There has been a storm of new tax legislation during 2011 as the French legislator has scrambled to extract more revenue to support the sputtering economy. None is more controversial or more likely to run into both political and legal challenges from foreign jurisdictions than the law of July 29, 2011 in respect of foreign trusts.
The effect of the law is to disregard the divestiture operated when a settlor places assets in a trust when either the settlor or a beneficiary is (or becomes) a French tax resident or when the trust has qualifying French assets.
France’s net wealth tax (“ISF”) applies annually to qualifying assets, either on a worldwide basis (if the tax payer is a French resident) or just to French assets if the tax payer is resident in a foreign jurisdiction. When an irrevocable trust has been set up the trust assets no longer form part of the settlor’s estate. They have become trust property, subject to the terms of the trust deed.
This fundamental concept in jurisdictions recognising trusts has just been turned upside down by French law. For ISF and gift and estate purposes it is as if the trust has never existed.
Suppose a British couple place funds in an irrevocable trust in the U.K., for the education and maintenance of their grand-children, the trustees being professional advisors in the U.K. They subsequently retire to the South of France. Under English law they no longer have title to the assets, legal ownership lying with the trustees, beneficial ownership with the grandchildren. Under the new law, however, as the settlors, they will be liable for the annual ISF on the entire trust assets and estate or gift duty will be payable either on their death or during their lifetime if the trustees decide to vest the assets in the grandchildren. A similar situation will arise if the grandchildren move to France, the grandparents remaining in the U.K.!
To add insult to injury, the new law imposes an annual reporting obligation on the trustees which purports to be retroactive to July 31, 2011. These obligations have been the object of a ruling dated December 23, 2011 but the law provides for further implementing legislation in the form of a decree, not yet published.