This is the second time London & Capital has made a presentation to an AARO audience. The presentation was not recorded, and was directed to a population residing in France. If there is demand, we can see if we can organize such an event elsewhere.
Paul Fletcher was the moderator of the presentation. The speakers were: Tony McLoughlin, Director in London & Capital’s US Family Office; David Daley, Tax Director US Tax and Financial Services; and Nora N. Muller, NM law, AARO board member.
Before addressing the five “challenges”, there was a slide comparing the current US and French tax regimes for different sorts of investment income. Nora pointed out, however, that in both countries, there are upcoming tax changes for 2018. Globally, however, under the current rules for 2017, France taxes at higher rates than the US and that order is unlikely to change.
The next slide presented the case study, so that all sorts of income could be addressed: a Franco-American couple, with two adult children, who live in their own home in Nice. The wife, the American in the couple, owns an apartment in New York and has investments in the US. She also has investments in France, including an Assurance Vie. And she will eventually inherit from her parents. They also want to consider passing assets to their children.
Finally, there were some basics to know:
- A PFIC is a Passive Financial Investment Company. It’s an investment fund or collective investment and it is taxed at a disadvantageous rate in the US. They are commonly found in Assurance Vie contracts and PEA. They are difficult to declare correctly as the reporting for such investments in France does not correspond to reporting for the IRS.
- US qualifying assets are securities that will generate income. They pay dividends that are taxed as long term capital gains, a lower rate than regular dividends.
- Most US citizens married to a NRA (non-resident alien), as in the case study, file with “married filing separately” status. The children in the case study are adults and will file “single”.
- US citizens are always required to file a US tax return if our income is above the filing threshold. For France, residents of France must declare their worldwide income to France and will get tax credits for taxes paid elsewhere. The tax credit for US income to US citizens in France is equivalent to the tax that would have been charged. Non-residents of France will declare only French source income. To determine whether one is a resident or non-resident, the French will consider “vital connections” (home, children in school, work, …) first, then, if there is still a doubt, the number of days presence.
- France has a wealth tax, ISF, which is undergoing a change to a tax only on real property. There are also social charges (CSG, CRDS) on income. For investment income, it’s 15.5%.
- Muni-bonds are US state-issued obligations. The interest income is tax-free in the US. It must be declared in France.
- The AMT (Alternative Minimum Tax) is a second tax calculation for US tax. One pays the calculation that returns the higher tax. This may or may not be eliminated in the tax reform bill.
Investment – How Best to Plan
In the case study, the wife has a brokerage account at Fidelity and a BNP Paribas account.
- It does not really matter whether they choose the US or France to custody her accounts.
- Her US assets are subject to the ISF – but again, the ISF is changing.
- If her BNP Paribas investments are in funds, then that creates a PFIC problem. A PEA, regular investment account, or assurance vie – if they are PFICs, it’s not impossible to report, but it’s costly both in terms of the accountant’s fee and the higher tax.
- A PERP (French retirement account) is reportable on the FBAR, but can be considered retirement income and not reported on the tax form. This was debated a bit; it’s a matter of interpretation since the French retirement accounts are not detailed in the treaty.
Property – How Best to Plan
The case study couple own an apartment in Nice and the US wife owns her New York apartment.
- Whether or not they should be considered joint property depends on the marriage contract. If they are married under with a “séparation de biens” contract, then no. If they are married with a “communauté réduit aux acquêts”, then if the New York apartment was bought before the marriage, the answer is “no”. And you have to differentiate between the title and the tax.
- The problem of reporting the French mortgage for the Nice apartment to the US is a problem of currency conversions and ghost gains. The calculations need to be followed: the exchange rate on the date of the contract and then with each payment. The same is true if they reimburse the mortgage, entirely.
- If a French person inherits the proceeds of non-French property from a deceased US citizen, and the estate fulfills its US tax obligations, even if there is no US tax to pay, then the French heir will not have French tax to pay.
- An SCI (Société Civile Immobilière) is a frequently used means to own one or more properties in partnership with others. It is a financial partnership and needs to be reported on form 8938 (FATCA) as a foreign financial asset and, if there is rental income, on form 8865 as a foreign partnership.
Pensions and Assurance Vie
The US wife has and IRA in the US and and Assurance Vie portfolio of funds in France.
- Pensions are taxed at the source. The IRA may be exempt from the French ISF. If the investment contains REITS, then they may be included in the new version of the tax on real property.
- The funds in the IRA in the US do not pose a PFIC problem. It’s only if the funds are foreign.
- The Assurance Vie is not a US qualifying insurance policy; it is not life insurance. There are tax benefits in France for Assurance Vie. The money can be passed to the beneficiaries without inheritance tax. There are possibilities for finding assurance vie holding individual securities instead of funds and there are “monosupport” contracts that contain only government bonds, therefore earn interest, which is easier to report to the US.
Estate Planning – How Do I Do It
The US wife has a Revocable Trust set up before she moved to France. The New York apartment and her mutual fund portfolio are in the trust.
- First, in the US, there is a lifetime exemption of $5.49 million for federal taxes. This may change with the tax reform bill. Depending on the state in which the will is probated, state taxes will apply. In France, a child can inherit €100K before inheritance tax is applied.
- The top rate for inheritance tax is 40% in the US, when applicable; in France the rates are from 20% for a child inheriting to 60% for a distant relative or non-related heir.
- In France, French forced heirship rules apply, whereas in the US, it is estate rules. In addition, residents of France who have another nationality can choose to have their will executed in France or, in our case, in a state, applying EU regulation 650/2012
- The revocable trust is also known as a grantor trust. Any element (grantor, beneficiary, property, assets of the trust in France means that the trust must be reported. The problem is not that a trust is not allowed; it simply must be reported. The income from the trust must be reported, too.
- A US citizen can give $14K (in 2017, rising to $15K in 2018) to any number of people, related, or not. Over that amount, a gift tax form needs to be filled out, but there is no tax. It counts against the lifetime exemption.