality of either spouse or future spouse at the time the agreement is concluded, to govern their rights and obligations upon divorce and at death. Absent an agreement, the default rule under the default matrimony rules would apply, and this could lead to an equal division of all marital assets, subject to court determination.

In France, the spouses elect their marital regime, or the default regime of communauté réduite aux acquêts applies. Under this regime, if one of the spouses is a U.S. citizen or domiciliary or the property is U.S. situs, the change of marital regime may trigger adverse tax consequences in the U.S. or France depending on the facts. U.S. couples redomiciling to France should consult local and U.S. tax counsel to determine their matrimony status and any cross-border tax consequences (and rules governing assets distribution in the event of a marital dissolution) associated with their French matrimony status.

U.S. and France Tax Basics

U.S. citizens redomiciling to France must understand the differences between U.S. and French tax law. Below, is a discussion that points out the difference between the two tax systems.

U.S. Income Tax

The United States taxes its citizens and resident aliens on their worldwide income. Non-resident aliens are taxed on their U.S.-source income. The determination of an alien’s residence is subject to a set of relatively objective tests. These rules generally treat the following individuals as residents.

1. All lawful permanent residents for immigration purposes (“green card” holders).

2. Those who meet a “substantial presence test.” (Present in the United States for at least 183 days in the current year or, alternatively, present in the United States for at least 31 days in the current year and a total of 183 equivalent days during the last three years. For the purposes of this 183-equivalent-day requirement, each day present in the United States during the current calendar year counts as a full day, each in the first preceding year as one-third of a day and each day in the second preceding year as one-sixth of a day).  A U.S. person is subject to an ordinary income tax rate of 37% and a maximum capital gain tax rate of 20% plus a net investment income tax rate of 3.8%, plus potential state income tax if resident in a U.S. state.

Non-resident aliens of the United States are only taxed on certain U.S. sourced income (effectively connected income at ordinary rates up to 37% and passive types of income referred to as fixed, determinable, annual, or periodical (“FDAP”) income at a 30% flat rate withheld at source or a lower treaty rate.  The net investment income tax of 3.8% does not apply to non-resident aliens.

U.S. Estate and Gift Tax

The United States imposes estate and gift taxes on certain transfers of U.S. situs property by “nonresident citizens of the United States.” In other words, individual foreign investors may be subject to the U.S. estate and gift tax on their investments in the United States. The U.S. estate and gift tax is assessed at a rate of 18 to 40 percent of the value of an estate or donative transfer. An individual foreign investor’s U.S. taxable estate or donative transfer is subject to the same estate tax rates and gift tax rates applicable to U.S. citizens or residents, but with a substantially lower unified credit. The current unified credit for individual foreign investors or nonresident aliens is equivalent to a $60,000 exemption, unless an applicable treaty allows a greater credit. U.S. citizens and resident individuals are provided with a far more generous unified credit from the estate and gift tax. U.S. citizens and resident individuals are permitted a unified credit of $13.990,000 or $27,980,000 for a married couple (for the 2025 calendar year).

France’s Tax System

France’s Income Tax

Individuals, whether French or foreign nationals, who have their tax domicile in France are generally subject to personal income tax on worldwide income unless excluded by a tax treaty. Individuals who are not domiciled in France (nonresidents) are subject to tax only on their income arising in France or, in certain instances, on imputed income.
French income tax provides for graduated rates up to 45% for ordinary income. Investment income (dividend, interest) and capital gains are generally subject to a flat income tax rate. A contribution on high income at 3% to 4% can also apply on top of the income tax. The U.S.-France income tax treaty may adjust the sourcing and taxation of certain income.

Property Wealth Tax

France imposes a wealth tax only on real property interests. Individuals who qualify as French residents are liable to the French property wealth tax on a worldwide basis, whereas non-French residents are subject to the French property wealth tax on French-situs property interests only. Only individuals with a net tax base in excess of 1.3 million Euros as of the 1st of January of each year are subject to the French property wealth tax. The tax base includes real property interests, real estate rights, and equity interests in companies or entities for the fraction of their value representing French situs real property or real estate rights. There are a number of exceptions to these rules. The rates of property wealth tax vary from 0.5% if the net value of the taxable estate is between 0.8 and 1.3 million Euros and a top rate of 1.5% when it exceeds 10 million Euros.

This wealth tax can be an unwelcome surprise for U.S. citizens redomiciling to France that hold real estate in U.S. revocable trusts. Under French law, a settlor or deemed settlor of a U.S. revocable trust is regarded as the owner of the trust assets for French wealth tax purposes unless the deemed settlor demonstrates that he or she cannot derive any contributive capacity from the trust. Failure to report trust taxable assets and pay the corresponding French property wealth tax can attract a 1.5% sui generis tax on the trust taxable assets. Any U.S. citizen that holds real property in a revocable trust (regardless of the location of the real estate) that is considering redomiciling to France should determine if the wealth tax will apply to the trust’s assets.

Inheritance Tax

Unlike the United States, France has an inheritance tax. The French inheritance tax applies to any inheritance from a French resident, any inheritance by a French ordinarily resident, or any inheritance of a French situs asset. Certain debts of the decedent reduce the inheritance tax.  Each beneficiary of a gift is liable for French inheritance tax. French inheritance tax then applies at graduated rates depending on the relationship between the decedent and the beneficiary. The French inheritance tax is computed as follows:

Spouses                    Married couples are exempt from the inheritance tax. However married couples      are subject to the French gift tax.

Parents, children,     Tax-free 100, 000 Euro
grandchildren

Brothers and             Tax-free 15,932
sisters

How French Law Treats U.S. Trusts?

