It can come as a surprise to US expats moving to France when they discover France doesn’t have trust laws. A trust can’t be created in France though a US citizen residing in France may create a trust under US law or be a beneficiary of a US trust. But it’s complicated. And for Trust loving Americans it can be a challenge when moving to France – especially when it comes to a living trust which are routine in the US, but if you’re moving to France, you should probably leave that living trust behind for all sorts of reasons – not least because of the onerous tax penalties. We asked American finance expert Amy Witherbee of Sanderling Expat Advisors to explain what the issues are for US citizens who have a living trust and how to deal with the situation to your benefit.
What is a revocable trust anyway?
Trusts are very popular generally for Americans – to do charitable work, to avoid taxes, to control assets, to control people… But there is one form of trust that we use more than any other. The revocable trust, also known as a living trust, is common in the U.S. primarily for one reason: it bypasses the probate court processes that have become long, tedious and expensive in most states.
Estate attorneys almost always recommend revocable trusts. But if you’re planning a move to France, you should probably get rid of the trust first.
We call these trusts “revocable” because you can revoke them at will – if you want to cancel the living trust and the assets within it – you can whenever you want to. During your lifetime, the living trust is still part of you for tax purposes. It uses your social security number for its tax ID, and any real estate, income, accounts or other assets in the trust are considered still to be yours for tax purposes. It doesn’t mean you can avoid or manage taxes or liabilities.
However, on your death, the trust becomes its own entity, with its own tax filings and legal liabilities. It can only be ended by certain parties – often the trustees designated in the trust and/or a court of law.
How does France treat trusts?
Until 2023, this was all fine and dandy for US expats moving to France. However, trusts do not exist as a concept in French law. To the extent there are any laws about them, those laws were put in place to deal with trusts set up in the other countries (usually the U.S. or U.K.) that impact France or French residents.
For quite a while now, France has required specific processes for trusts of any kind created abroad. First amongst these is an initial accounting. If a trust has a trust creator (settlor) or beneficiaries who are resident in France, if the administrator of the trust is resident in France on January 1st of the year, or if the trust contains French assets, it must file a form 2181-T1. This form is not a tax, but it details the people involved in the trust, its terms, relevant addresses and contact information and the list of assets in the trust. After that, the trustee files an update of this information annually on form 2181-T2.
These two filings can be either fairly simple or very complex, depending on the assets you have in the trust. And plenty of expats have found themselves in a sea of accountancy and legal questions while trying to pry the information out of a secretive family trust. But until 2023, people with living trusts did not tend to put in much (or any) effort.
What changed
In 2023, an American couple living in France appealed the French tax authority’s decision on the income from their U.S. Trust. At the time, the tax authority was treating U.S. trusts as “pass-through” entities for the purpose of taxes, and they ignored that the assets were in a trust at all.
So, if your trust earned say €3000 in dividends from an investment account and €40,000 in capital gains from a real estate sale, you reported the income (or your share of it) as personal income in your French tax Déclaration. This was true whether you actually took the money out of the trust or not, which is how we tax those trusts in the U.S.
What’s more, because you paid your taxes on whatever was earned in the tax year, the annual trust filing (form 2181-T) was more of a formality.
But the French-resident American couple won on appeal. The Conseil d’Etat confirmed that all trusts need to be treated as taxable, rather than “pass-through,” entities. And that now includes your previously benign revocable trust.
Why you need to close your trust before you move to France
What does that mean for you? First, this change is recent and the experts are still trying to figure out the consequences. But at the moment, it looks like you will pay taxes on income from the trust only when you take that asset out. If the brokerage account you put in trust earns 30,000 USD in dividends from bonds this year, but you don’t withdraw anything from the account, you will not pay tax personally. This is what the American couple was looking for on appeal.
But it also means that the income from your trust will be treated as a particular sort of investment income (the amorphous “other income” category of the Tax Treaty (in the amorphous “other income” . And that type of income does not get the lovely favorable treatment that much of your brokerage income was getting before when it was just like interest, capital gains or U.S. bond dividends from your savings. Ouch.
To make matters worse, the annual 2181-trust form is a lot more important now because it is the authorities’ only insight into what is going on with those assets. Expect the authorities to be much more diligent in ensuring you have filed those.
And there are other potential consequences of your trust losing “pass-through” treatment. You will now have to pay personal taxes on trust income only when you take it out of the trust. That doesn’t sound like an issue, but if you close your trust after moving to France, everything that was in it that was not part of your original capital becomes income for that year. So you could end up with a complicated mess as you try to determine what was “capital” and what investement income is suddently taxable.
And what about retirement accounts? The French law on trusts makes exceptions for certain trusts used to create pension or retirement accounts. So money coming directly from your 401k should be fine. But some U.S. attorneys have their clients add retirement accounts to their trusts even though those do not generally go through probate anyway. The new decision seems to indicate that retirement funds held in a trust might no longer get the favorable tax treatment afforded to pensions and retirement accounts.
What should you do?
Every person’s situation is different and needs to be treated as such so there’s no one answer that fits all. But if you are thinking of moving to France, particularly if it’s a permanent move, you should consider closing your revocable trust.
And if you’re already a French tax resident, you need to be very careful about making any changes without a thorough analysis of the repercussions.
And you definitely want to make sure that you start filing your trust forms. The penalties and the paperwork can be significant if you don’t.
Sanderling Expat Advisors are professional and qualified experts in both France and the US. They can help you decide what’s best for your when it comes to managing your investments and tax management when moving from the US to France and vice versa.
Find out more and book your free consultation or request a tailor-made financial plan for your household at: sanderlingexpat.com
