Client Affairs

French Law Edges Towards Trusts

Geraldine Appert, Payne Hicks Beach, 14 March 2007

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Though very cautiously and one step at a time, there is now no doubt that the concept of fiducie - trust - is being progressively introduced into French law.

Though very cautiously and one step at a time, there is now no doubt that the concept of fiducie - trust - is being progressively introduced into French law.

Indeed, as a very first step France signed as long ago as 1991, though has not yet ratified, the Hague Convention on Trusts which came into force on 1 January 1992. There has been a long wait for a second step: in 2004, a French court acknowledged in its decision the mechanism, principle and effect of a foreign trust having effect in France.

Between 1992 and 1994, a number of draft bills on fiducie had been submitted to Parliament. Originally, the intention was to create a flexible and broad regime to cover transfer, settlor and beneficiary and to apply to both commercial companies and private individuals.

However, all these initiatives came to nothing. It led to a different way of introducing trust elements into French law: the legislature did not go for one general set of rules on trust but rather chose to introduce certain aspects in various areas of law.

In practice, the following general areas of law are concerned:

Business, Companies and Finance Sector
The 7 February 2007 Act introduced the fiducie regime but has limited its scope to commercial companies liable for corporation tax. These settlers will be entitled to transfer part of their assets to a fiduciaire, which can only be a financial institution.

This transfer is made in order to ensure good management of the company’s assets, with the aim of profitability and self-funding. It can also be used as a security instrument for creditors.

A fiducie can last for a maximum 33 years and cannot be used to mitigate tax, as the settlor is for tax purposes still deemed to be the legal owner of the estate and is the one liable for tax.

Any transfer made as a gift or free of any kind of compensation is void and would be taxed at the dissuasive rate of 60 per cent. Similarly, any transfer made by private individuals or returning to private individuals when the fiducie comes to an end would bear the same penal tax.

Succession Planning
The law of succession has been partly reformed by the 23 June 2006 Act which came into force on 1 January 2007.

It has also introduced a number of elements similar to trust.

The first two are a response to some parents’ concerns for their disabled child, though extended to any kind of situation, setting up the right for them to give a life interest in certain assets for the beneficiary to benefit from it and live on its income with the obligation on death to transfer the assets to another person or persons, by presumption but not necessarily one or more siblings.

1 Libéralité graduelle - Can only be on the deceased’s quotité disponible: see below for explanation of this and other technical expressions.

In this case, the asset can only be for use and income (like a life interest) but the beneficiary can never sell it or otherwise dispose of it.

It originally had in mind the protection of a disabled child, but is not limited to that situation; it could for example apply to a surviving spouse when there are children from a previous marriage.

Nevertheless, it is not very different from what existed before and still exists - usufruit - apart from the fact that with libéralité graduelle the deceased can elect an unborn beneficiary.

2 Libéralité résiduelle - Here, the gift can affect all the deceased’s estate including the réserve héréditaire if and only if the reserved heir agrees to renounce his or her forced heirship entitlement.

By contrast to the first one, the beneficiary of the gift can dispose of it (but cannot bequeath it by a will) and there is a great risk that the value will disappear completely.

3 Mandat à effet posthume - This allows someone to appoint one person to manage his or her succession in order to safeguard a child’s interests or to manage a family business when no other person in the family is willing to do so or has the expertise and knowledge to do so.

Reform of the tutelles – guardianship - is on its way: the mandate pour incapacité future will address the issue of the growth in the number of elderly people, enabling them to decide to transfer their estate to a fiduciaire for good management and an income.

Quick memo on compulsory rules in French succession law which override any will if contrary to statute:

The estate is divided as follows:

a) First, the surviving spouse’s rights will apply: option between a quarter in full ownership or life interest (usufruit) on the whole estate. However, if the deceased has children from a previous marriage the surviving spouse is only entitled to a quarter of the total net estate in full ownership.

b) On the remainder the children’s rights, a proportion which varies with the number of children : this is the mechanism of réserve héréditaire (forced heirship).

- if there is 1 child : he is statutory entitled to half of the estate;
- if there are 2 children: they are entitled to two-thirds of the estate to be divided in equal shares;
- if there are 3 or more children: they are entitled to three-quarters of the estate to be divided into equal shares in full ownership.

However, if the surviving spouse opted for life interest - see (a) - they are all entitled to the residue (nu-propriété), meaning that they will only be able to use and dispose of the estate after the surviving spouse’s death.

c) After (a) and (b) there is a balance of the estate left. This is called the quotité disponible and is really the only part of the estate the deceased can pass on and choose to give to any person or charity of his or her choice. If there is no will it is distributed in equal shares between children.

If there is no surviving spouse nor any children, parents, siblings and nephews and nieces are entitled to inherit, again with strict shares to observe.

A reserved heir can now renounce partly or wholly the entitlement to réserve héréditaire.

However, considering French legal culture, it can be assumed that it will not happen very often unless there is a disabled brother or sister.

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