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Navigating the Choppy Waters of Cross-Border Estate Administration

Jul 12, 2022 | General Estate Planning, International T&E, IRS / Tax Guidance, Podcasts, T&E Administration

“Navigating the Choppy Waters of Cross-Border Estate Administration,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Natalie Perry, ACTEC Fellow from Chicago. Many estate complications arise when a loved one passes away in another country. It may impact conflict of laws, forced heirship, estate tax returns, EU regulation and succession, and other issues. ACTEC Fellows Stéphanie Auféril of Paris, France, and Andrew Stone of Chicago will give us insight into cross-border administration. Welcome, Stéphanie and Andrew.

Common Law, Civil Law and Forced Heirship

Andrew Stone: Thank you, Natalie. And Stéphanie, it’s good to be here with you today, albeit divided by an ocean. We should probably note that I’m coming at this from an American common law perspective and Stéphanie is coming at this from a French civil law perspective. And it bears mentioning that we obviously have two very different fundamental legal systems on either side of the ocean and that will, of course, impact how we plan for succession, and inheritance. And I think we might just start off by mentioning the basic differences there between the common law system and the civil law system that France has and much of Europe has.

So, under the common law system in the US, we have testamentary freedom for the most part, albeit with certain rules that provide for spouses, and so forth. And that enables us to give property to whomever we want, and usually, we’re thinking about using the US marital deduction. So, when we give property to a surviving spouse, for example, we know that there’s not going to be any tax. That might not necessarily apply if the property is real estate in Paris, for example, there may or may not be tax. We may or may not be able to pass that asset along to the spouse, as opposed to the heirs. So, this gets into the concept of forced heirship. And, Stéphanie, if we’re talking about French real estate, for example, what are the default rules that you would look at from a French perspective?

Stéphanie Auféril: Many thanks Andrew, and hello everyone. Yes, indeed, a civil law system is applicable in France and is very different from the American way of looking at it. But indeed, we have in France what we call the French forced heirship rule, meaning that there’s no freedom in the way that the children necessarily need to inherit something not specifically to French children. And forced heirship rules are where they’re treated in the domestic context, meaning that you should have a French real estate or have a French family, those rules would apply. But, turning to a more international situation that we have here, it’s possible thanks to a European organization that we call Brussels IV to elect to the laws of your nationality to govern your entire estate in a way that only one law would be applicable to the American or the French estate.

That’s the basic rule that would be applicable, that we should apply, from a French standpoint. And would be enforceable in France as well, including on the French real estate. The point is that if an American family would indeed elect to a law in an American state, so it would be applicable to all assets, but we recently introduced unfortunately a pure domestic regulation that could go against Brussels IV in case you have a deceased person or the children who would be European Union citizens or residents. And in which case, French forced heirship rules could be applicable only on the French assets. So, we have some specific rules that may complexify the situation. So that’s, in a nutshell, the situation on forced heirship rules and new French regulation Brussels IV.

One or Two Wills and Benefits of EU Succession Regulation

Andrew: Yes. And I’m glad you mentioned the EU Succession Regulation, which of course, applies to all EU member states. And so, Stéphanie, if I understand correctly if I were an American with a real estate in Paris and let’s say I don’t have a will at all, either in France or in the United States, upon my death French law would govern what happens to that property. And it might give a share to my spouse, it might give a share to the children, and of course, the share passing to the children would trigger US estate tax potentially, not to mention French inheritance tax. But with the EU Succession Regulation, we can avoid that result.

So, simply by an American electing the law of his or her nationality to apply, it’s specifically with reference to one of the states of the United States, where that individual would be domiciled. We can avoid that forced heirship result and importantly can avoid the property passing to the children, in this instance, which would trigger a US estate tax that we were probably hoping to avoid upon the first death of the married couple. So, the EU Succession Regulation is very helpful in that regard.

So, now we’ve got a client who wants to plan with EU Succession Regulation. They might have, as you mentioned, a US will where they referenced this law, they might also have a French will, for example, that sets forth their wishes in France. Would you, typically, recommend having a French will in addition to a US will in this situation with French assets like real estate or indeed other intangible French assets?

