US trusts in France: a looming tax bombshell

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Still largely misunderstood under French law, trusts raise numerous questions for expatriates, particularly Americans. Thomas Dubanchet, a tax lawyer specializing in the matter, decodes the specific characteristics of this legal tool and the tax challenges surrounding how it is treated in France.

Before diving into the details, what is your primary advice for an American expat holding a trust?

The key point is anticipation. It is highly recommended to consult a specialist before moving to France with a trust. Every situation is different, and it is important to analyze beforehand whether it makes sense to keep the trust and, if so, how to adapt its operation. Taking this step helps prevent what can often become complex difficulties once you have settled in France.

Why is this anticipation so important?

Because a trust is an unfamiliar legal concept in French law; it has never been introduced as such. Through the law of July 29, 2011, the legislature limited itself to organizing its tax treatment without ever recognizing it as a civil law institution. Furthermore, France signed the Hague Convention of July 1, 1985 on the Law Applicable to Trusts, but never ratified it. As a result, it remains impossible today to create a trust under French law.

What changes did the 2011 law you mentioned actually bring about?

It reflects a pragmatic approach by the tax administration. Faced with the arrival of taxpayers from common law countries with their trusts, authorities needed to provide these structures with their own tax and reporting framework to prevent them from escaping taxation due to the lack of dedicated rules. The law therefore establishes a tax framework for trusts without legally recognizing them. It is precisely this lack of legal recognition that can create difficulties.

What kind of concrete difficulties can arise?

The lack of a clear legal framework means every situation must be analyzed on a case-by-case basis. The rules are relatively limited, and each foreign trust must be adapted to French tax regulations. Without proper guidance, this can lead to misunderstandings or unfavorable tax treatments.

Can the different types of trusts be categorized?

Yes, even though practice has developed many variations. A key distinction is made between revocable trusts—where the settlor can reclaim the assets transferred to the trustee—and irrevocable trusts, where the transfer is permanent. There are also inter-vivos trusts (created during the settlor’s lifetime) and testamentary trusts (set up upon death), as well as discretionary trusts, which grant significant freedom to the trustee, and more strictly framed trusts. In practice, these characteristics can be combined.

Is a trust a legal entity?

No, and that is its unique feature. It is neither a legal entity, nor a contract, nor a power of attorney. A trust relies on a tripartite relationship between a settlor, a trustee responsible for managing the assets, and beneficiaries. In some cases, the same individual can hold multiple roles.

What type of trust do you encounter most frequently?

Revocable trusts are very common among American clients living in France. They are often used to avoid the US probate process, which requires making the deceased’s estate public record. Consequently, many Americans set up trusts during their lifetime of which they are also the beneficiaries. This mechanism can resemble life insurance (assurance-vie), but it remains difficult to grasp under French law.

What are the consequences of this unfamiliarity on the part of the French tax administration?

The administration generally views trusts as opaque. For income tax purposes, unless transparency can be demonstrated, authorities tend to treat distributions from the trust as taxable income. In practice, withdrawals from the trust may be treated as income unless it can be proven, for example, that they represent a return of capital. This is typically the kind of situation that can be anticipated and better managed if analyzed beforehand.

Does tax treatment vary depending on the country of origin of the trust?

French domestic law does not differentiate based on the trust’s country of origin; the same tax and reporting rules apply. The difference actually comes into play at the level of the applicable tax treaty. Depending on the state involved, the treaty may allocate taxing rights over the income and assets held within the trust differently, or even neutralize certain tax effects. Therefore, it is less about the origin of the trust itself and more about the specific tax treaty between France and that country that can alter the outcome. »