Assets worth 300,000 Euros but the beneficiaries of the Will receive nothing… What happened?

A recent case handled by Deborah Vaysse underlines an all too-common issue with poor cross-border estate planning.

I was asked by the executors  of a will to review the accounts of a French estate.

The deceased, a British national, had left assets in both France and the UK worth approximately €300,000. On paper, it appeared to be a substantial sum that the beneficiaries expected to benefit from. Yet ultimately, I had to regrettably inform that they would receive nothing. Because by the time French inheritance tax, legal fees, notarial costs, certified translations, apostilles, administrative charges and other expenses had been paid, the estate had effectively been absorbed.

Understandably, they wanted to know: how could this have happened?

The answer lies in a common misunderstanding of cross-border estate planning.

A Will does not override tax rules

The deceased had left an English Will dealing with his worldwide estate, which included a clause expressly choosing English law to govern his succession.

Under the EU Succession Regulation, a person may choose the law of their nationality to govern the civil aspects of their succession. That choice can be very useful. It may affect the distribution of the estate, the application of forced heirship rules and the way in which beneficiaries inherit.

Many people assume that if they have an English Will covering their worldwide assets, their estate will be administered and taxed like an entirely English matter.

This is incorrect.

A Will is an essential part of estate planning and determines who is entitled to receive the assets. But a Will does not allow you to bypass the tax rules of the country or countries in where tax is due.

In my experience, this is where many families unfortunately get caught out.

They have a valid Will. The Will may even contain a valid choice of law; but the tax position may still be French.

Why did French inheritance tax apply?

French inheritance tax may apply to French assets or as a result of residence in France.

In this case, the deceased died in France where he had his last habitual residence.

Where a person dies while resident in France, French inheritance tax may apply to their worldwide assets subject to any applicable double tax treaty. This means that the French tax authorities may look not only at French property but also at bank accounts, investments and other assets situated outside France.

For individuals and families this news can come as an unwelcome surprise.

French inheritance tax is calculated by reference to the relationship between the deceased and each beneficiary.

A spouse or civil partner may be exempt. Children benefit from significant allowances and progressive rates. But distant relatives, unrelated beneficiaries, friends, stepchildren or unmarried partners can face very high rates. In some cases, the French inheritance tax rate can reach 60%, after only a very small allowance.

That alone can have a significant impact on the value ultimately received by the beneficiaries.

Then come the additional costs of a cross-border estate: legal advice in more than one jurisdiction, notarial formalities, certified translations, apostilles, correspondence between professionals, bank requirements, tax declarations etc.

Taken together, these factors can dramatically reduce what appears to be a substantial estate on paper and this is how an estate of €300,000 was absorbed.

Write a Will, but make a plan

The existence of a Will does not mean the estate has been properly planned. A Will is one tool but it is not a complete estate plan.

In cross-border situations, a proper estate plan should consider:

• where the person is resident;
• where their assets are located;
• who the intended beneficiaries are;
• whether any double tax treaty is relevant;
• whether lifetime planning could reduce the tax exposure and whether insurance, gifts, matrimonial property arrangements or other French planning tools should be considered.

The correct solution will always depend on the individual circumstances but doing nothing or assuming that an English Will is enough can prove to be extremely costly.

Key take-aways

• Proper advice reduces risks
• The worst time to discover the problem is after death. At that stage, the options are limited.
• Cross-border estate planning needs specialist expertise.
• Do not assume that your English Will is enough.
• Cross-border succession planning is not just about leaving assets to the right people. It is about making sure there is something left for them to receive.
• If you live in France, own property in France, or have beneficiaries who may be exposed to French inheritance tax then it is worth seeking specialist advice before it is too late.

For legal advice on French succession law, French inheritance tax exposure and estate planning, contact Avocat and solicitor Deborah Vaysse.