Many Americans utilize revocable trusts or living trusts for estate planning purposes to avoid probate. Although revocable trusts are a very effective tool for U.S. estate planning purposes, revocable trusts do not work well in France. Any U.S. citizen considering moving to France or redomiciling to France should have a qualified attorney carefully review their revocable trust.

As discussed above, France does not have the concept of trusts in its domestic law. However, France has enacted laws to provide specific tax laws that are applicable to trusts that have a nexus with France. Under French law, trusts are considered opaque entities and tax the trust when there is a distribution to a French beneficiary of the trust. The U.S. taxes taxes trusts differently. Under U.S. tax law, trusts are classified as either a “grantor trust” or “non-grantor trust.” A grantor trust is a trust in which the grantor retains some level of control over the trust’s assets or income. A grantor is treated as the owner of the trust’s assets. Under the U.S. grantor trust rules, a settlor or individual that establishes a grantor trust will be taxed on the assets of the trust. A “non-grantor trust” is a trust where the grantor relinquishes control over the trust property once the trust is established. A non-grantor trust is treated as a separate entity from the individual that established or settled the trust.

The differences in the way trusts are taxed under U.S. and France law has resulted in uncertain French tax treatment on distributions from U.S. trusts. In 2023, an American couple appealed the French tax authority’s decision on the income from their U.S. trust. The French tax authority treated U.S. trusts as “pass-through” entities for purposes of French taxes and ignored that the assets were in trust. At the request of the French Minister of the Economy, the French Administrative Supreme Court was asked to decide on whether, under the provisions of the United States-France income tax treaty, income distributed by a non-discretionary revocable trust established in the United States should be considered to be directly derived by U.S. citizens who are French tax residents and who are settlor, trustees, and beneficiaries of the trust. The French Administrative Supreme Court was asked to determine whether under French law a U.S. trust should be considered tax transparent. The French Administrative Supreme Court rendered its opinion on April 18, 2023. The opinion of the French Administrative Supreme Court stated as follows:

1) French domestic law does not recognize the transparency principle applicable to certain U.S. trusts. Under French law, U.S. trust income is taxed only when it is effectively distributed from a U.S. trust to a French tax resident. Such income will be taxed as a foreign dividend, regardless of the nature of the assets held in trust. As a result, income that is not distributed by the trust is not subject to income tax. However, when the income is distributed from a trust, it will be taxed as investment income at a rate of 30% “flat tax” rate (34% in certain cases).

2) The purpose of the U.S.-France income tax is to allocate the right of taxation between the two nations and not to modify the substantive domestic tax rules of the contracting state. In the absence of any explicit provision in the tax treaty preventing the French domestic taxation of distributed trust income as dividends, the domestic rules continue to apply.

3) More specifically, Article 7 Section 4 of the tax treaty, which provides for a transparency principle regarding the income from “partnership” does not apply to trusts and trusts are not treated as partnerships.

4) The French Administrative Supreme Court avoided discussing the issue of whether or not tax credits may apply in France for U.S. taxes paid in trust distributions. Thus, U.S. citizens receiving trust distributions that reside in France may be subject to double taxation.

What the French Court Opinion Means For U.S. Settlors and Beneficiaries of U.S. Trusts

The French court opinion means that U.S. beneficiaries of domestic trusts will likely pay French taxes on income from a U.S. domestic trust only when distribution is made from the trust. The French Supreme Court Opinion does not seem to distinguish between grantor and non grantor trust for purposes of French income tax. For French inheritance and gift tax purposes, the settlor of a U.S. revocable trust is deemed to have ownership of all the assets placed in trust and the death of a settlor is a deemed transfer and therefore a taxable event. This means if a U.S. citizen establishes a U.S. revocable trust and later redomiciles to France, French gift and inheritance taxes will apply to the trust regardless of the location of the assets or beneficiaries.

The tax rate that will apply to the gift will depend on the relationship between the settlor and the beneficiaries. In addition, as discussed above, assets in trust generally are counted for French property wealth tax purposes. Any settlor of a U.S. revocable trust that redomiciles in France must include the value of their taxable assets in trust in his or her annual French property wealth tax computation. A beneficiary will be deemed the settlor when the original settlor dies (referred to as a “deemed settlor”) and then must include the value in his or her wealth tax calculation. For French income tax purposes, a trust is generally viewed as opaque (non-transparent), which means that trust income is generally not subject to French income tax until distributed. However, certain trusts (such as revocable grantor trusts where the settlor is also the trustee) might either be disregarded or subject to anti-abuse inclusion rules, thus making the settlor subject to French income tax on income accrued by the trust regardless of distribution. French income taxation of a French resident trustee remains uncharted territory and should depend on the type of income derived by the trust.

Finally, a U.S. revocable trust could be subject to French income taxation. Consequently, if a brokerage account was placed in a U.S. trust and earned $30,000 in dividends, but the dividends were not withdrawn from the trust, the U.S. beneficiary would not be subject to French income tax on the dividends. The income distribution from the U.S. trust will also be taxed as a dividend from a closely-held entity for French tax purposes. (This type of dividend is taxed at a relatively high rate in France).

The French Supreme Court opinion did not address the issue as to whether income received from U.S. trusts already taxed in the U.S. can be reduced under the U.S.-France income tax treaty. In addition, U.S. settlors and beneficiaries of U.S. trusts will be required to file annual Form 2181 with the French tax authorities.

Conclusion

There are many Americans living in France. If you are an American that is living in France and you set up a U.S. trust for estate planning or other purposes, you should consult with a qualified international tax attorney to determine the trust’s cross-border reporting and tax obligations.

Anthony Diosdi is an international tax attorney at Diosdi & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals.

He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or [email protected].

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.