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There is much information available about inheritance law. Most of it, however, focuses on the next generation. French inheritance law heavily favours bloodline heirs, often leaving stepchildren, friends, and non-blood relatives out in the cold.
It is news to many that strategic options exist, which can ease the complexity and anxiety over the seeming loss of control over your assets.
A family in agreement
Not all children are rubbing their hands together with glee at the prospect of inheriting their parents' money and assets.
Indeed, some do not need or want them and instead value their relationship with their family over their hard-earned money.
A pacte de famille allows heirs to agree on the distribution of the estate during the donor’s lifetime.
This can help reduce potential disputes, particularly in multi-relationship families where clauses such as the “legs résiduel” can be incorporated.
This ensures the spouse can “use” the assets during their lifetime; however, when they are passed to stepchildren, it is deemed as if it had been passed directly by the parent, thus avoiding the potential 60% inheritance tax.
It is a legal, notarial act and is, once signed, completely irrevocable.
Due to the potential for abuse, it generally requires two notaires, a system designed to ensure heirs are protected.
It does require getting your family in one room, so it is not always an easy option if your children are spread out.
Of course, what is essential is that they all agree on any gifts being made.
Read more: French inheritance tax: current rules and what reforms are proposed
Assurance vie: a flexible friend you can trust
An assurance vie is one of the most flexible tools in French inheritance planning.
While technically a life insurance product, it operates much like a trust, where the designated beneficiary can be anyone, including stepchildren, friends, or non-blood relatives.
In contrast to the rigid rules of French inheritance law, the assurance vie allows assets to be passed on outside of the traditional estate framework.
A significant advantage of an assurance vie is that you can leave up to €152,500 per beneficiary (paid directly, functioning like a trust), no matter how many beneficiaries you choose, completely tax-free.
This applies even to distant relatives or non-relatives, making it a powerful way to provide for stepchildren or friends.
However, it is essential to note that this tax-free benefit only applies if the investment into the assurance vie is made before age 70.
Contributions made after age 70 are still advantageous, but the tax-free allowance is significantly reduced.
Does this keep everything "completely" outside inheritance considerations? Mostly, yes. An assurance vie is outside of the estate and so treated separately from the estate for inheritance purposes.
However, if you contribute disproportionate amounts, particularly close to death, the contributions might be classified as primes manifestement exagérées (manifestly excessive premiums) and treated as a taxable gift.
This is why it is essential to plan carefully, ensuring that sums paid into an assurance vie remain proportionate to your overall wealth.
All kinds of clauses can be added to an assurance vie, bending them to your wishes (much like a trust). A quasi-usufruit, for example, allows a surviving spouse to use the money, while maintaining the heirs' right to inherit the value later.
In essence, it creates a debt on the estate, so any and all assets can be used to ensure the debt is repaid, protecting the heirs while giving the spouse the resources they need.
Its use also has downsides, so understanding the vast array of options is vital before setting up an assurance vie.
Read more: How do French financial products compare to those in UK and US?
Under French law, blood relatives, particularly children, are the main beneficiaries. Stepchildren and non-relatives face significant tax burdens.
Despite recent political promises to make inheritance easier for non-blood relatives, no substantial changes have yet materialised. An assurance vie remains the best legal tool for reducing this burden, allowing more flexibility in terms of who inherits and how much they receive.
Conclusion
Inheritance planning in France involves more than simply dividing assets; it requires navigating a complex legal landscape.
Tools like a pacte de famille, donations, an assurance vie, usufruit, and property (real estate) ownership structures can help mitigate the rigidity of the law. This is especially true for those wishing to provide for stepchildren or friends.
For those below 70, an assurance vie offers a unique opportunity to leave up to €152,500 per beneficiary, regardless of relationship, tax-free. However, careful planning is crucial to avoid pitfalls such as primes manifestement exagérées.
There are many other options, far too numerous to cover here, such as wills, marriage regimes, and EU succession regulations.
While they can impact the broader inheritance plan, each situation is unique. A blend of options, engineered to gain the best outcome, is often the answer. This is why professional advice is so essential when it comes to French inheritance planning.
Read more: Make sense of French inheritance tax
Kentingtons provide tax and financial advice in France
