Here for the long haul

On May 18, London & Capital presented an information meeting on investment options we Americans have when we live abroad. Daniel Freedman, head of the US Family Office at London & Capital, moderated the event. Tony McGloughlin, director at London & Capital in the US Family Office, was on the panel, as an investment specialist. From AARO, Tim Ramier, Ramier Law Office and chairman of the AARO tax committee, and Mojgan Ghanipour, C.P.A. and partner at MG Partners were also on the panel, specialists in estate and tax planning. Behind the scenes, Joseph Cohen, organized the event at the Intercontinental Marceau.

The meeting started off with the assumption that we did not need an introduction to FATCA, nor to our FBAR and tax reporting obligations to the US. There was a very informative comparative table summarizing tax obligations in France and in the US: maximum income tax rate, capital gains tax rates,  taxes on interest and dividends, social “contributions”, and wealth tax.

Daniel presented a case study, not one that represented us individually, but rather one that gathered together most of the complicated issues we face. Most of us do not face all of the following issues: an American woman, who already had a successful career in the US (retirement accounts and equity investments in addition to a fully paid up apartment in NYC), married to a Frenchman (not currently working), living in France since 2000, with two children, an apartment in Paris (bought for €900,000 and now worth €2 million), an “assurance vie” contract….

With that scenario, there were several questions: what happens if they sell the apartment they live in? (US tax on a gain of over $250,000 for the US taxpayer); how is the assurance vie handled for US taxes? Is it a good investment for us? (If you are American, you’re better off investing in the US with a brokerage account there.) (Assurance vie contracts, the multi-support ones, are PFICs and better to avoid them.) That brought up the question of getting a brokerage account. Of course, London & Capital have a solution for that, so while brokerages are dropping us, others are maintaining our connection to the US. This applies even if the American has no US address to claim.

French taxes were also discussed, including the ISF (wealth tax), which the case study family would definitely have to pay; trusts, inheritance issues (in France, US citizens can choose to have the estate settled under a US state’s regime rather than the French one). (The inheritance the American wife in the study will get will not be taxed in the US because it falls under the threshold, and it will not be taxed in France because the estate will have fulfilled the US tax obligations of reporting to the IRS and the treaty exempts it, then, from French taxes.)

The case study allowed discussion of most of our issues. Daniel, the moderator, made sure that the questions were answered briefly and to the point. Personal circumstances were discussed privately with the panel members when the seminar was over.

AARO and AAWE plan to hold more events with London & Capital, involving less of an overview and more focused on specific case studies. 

Investment Follow-Up with WITAM and WISEAM

The meeting with Andrew Hodder of WITAM and François Jubin, WISEAM was aimed at an audience living in France, making French investments. Several AARO members regretted not being able to attend the meeting and we hope this summary will help you.

After a brief re-introduction of who they were and a short reminder of what our reporting and tax obligations to the US are, Andrew got straight to the crux of the matter - How can you save and invest in France if you are an American?

If you are young, just starting out, you have the state-sponsored accounts, available to all French resident tax payers from the major banks: Livret A, LDD (Livret de développement durable), LEP (Livret d'Epargne Populaire), Livret Jeune, CEL (Compte d'Epargne Logement), and PEL (Plan d'Eparnge Logement). 

Some of these accounts have certain criteria, such as age limit (Livret Jeune, from 12-25 years old) or income (LEP, only 2 per household and limited to low annual income earners - up to €19K.) The maximum allowed in a Livret A is €22950, but each member of the family can have one. An LDD is limited to €12000, and you must be an adult to have this account. The CEL (up to €15300) and PEL (up to €61200 with a 4 year minimum before you can take money out, and, if you keep it longer than 10 years, it becomes a regular savings account with regular tax implications on the income) are savings meant for real estate purchases, but they can be used as regular savings vehicles, should you choose not to take a loan. They earn very low interest and the counterpart is a home loan at very low rates. 

Although these accounts earn very little interest, they have tax advantages in France -- the income is not included in the income tax calculation. The accounts must be declared on your FBAR if the total of all your accounts (checking and savings) is over $10K. However, if you are not earning over the Foreign Earned Income Exclusion and this is all you have in savings, even after declaring the interest income, you probably will not be taxed in the US. It's a way to start. If you have other investment income, such as investments in the US, then the interest income from these accounts will enter your taxable income and be taxed. As there is no income tax paid in France, there is no tax credit in the US.