Stéphanie: Yes. Actually, the practice may vary. My personal recommendation is to have a Euro-French will that would govern or reinstate the US will. The reason why is that it would be more practical in order to a nature the succession in France because you would have to go to a French notary, a notaire, and look there to handle the transfer of ownership of the real estate, in your example. And that notaire would need to draft what we call adoutrumont de conformité which is a document that expresses who inherits what. If we just have a US will there is a lot of formalities that will need to be done apostille and potentially troubles in integrating the US will.

So it is, generally, better if we exactly have the same terms as the US will, to have a French will that will be registered by a French notary. And that will be registered in the central register of the notaire in order to actually take the administration of the estate. It’s really not compulsory just to continue the estate.

Impacts of Civil Law on Tax of Trusts

Andrew: And I’m glad I share that view that having a French will would also be a good idea. And this also raises the question of what the US estate plan looks like. Typically, we would use a will which pours over assets to a revocable trust and, in this situation, we would want to be careful that the assets are not passing to a trust whether for the surviving spouse or for other beneficiaries. Because I think, the use of a trust in France, or indeed other, European jurisdictions would probably lead to tax consequences that we would rather avoid. Maybe you could comment a little bit on how trusts might be taxed in this situation, Stéphanie?

Stéphanie: Yes, exactly. It’s good that you mentioned that. That’s another big difference between civil law jurisdictions and common law jurisdictions. That in France we don’t know, I mean, we don’t create, trusts, but that is not a tool for people in this jurisdiction. So, even if we recognize the tax effect and certain other effects of trust issues, a tool that is not well accepted here in France, and the taxation can be very important. I would just mention that it is always possible to administer a kind of estate through a trust when there is some French connection, but it’s much more complex.

Because, again, the notaire would not know how to deal with those and the taxation might be much more important than assets passing outside a trust. Our tax rates of inheritance in France, generally, can reach 45% in a direct line, noting that we have a spousal exemption. So, it’s always better to organize the estate plan and the American law so that to be able to have the estate passing to the spouse because, even if taxes in France, there would be zero taxation on the first death. But still, certain assets would be either passing through a trust or would already be held by a trust, a grantor, or a non-grantor trust.

Then, the taxation could reach, in specific situations, 60%, that’s the marginal rate we have in France. So, I’m not saying that you should absolutely avoid using a trust, but you need to be aware that it could increase the taxation in France if it’s not properly designed.

Conflicts of Laws in Cross-Border Planning

Andrew: Yes. And we should also distinguish between the governing law for the succession and which country will apply its taxes. So, if we have proper planning on the US side where we have a will that gives the French real estate to the surviving spouse by referencing the EU Succession Regulation and therefore US law will apply and the French will recognize that we would still have to be concerned about taxation. So, just because the law of Illinois, for example, might govern who receives the property in this instance, you would still have French taxation depending on the nature of the property and depending on the location, or residence, of the beneficiaries, if I understand correctly.

Stéphanie: Yes, exactly. In your example, there would be no tax at first death because all thanks to the spousal exemption. But at the second death, when the surviving spouse would pass away, then if the real estate is held by the spouse, French inheritance tax would be applicable just by the fact that the law applicable to the succession would be an American law. Of course, we need to look at the territory and the rules of taxation, and also, we have to look at the double tax treaty between France and the US that is fairly interesting. But, generally, all right to mention that French real estate always remains taxable in France, subject to specific rules and valuation.

Andrew: Thank you, Stéphanie. I’ve enjoyed our discussion today. To recapitulate the topics we discussed were the differences between common law and civil law, how forced heirship might impact assets like real estate in a civil law jurisdiction, the benefits of using the EU Succession Regulation by Americans who have property abroad in the EU, and whether to use one or two wills when planning for these situations and the skepticism that we should have about the use of trusts for property located in the EU.

Natalie: Thank you, Stéphanie and Andrew, for educating us on cross-border estate administration. There’s a lot of issues to keep in mind, and we appreciate your time.

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