Is a French Marriage Contract Worthwhile?
Tuesday 04 April 2017
In order to get around French inheritance laws many international buyers adopt a French marriage contract, but it is not always necessary or possible to do so.As is now widely understood, French inheritance laws do not permit you to dispose of your estate as you wish. Your children have entrenched inheritance rights, and even in the absence of children, your parents, if they are alive, also have similar rights.
Even non-residents are caught by the rule, for real estate in France is subject to French inheritance laws.
These laws mean that if you have one child they would be entitled to half of the estate of the deceased; two children would have an entitlement to two-thirds of the estate, and three children three-quarters' of the estate.
When stated in such stark terms it all sounds rather unpalatable for the surviving spouse, who is not the automatic single beneficiary of the estate of the deceased.
However, it is not quite as bad as it seems, for statute law does not leave a surviving spouse without legal protection.
In the first place only that part of the estate belonging to the deceased is in play, so if a couple held property 50/50 between them, the surviving spouse would still retain full ownership of half of the property.
In addition, the surviving spouse is entitled to at least one-quarter of the estate of the deceased, or they can opt for life-use (usufruit) of the entire estate. They cannot be turfed out of the family home by their children.
It is also possible for a couple to increase the amount left to the surviving spouse by a lifetime gift - donation entre expoux - although fees and taxes are payable.
Nevertheless, many couples consider these basic rights are insufficient, and that sharing the proceeds of the inheritance may leave them in financial difficulty. The issue can become particularly difficult where family relations are fractured.
Under The Hague Marriage Convention 1978, it is possible for French property owners to enter into a marriage contract, which governs the administration and disposal of property during the marriage. This right exists for both resident and non-resident property owners.
The favoured marriage contract of international buyers is called regime de communauté universelle, with the clause d’attribution intégrale, which prescribes that all property in the marriage is communally owned, including that gifted to or inherited personally by one of the spouses.
On the death of the first spouse the surviving spouse automatically becomes sole owner of all of the property, and the rights of the children are deferred.
So the main purpose of the marriage contract is to give complete freedom of action to the surviving spouse, and with longer life expectancy that is a factor that has become of greater importance to couples.
With the growth in second marriages many families now comprise children from a former marriage, a situation that has significant consequences for those wishing to enter this type of marriage contract.
This is because they are not permitted when there are children from outside of the marriage, due to the fact that it disinherits at least one set of children; only the children who are blood relatives of the deceased would have any inheritance rights on the death of the surviving spouse.
Some couples mistakenly think they can get around this rule by simply not confiding it to the notaire, but even if the notaire is fooled it may not be the case with those children who are disenfranchised, who can later challenge the contract and the inheritance itself.
The marriage contract also has implications on inheritance taxes, for the contract is disadvantageous to inheritors, as the inheritance allowance to them are reduced by 50%.
As the property becomes the sole property of the surviving spouse only their allowance can be used to set off against liability to inheritance tax; ordinarily it would be an allowance from each parent.
The extent of the problem is going to depend on the size of the estate. There is an allowance of €100,000 to each children, from each parent. So, in a family of four without a marriage contract, no inheritance tax arises for the children if the estate is valued less than €400,000.
Where a marriage contract is put in place this allowance is reduced to €200,000, being €100,000 for each child, as the property becomes the sole property of the surviving spouse and only their allowance can be used.
Even this may not be a significant issue. Thus, where the estate is valued at €500,000, a marriage contract increases the tax liability of two children from around €25,000 to €60,000, perhaps not a huge sum in the scheme of things, and particularly if shared between them.
It is also possible to reduce the losses by stipulating the assets that are transferred into the estate, to specifically exclude some assets, or to omit use of the clause d’attribution intégrale and attribute only life-use (usufruit). This would enable the children to make use of their allowances in full.
However, this once again reduces the rights of the surviving spouse to complete freedom, the main purpose of entering into the contract in the first place.
It may well then simply depend on whether the relationship you have with your children is such that you could live with that arrangement. If the relationship is strong, and you intend that they should inherit your estate, there may simply be no need at all to enter into the contract.
The contract may also be less immediately of interest to younger couples, who may well wish to consider other inheritance planning options.
The process costs of the marriage contract may also be a factor some couples will need to consider. If no property is being transferred from single ownership into the marriage, the notaire charges are normally no more than a few hundred euros.
However, where a property is being transferred into the contract (where one is owned by only one of the spouses) then costs increase to at least several thousand euros, as stamp duty is payable.
Adopt Country of Origin RulesAs an alternative to a marriage contract, since August 2015 it has been possible for foreign nationals living in the EEA to adopt their country of origin inheritance rules ('Brussels IV'), as we set out in our article Inheritance in France Under European Succession Law. You need to elect for this option through a Will.
The great advantage is that no enforced inheritance rules apply whatsoever, but freedom to leave to whom you wish does not exempt the beneficiary from potential liability French inheritance taxes, which continue to apply in the usual manner.
This right to opt for country of origin inheritance rules will remain in place following Brexit.
Assurance VieThe use of assurance vie is also a good inheritance tax planning option, as such proceeds are exempt from inheritance tax, and can be left to whom you wish.
You can read more at Life Insurance in France.
This article was featured in our Newsletter dated 04/04/2017