An individual can save over €100K this way. If you are, perhaps, older, have filled the accounts listed above and are ready for more income-generating investments then this is the point at which WITAM’s services start. You can invest in a PERP (a retirement savings plan), a PEA / PME ETI (Plan d'Epargne en Actions and, more specifically, in Petites et Moyennes Entreprises or Entreprises de Taille Intermédiaire), Assurance-Vie (Life insurance, not in the US sense) and or a Compte Titres (brokerage account). All of these can be provided by WITAM, who will also advise on and manage the investments.

The PERP was not discussed. It has certain tax advantages in France, but requires regular payments in from a French salary. It is also limited to 10% of that salary.

A PEA is interesting. By combining the PEA and PEA/PME ETI, you can invest up to 2 times €225000. There are certain tax advantages in France linked to how long you hold on to the account. You are limited to EU stocks. The recommendation is to invest in individual stocks rather than funds because the PFIC (Passive Foreign Investment Company) reporting to the US is difficult to do. With individual stocks, you can report your dividends, your gains and your losses easily. If there is no income tax in France on these accounts, then there is no tax credit in the US. If you do not have enough taxable income to be taxed in the US, that's fine; if you do have taxable income in the US, it will be raised by this income and therefore taxed.

A compte-titres does not have the French tax advantages of a PEA. On the other hand, you are not limited to just EU stocks. It is fully taxed in France and you can claim a tax credit in the US for taxes paid in France on this income.  

Assurance-Vie. WITAM has persuaded a handful of assurers with which it already has a strong relationship to accept US Persons. All these are Luxembourg based entities, who will provide you with a French approved policy, but the Luxembourg environment provides additional comfort over the French market as your funds will be placed in a custody bank and you can in certain circumstances choose your own investment manager rather than having to leave the funds on the assurer’s balance sheet, exposed to its and to the whims of its in-house investment management team. (You may approach your own bank or insurance company, they may not even want to take you on once they find out you are American). The French tax efficiency of these policies means that that until drawdown there will be no tax to deduct from your US declaration. WITAM will advise you on the underlying portfolio in which to invest based on the amount of your funds, your view of risk and the practical difficulties of us reporting. Policies (and portfolios) are likely to be of 3 types:


  1. If you have between €100K and €249K, WITAM will suggest a portfolio of 4-5 funds. These will give a diversification of investment risk which is practical to manage, as you (with the constant guidance of WITAM) will be the author of all further changes in your investment. These funds will be PFICs, but you will opt for US tax reporting on a mark to market basis. This has the advantage of removing any complex segregation of income and capital gains, but the disadvantage that all increase in value will be taxed by the US as income.
  2. If you have between €250K and €499K, WITAM will suggest a portfolio of 6-8 funds. But you could replace some or all of these funds with an already established PEA of (WITAM advised) individual stocks. These will give a greater diversification of investment risk, will still remain be practical to manage, as you continue to be the author of all further changes in your investment. But in addition, the existence of individual stocks will allow some of the increase in value to be recorded as capital gain. Otherwise dividends from the stocks and the mark to market value of the PFICS will be recorded as income.
  3. Finally, if you have more than €500K to invest WITAM will recommend that you sign a discretionary investment mandate with WISEAM who will create a truly customized portfolio with the appropriate mix of stocks and bonds to offer the required balance between your view of risk and the complexities of US reporting.

WITAM/WISEAM will, where appropriate, ensure that providers issue 1099-type reporting so you or your tax preparer can file your US tax declaration correctly.

AAWE/AARO Citizenship Event with Anne Lebreton

The conference room at Reid Hall was fully packed with AAWE and AARO members anxious to hear Anne Lebreton speak about the just-dropped constitutional change to allow revocation of French citizenship for accused terrorists. 

Who is Anne Lebreton? She's a deputy mayor of the 4th arrondissement in Paris, in charge of families, exclusion, child and elderly protection and a vice-president of Nous Citoyens, which is part political party, part citizens for action movement. Most importantly, she's one of us. Her mother, long-time member of both AAWE and AARO, is American; her father was French. She grew up with a dual national mentality, nurtured by activities with AAWE that brought out the American side of her as she grew up in France. As she pointed out, when she was growing up, dual nationality was still fairly rare; it has now become more and more frequent.

