Leave your living trust behind
We love trusts in the U.S., and we use them in all sorts of ways : to do charitable work, to avoid taxes, to control assets, to control people… But there is one form of trust that we use more than any other. The revocable trust, also known as a living trust, is ubiquitous in the U.S. primarily for one reason: it bypasses the probate court processes that have become long, tedious and expensive in most states.
If you have ever been to an estate attorney, you probably have a revocable trust. And that is fine if you are staying in the U.S. But if you are planning a move to France, you should probably get rid of the trust first. Let me explain why.
What is a revocable trust anyway?
We call these trusts “revocable” because you can revoke them at will – that is to say that you, as the founder of the trust, can cancel the whole thing and take back its assets whenever you choose. We also refer to these as “living trusts” because we use them to hold assets while you are still alive. Upon your death, however, the trust immediately changes its nature to something that can only be ended by certain parties – often the trustees designated in the trust and/or a court of law.
During your lifetime, the living trust is still part of you for tax purposes. It uses your social security number for its tax ID, and any real estate, income, accounts or other assets in the trust are considered still to be yours for tax purposes. After death, it becomes its own entity, with its own tax filings and legal liabilities.
Why use a revocable trust?
Obviously, these trusts are entirely useless for avoiding or managing taxes or liabilities during your life. But they are considered essential to U.S. estate planning. When you die the state in which you lived will oversee an accounting of all your assets and liabilities, make sure the debts and taxes get paid, and then see to it that the remaining assets get to your heirs.
To do all of this, your estate will need an administrator – sometimes an attorney that the estate pays, but often an unlucky relative or friend who is left with all of the paperwork and phone calls. The process can be long and expensive depending on the complexity of the estate and the delays at your local probate court.
The real beauty of the revocable trust is that all the assets in it go to the beneficiaries without going through probate. This can be a very nice extra gift for your heirs. But let us be very clear – the revocable does not allow you to get around U.S. estate taxes.
How does France treat trusts?
All of this makes your revocable trust sound pretty benign, right? And that was also the case in France for expats who came over with one of these… until 2023.
Trusts do not exist as a concept in French law. To the extent there are any laws about them, those laws were put in place to deal with trusts set up in the other countries (usually the U.S. or U.K.) that impact France or French residents.
For quite a while now, France has required certain processes for trusts of any kind created abroad. First amongst these is an initial accounting. If a trust has a trust creator (settlor) or beneficiaries who are resident in France, if the administrator of the trust is resident in France on January 1st of the year, or if the trust contains French assets, it must file a form 2181-T1. This form is not a tax, but it details the people involved in the trust, its terms, relevant addresses and contact information and the list of assets in the trust. After that, the trustee files an update of this information annually on form 2181-T2.
These two filings can be quite simple or very complex, depending on the assets you have in the trust. And plenty of expats have found themselves in a sea of accountancy and legal questions while trying to pry the information out of a secretive family trust. But until 2023, people with living trusts did not tend to put in much (or any) effort.
What changed
In 2023, an American couple appealed the French tax authority’s decision on the income from their U.S. Trust. At that time, the tax authority was treating U.S. trusts as “pass-through” entities for the purpose of taxes. In other words, they ignored that the assets were in a trust at all.
So, if your trust earned $3000 € in dividends from an investment account and 40,000 € in capital gains from a real estate sale, you reported the income (or your share of it) as personal income just that way in your French tax Déclaration. This was true whether you acutally took the money out of the trust or not.
For everyone with a revocable trust, this worked perfectly. It is after all, exactly how we tax those trusts in the U.S.
What’s more, because you paid your taxes on whatever was earned in the tax year, the annual trust filing (form 2181-T) was more of a formality. But our French-resident American couple won on appeal. The Conseil d’Etat confirmed that all trusts need to be treated as taxable, rather than “pass-through,” entities. And that includes your up-to-now benign revocable trust.
Why you need to close your trust before you move
What does that mean for you? Well, for one thing, you will pay taxes on income from the trust only when you take that asset out. If the brokerage account you put in trust earns 30,000 USD in dividends from bonds this year, but you don’t withdraw anything from the account, you will not pay tax personally. This is what the American couple was looking for on appeal.
But it also means that the income from your trust will be treated as a particular sort of dividends (from a closely-held entity). And that type of income does not get the lovely favorable treatment that much of your brokerage income was getting before when it was just like interest, capital gains or U.S. bond dividends from your savings. Ouch.
To make matters worse, the annual 2181-trust form is a lot more important now because it is the authorities’ only insight into what is going on with those assets. Expect the authorities to be much more diligent in ensuring you have filed those.
There is are other potential consequences of your trust losing “pass-through” treatment. You now will pay personal taxes on trust income only you take out of the trust. It doesn’t sound like a problem, does it? But if you close your trust after moving to France, everything that was in it becomes income that year. So the act of closing a trust could turn what was just your savings account into taxable income.
And what about retirement accounts? The French law on trusts makes exceptions for certain trusts used to create pension or retirement accounts. So money coming directly from your 401k should be fine. But some U.S. attorneys have their clients add retirement accounts to their trusts even though those do not generally go through probate anyway. The new decision seems to indicate that retirement funds held in a trust might no longer get the favorable tax treatment afforded to pensions and retirement accounts.
What can you do?
Every person’s situation is different, of course. But if you are thinking of moving to France — particularly as part of a permanent move — you should consider closing out your revocable trust. If on the other hand you are already a French tax resident, be very careful about making any changes without a thorough analysis of the repercussions. And you definitely want to make sure that you start filing your trust forms. The penalties and the paperwork can be signficant if you don’t.
You can find copies of the trust forms with instructions here: