i. Property Ownership Options
ii. Juridical Options
- Adopt a French Marriage Contract
- Enter into a French Civil Partnership
- Make a Family Inheritance Pact
- Make a Will
- Create a Trust Structure
- European Succession Law
iii. Financial Planning Options
- Buy or Improve with a Mortgage
- Make a Gift Between Man and Wife
- Make a Gift to Children/Grandchildren
- Make a Gift to Others
- Take out Life Insurance
4.13. Take out Life Insurance
There are two types of life insurance in France:
- Assurance vie
- Assurance décès
Both are useful inheritance planning measures, as they offer tax advantages, but assurance vie is an investment product for the living and for inheritance planning.
Assurance décès policies, on the other hand, are products that only pay out a sum to the beneficiary on the death of the insured.
In the following review we consider assurance vie, although the main inheritance tax benefits apply to both.
i. Life Insurance for Inheritance
Life insurance policies (assurance vie) are not liable to inheritance tax unless the amount received by the beneficiary exceeds €152,500. Beyond this figure a withholding tax becomes payable at the rate of 20%.
The level of the tax is increased to 25% for any benefits exceeding €1,053,338.
As the tax allowance applies to each beneficiary (not the total sum) it is possible to make provision for several family members, although there is no inheritance tax between man and wife or those in a civil partnership. You should take care in the drafting of the beneficiary clause in the policy, which should be explicit.
Those with a French marriage contract égime de communauté universellewith the clause ’attribution intégrale need to give particular consideration to the structure of their policies so that their inheritors are not penalised.
Beyond your spouse or partner, the capital sum payable out of an insurance policy up to the tax threshold is simply not taken into consideration in the global inheritance calculation.
In order to benefit from this exoneration, the insurance premiums in respect of the policy cannot be so large that they are considered excessive in relation to the lifestyle of the insured.
This condition is imposed in order to prevent insurance policies being opened near the end of a persons life, specifically to get around the entrenched rights of protected heirs. On the death of the insured, the latter would be able to make a legal challenge a policy if they considered it had this intent.
However, the courts have taken a liberal view of the size of the policies taken out, and many use this as an open window through which to circumvent the entrenched rights of inheritance.
Thus, in a famous legal case, a 91 year man took out a life insurance policy, making a premium payment of €23,000, with his nephew named as beneficiary in the event of his death. Within a month of taking out the policy, the man died. The nephew received the whole of the premium payment on the policy, without having to pay any inheritance tax. The nephew would otherwise have been liable for inheritance tax, at the rate of 55%.
Only where the insured is over 70 years of age, and the premiums paid after this age exceed €30,500, would the rule change. In such circumstances, on the death of the insured inheritance tax is payable in the normal manner, or at the fixed rate of 20%, although spouses are exempt. The 20% witholding tax is not payable if at the date of subscribing to the contract the deceased lived outside of France.
As there is no inheritance tax between married couples, and there are tax allowances for children, for some expats life insurance policies have ceased to be of such importance for the purposes of inheritance tax planning.
Nevertheless, provided the premiums are not considered 'manifestly excessive' to the lifestyle of the insured, any sums paid out by a life insurance policy to a named beneficiary are not caught by the rule on the entrenched rights of protected heirs, leaving it possible for you to leave the full proceeds of the policy to whomever you wish.
However, if you have also entered into a French marriage contract - régime de communauté universelle with the clause d’attribution intégrale - then the policy is not automatically excluded from the succession.
Life insurance contracts taken out by the spouse of the deceased, married under the community regime, are part of the estate assets to be divided between the heirs, in particular the children.
That said, the policy is not taxable for inheritance tax purposes.
Of course, if you are not married, then the policies also remain an important tool in inheritance planning.
Any proceeds of a life insurance policy that remain on the death of the surviving partner will be inherited by your children, or other next-of-kin.
ii. Life Insurance for Savings
Despite the undoubted advantages of assurance vie for inheritance planning the policies are also a savings scheme.
These policies offer three savings advantages:
- A return that is normally higher than bank savings schemes
- A right to make withdrawals during the life of the policy
- Favourable tax treatment
During the term of the policy, if you make a withdrawal, then only the growth element of the withdrawal is taxed. The rest of the sum is available to you tax free.
The rate of tax on withdrawals reduces the longer you have held the policy and a couple could withdraw €9,200 each year, free of tax, although not of social charges (17.2%).
Since January 2018, for contracts in excess of €150K (per person), the withdrawals are subject to the flat tax of 30% (including social charges), although it is still possible to opt for the standard income tax scale.
Accordingly, if you arrive in France with a lump sum to invest, you can take out a life insurance policy, and later make withdrawals to meet day to day requirements, with only the growth element of the withdrawals subject to tax and (inevitably) the social charges.
As always with any investment, you need to do your research and get good advice. Be careful, in particular, of management charges and charges for withdrawals. Additional deposits also frequently incur a charge.
In recent years, and with negative interest rates now appearing on the High Street, the return on such policies invested in bonds has become questionable. Many banks and insurance companies offering the product are now asking their investors to take out a policy where less than 100% of the funds are guaranteed ie, by investing in shares. That is a fundamental change to the basis on which the industry has been built.
Although the return on these schemes has substantially reduced, as interest rates have fallen, they remain a good vehicle to optimise your inheritance tax liability.
Due to taxation laws in the USA, this product is not one that is suitable for US nationals as they are tax on all gains, with no relief granted.
Fees for taking out and managing an assurance vie can be substantial and often lack transparency.
You can find an article about the issue in France Insider at Fees for Assurance Vie.
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