Her mother's long commitment and service to associations became her example for community service and when her children started going to school, she was elected to the parents' committee for her school (similar to P.T.A.; in France there are two main associations and there are elections at each school). Through that activity, she became involved with the status of families without immigration papers whose children are in the schools. One thing led to another and she started volunteering at the La Cimade, an organization devoted to helping immigrants in France. Once these immigrants have the proper papers to reside in France, she encourages them to move on to citizenship.

A turning point came in 2010, when Nicolas Sarkozy, then President, made a speech in Grenoble in which he introduced the idea of revoking citizenship of naturalized citizens who became delinquent or attacked persons of authority (police, for example). It was the first time the concept that dual-nationals are somehow different, less worthy, than those who hold only French citizenship. All of the political left protested, along with many centrists and those on the right, from President Sarkozy's own party. This speech triggered Anne's political engagement and she joined the centrist Parti Radical, led by Jean-Louis Berloo. In 2012, she was the Parti Radical candidate in the legislative election. She did well, for a small party candidate, but did not win the seat. The Parti Radical changed leadership and joined the ranks of a larger group, U.D.I. Anne moved to Nous Citoyens, a movement of engaged citizens from the general population: working people, not professional politicians. She was elected to the Paris Municipal Council in 2014 and became a deputy mayor.

In November 2015, following the terrorist attacks in Paris, President Hollande, in the emotional moments afterwards, proposed the constitutional change to allow the revocation of citizenship of any dual national involved in terrorist activity. This goes farther than the Sarkozy proposal because it included those born French. The opinion poll on November 19 showed 94% approval. Anne was the first to react in horror to this proposition, on November 18, in the Huffington Post. She had 2000 likes the first day and 6000 by the next morning. People were taking notice. She was interviewed on Berbere TV. Her argument is, first of all, it creates a difference between "categories" of citizens, those who are French only and those who are different. Secondly, by saying "they no longer belong to us", France is not taking responsibility for these monsters that it raised and educated. It creates easy scapegoats for escaping responsibility. Lastly, there is no reason to believe the other country will take the terrorist from France. They die (nationality no longer makes a difference) or they survive to stand trial and are imprisoned. 

President Hollande withdrew the proposition on March 30, the day before the meeting. The issue remains important, though, as almost every other country has dual nationals and other countries might try the same sort of action against them. Anne recommended we read Benjamin Barber's article in the Atlantic, from 1992, "Jihad vs. McWorld".

A lively question and answer session followed Anne’s talk. 

Investment Options for Americans Living in France

There was a large turn out for François Jubin’s and Andrew Hodder’s talk on November 18th on investment options for Americans living in France. Respectively president/executive officer of Wiséam and senior advisor of Witam, their talk was centered on the questions of: How can we invest abroad as U.S. persons? How do we work around the challenges that FATCA presents?

Andrew Hodder, a financial advisor who works as an intermediary between the investor and the investment management company, began by introducing the two companies, French investment advisors who have been actively working on the question of investments for U.S. persons. Wiséam is a financial management company registered with the SEC. He then did a brief overview of FATCA and its implications for U.S. persons living in France and elsewhere. FATCA provides for the gathering and storing of financial information on U.S. persons living outside the U.S. The American government essentially leaves it to foreign financial institutions (FFIs) to implement the information gathering procedures. FFIs must search their databases for U.S. persons, send out and collect paperwork, and store all the information they gather. Andrew Hodder points out that this mass of information now held by these financial institutions represents a potential security problem, and in this way FATCA is at odds with the reality of the modern world.

The implementation of FATCA has also been very costly. The estimated revenue from FATCA is estimated to be $800 million, with a cost of around $40 million in the U.S. The bulk of the implementation costs have been exported to FFIs; Australia estimates that FATCA cost its country $343 million in the first year, while Germany estimates that it cost $445 million. FATCA is intended to chase down money that is not being reported to the IRS. In reality, about 82% of U.S. persons filing from abroad owe no tax to the IRS.

In most countries that have signed onto FATCA, banks must prove that clients are NOT U.S. persons, by sending out forms to every single client. They also must bear the costs of training their staff to deal with this regulation. It is for this reason that certain FFIs—mainly small to medium sized ones—have stopped dealing with clients who are U.S. persons because the cost is too high. In some countries, such as Switzerland, U.S. persons simply do not have access to financial services. This has, of course, contributed to the increasing number of individuals renouncing their U.S. citizenship.

Andrew Hodder and François Jubin have been exploring ways to handle clients who are U.S. persons and find good investment options for them. One option they have been using is investing funds of American clients in Luxembourg “assurance vie”. An “assurance vie” is a tax-efficient investment, and beyond a certain amount of money invested in Luxembourg, the banker and investment manager can be two different individuals, making it easier to keep the clients’ investments out of funds that are forbidden to Americans. An audience member wondered if such a solution would still be considered a PFIC (passive foreign investment company), which are complicated to declare to the IRS. François Jubin responded that unfortunately this is still a problem they face even with “assurance vie” in Luxembourg.

Witam are currently preparing a presentation for the AMF, the French public body responsible for safeguarding investments, explaining the problems of U.S. persons residing and investing in France. They hope to soon make some headway with the AMF. For the time being, Witam offers its clients “assurance vie” contracts that are conceived to avoid problems with U.S. regulations.

François Jubin concluded in saying they do not yet have all the answers for the problems U.S. persons face, particularly on tax issues, but that they are constantly improving their knowledge and the service provided to their U.S. person clients. 

Changes to E.U. Inheritance Law: What it Means for Americans Overseas

AARO hosted a packed room at Reid Hall on October 26, 2015 to hear Tim Ramier, lawyer and member of the AARO board, and Pierre-Alain Conil, notaire, present the changes in the E.U. law. The presentation addressed only the effects of this law as it concerns U.S. citizens and France.

To start, Tim reminded us all that the key is organization. He handed out a summary with some key definitions: "intestate" means without a will; "testate" means there is a will; "limits" signifies that there are certain limits which the will cannot override, such as marital regimes, surviving spouses, for, in France, forced heirship based on degree of blood relationship and limits for non-resident owners of French property.

Pierre-Alain (see his handout) first told us what the previous law was: French inheritance law (with forced heirship) applied to all real estate (immovable) property in France and for the other assets, called moveable property (cash, bank accounts, stocks, furniture, etc.) the law that was applicable depended on the country of residence. Forced heirship means that the children have a right to a certain percentage of inheritance, followed by parents, siblings, and finally, nieces and nephews. According to the degree of relationship, a given amount of that inheritance is tax-free and then the rest is taxed, more or less heavily according to degree of relationship. The surviving spouse pays no tax on his or her share. Many Americans in France, who wish to decide for themselves who will inherit their estates, are uncomfortable with the French system of forced heirship.

The changes

The first change to note is that, by default, the law of the country of residence will apply and that there is no longer any distinction between movable and immovable property. The law of the country of last residence will apply to all property (At least among E.U. member states.)

The second change is that you may choose to have the law of your country of citizenship to apply instead. Even dual nationals can choose which country. Couples of two different nationalities residing in a third country of the E.U. can decide among the three.

These changes only concern the laws governing the distribution of your property upon your death. They do not change the taxes that apply. Property in the U.S. will be taxed according to the state and federal tax rules that apply—and the current exempt amount for federal taxes is $5,430,000. Property in France will be taxed according to the French rules of a certain amount exempt and the rest taxed based on degree of relationship, from 20% for a child to 60% for a non-relation. Property held elsewhere will be taxed according to the rules in that country.

Decision

As a resident of France, the default law is the forced heirship rules of France.
If you want to have the rules of the U.S. to apply, you must say so in a will. You must decide on which state in the U.S. you want to have your estate probated. You must have some connection to the state—it can be where you were born, where you lived, or where you own property, for example. Take into consideration the rules governing wills—some states will accept handwritten (holograph) wills; others will not.

Conclusion

Make a will. In France, lawyers and notaires can advise you on how best to draft your will and on the tax consequences. The French notaires Bar has set up a national will registry but registration is not obligatory. The national database is consulted upon death. If you live in France and want your estate to be governed by U.S. law, then you should have a will that says so. It is usual and advisable to consult a lawyer with knowledge and experience of the laws of your country of residence and those of the U.S. when you decide to put together your estate plan. Many aspects of simple U.S. estate planning may become frustrated by the application of your resident country’s rules and regulations.

Also, should you choose to have your estate governed by the laws of a State of the U.S. and you leave your estate to your personal trainer, for example, and you have your entire estate in France and children or a spouse, they more than likely will attempt to apply French forced heirship rules. As these new European regulations have so recently come into effect they have yet to be put to the test as concerns France’s long engrained culture of entitlement.

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